Why I Love this Holy Grail Trade I’ve Just Recommended (Plus a Few More)
This week I'm going to begin with what I call an ‘off the grid’ play.
It’s “off the grid” that because it's counter to everything that's been going on in this particular currency pair: EURCHF (the Euro versus the Swiss franc). While I haven't followed EURCHF for quite some time, I recently noticed something very interesting.
Let’s start with a monthly chart:
Clearly and unambiguously, EURCHF has been in a profound downtrend.
But this pair represents a great risk/reward play right now. If the idea doesn't work out, I won’t get hurt too badly. And if it does work out, it's going to happen very quickly.
EURCHF has caught some support recently. While that in and of itself doesn't mean a whole lot, what caught my eye is that despite the long-term bear market in EURCHF, this pair seems to be setting up for a rally to the upside. Prices have been coiling in a steadily tighter range.
To my mind, such a coil represents a compression of energy that will eventually be released explosively.
Because this is a downtrend, it's very possible that EURCHF could uncoil to the downside, but this “off the grid” opportunity suggests we could see a bounce the market isn’t expecting.
If I'm wrong I'm not going to get hurt too badly.
That makes it an ideal opportunity: a great risk/reward ratio where if you're wrong you find out very quickly, dust yourself off and look for the next one.
To see why I suspect we’ll get a bounce, here’s how EURCHF looks on the weekly timeframe:
I always seek to identify a governing price pattern on a chart, the one that dictates prices going forward. That’s clearly the very bearish head and shoulders here.
But now very subtly, EURCHF has grabbed a foothold at recent support levels. There’s a very sneaky double bottom here – it’s marked by some bullish key reversals that formed recently. (This will be more apparent when we look at the daily chart in just a moment.)
A reversal pattern like this needs to be confirmed, of course. That means the price has to break through the neckline formed by the double bottom. EURCHF has done that, plus the neckline has since been retested after the initial surge higher.
Now EURCHF is starting to find traction to the upside … again. There have been some bullish key reversals recently where the buyers were in control by the end of each week.
Now here’s a key point: I don't look at key reversals in a vacuum. There has to be some kind of preceding pattern or trend before they have any validity. But when they do reinforce the rest of the price action, that adds up to a very compelling trade,
In fact, all these things together give me the idea that EURCHF is ready for a rally higher. How much higher and what timeframe I don't know yet. But things are definitely getting “interesting”.
To play this, put in a buy stop slightly above the weekly high, a bit above the 1.08 level. Put your stop loss about 100 pips lower. This could get you into a huge move at low risk.
If the market just falls, your buy stop isn’t triggered and so it’s no harm, no foul. And if the buy stop is triggered, then you have potentially very strong momentum working in your favor.
This is the kind of setup where I’ve made small fortunes because nobody is expecting something like this to happen. The price action is sneaky and flying under the radar of most traders.
Now here’s EURCHF on a daily timeframe so we can gather more evidence that this trade has a favorable risk/reward ratio:
That subtle weekly double bottom is now much more obvious, as is the retest of the neckline.
Since then, EURCHF has traced out a reverse triangle and there's every possibility we’ll see a breakout to the upside.
What I really like about this trade is that we're going to find out soon if it’s going to work. And we also don't have to risk a lot. This is where I tend to bet a little bit more because the risk is very identifiable and the market action should confirm what I'm looking at very quickly.
This may work out and if it doesn't, we're not going to get hurt too badly. Frankly, that's the Holy Grail of trading.
Now onto the rest of the market …
Let’s take a look at the USDI (the US Dollar Index) which measures the US dollar against half a dozen of the major currencies.
It's my contention that the dollar has put in a major double top and will ultimately go lower.
USDI’s most recent head and shoulders bear price pattern is very bearish, especially after the price cracked through the neckline. And while the implications of this double top/head and shoulders combination is that the dollar is going lower long-term, in the last couple of weeks USDI put in a bullish key reversal. That should translate to interim support for the dollar in the short term.
In fact, I believe USDI will likely retest the neckline of the head and shoulders. After that, it could consolidate for awhile before dropping lower.
So how is the Euro responding? Here’s EURUSD (the Euro versus the US dollar):
There’s recently been a consolidation zone forming in EURUSD at 1.20 and while there’s a possibility this pair could just keep tracking higher, I think there's a good chance it retraces back to the 1.15 area.
The 1.15 level represents the neckline of the inverted head and shoulders pattern EURUSD has recently traced out. While this is inherently a bullish price pattern, I think we’ll see a retest of that neckline before there’s any further upside momentum.
That means I’d rather be short than long EURUSD with a price target at 1.15. If and when the price reaches that level, I’d likely be a buyer of EURUSD once again.
Meanwhile, it seems the Australian dollar is the strongest currency on the board versus just about every other pair. Here’s the Australian dollar versus the US dollar (AUDUSD):
There’s an inverted head and shoulders here with a sloping neckline. The implications are not only bullish but (by virtue of the sloping neckline) very bullish. AUDUSD could move much higher, very quickly.
But first this pair has to overcome a minor resistance area at 0.74. I wouldn't be surprised to see a small setback here and a bit more consolidation before the Australian dollar resumes marching higher.
On the other hand, AUDUSD could simply rocket without waiting. So play this with a buy stop above current highs. That would get you into any incursion above 0.74 - 0.75, which in turn would open a lot of blue sky north of current lead price levels.
AUDCAD (the Australian dollar versus the Canadian dollar) is in a very similar situation:
It looks much like AUDUSD with a very similar inverted head and shoulders with a sloping neckline. The difference is that you can see how much higher the right shoulder is than the left.
That means this pair is even more bullish than AUDUSD. Place a buy stop above recent highs to take advantage of this.
Any dip in this pair is also a potential buying opportunity. Whichever strategy you prefer, this pair looks like it’s going much higher soon.
Now for some words on the key JPY pairs I’ve been following …
If you’re a regular reader, you’ll know I’ve been going on ad nauseum for the last several weeks, months and years that USDJPY (the US dollar against the Japanese yen) represents one of the most bearish price patterns I’ve seen:
This bearishness began with a double top five years ago at 126 that subsequently became the head of a head and shoulders pattern. Both indicated lower prices, which is exactly what we’ve seen.
Over the last couple of years, USDJPY has remained within the confines of a descending triangle, one where every rally is weaker than the last. This creates a sawtooth pattern that seems destined to ultimately give way to the downside.
Every time USDJPY hit 104 in the past, it’s found a way to bounce off. However, the more times the price hits a certain level, the more likely it is to cave in eventually.
That’s why I expect lower prices in USDJPY soon. In past weeks, I’ve toyed with the idea of USDJPY rallying to the top of the descending triangle. But last week’s decline has ended that speculation.
I’m firmly bearish once again because this pair is going lower. The historical patterns (including the most recent head and shoulders with double top) are all screaming “down”.
Now here’s GBPJPY (the British pound versus the Japanese yen).
It’s another great example of how identifying price action and price patterns can translate into huge moves in the market.
Just like USDJPY five years ago, GBPJPY has formed a double top which became part of a head and shoulders.
Once it cracked the neckline of that pattern, it confirmed a bearish trend that’s been in place ever since (and therefore it’s the governing pattern for this pair).
For the last couple of years GBPJPY has formed a rounding top with a neckline at the base of what appears to be a complex head and shoulders. A complex head an shoulders is one where there are a number of shoulders on each side of a head.
GBPJPY recently retested the neckline of that massive patten and failed to break through. This should lead to lower prices and perhaps all-time new lows.
I’m firmly bearish after recent price action broke through the recent uptrend line.
I believe momentum will continue lower and we'll see prices under the 130 level fairly soon.
Now here’s XAGUSD (spot silver) which has broken out above a seven-year downtrend line after forming a bullish inverted head and shoulders.
Silver has obviously enjoyed a magnificent move.
So is the current consolidation a pause that refreshes before another rise higher? Or will the next move be lower?
I’m in the second camp -- I feel silver is more likely to break lower due to the price action.
Here’s why: there’s been a huge increase in volatility when silver moved $5 - $6 in a week. Volatility often precedes a change in direction due to the intense emotions it arouses in most traders.
More recently, that volatility has died down and a coil has begun forming. A coil could release in either direction, of course. But because silver keeps making lower highs and there’s at least one bearish key reversal within that coil, I’m in the bear camp here.
Silver prices simply haven't been able to find traction to the upside. And that’s why I would view any rally as a sucker play and I expect the next move to be down.
Now I could be completely wrong. This could be a consolidation and we could see prices rocket again. If so, I will change my mind quickly and get on the right side of this play.
Is gold the same? Let’s take a look at XAUUSD (spot gold):
Just like silver, gold prices have been bunched up.
They’re coiling within the very narrow confines of a symmetrical triangle. This is a neutral price pattern which indicates that prices could break out either way.
Since gold is in an uptrend, that suggests the next move should be higher. Yet I feel gold is a bit of a trap right now and that we’ll see a release to the downside, perhaps as low as $1,750.
Again, my reasoning is the same as with silver: there have been a lot of bearish key reversals within gold’s symmetrical triangle.
What’s more, we're getting into the business of that pattern and I think we’re going to find out if my bearish inclinations are right or wrong very soon.
Here’s gold on a daily basis:
The symmetrical triangle on the weekly chart now looks more profound on the daily chart.
We’re going to get a resolution one way or another pretty quickly.
Key price levels I'm looking for include $1,980 on the upside (less likely) and about $1,917 on the downside (much more likely). When either is hit, I’ll take a new long or short position here with a buy stop or a sell stop.
Gold could drop as low as the breakout area I’ve highlighted.
Now for the NASDAQ stock index:
Since the depth of the pandemic, this index has had a parabolic move up with the Fed implementing quantitative easing, government adding stimulus and negative interest rates coming into the mix too.
However, there's something inherently frightening about parabolic markets. That’s because they tend to end with a bang. In fact, the NASDAQ has risen within the context of an ascending broadening price pattern, and the implications of these patterns are usually negative.
There was a slight breakout above the high of the ascending broadening price pattern but that has fizzled. It now looks like a bull trap with prices re-entering the confines of the pattern.
I think we’ll see an incursion lower or at best a long-term consolidation. It's just unsustainable that the parabolic move will keep going forever. So the risk now is to the downside if you’re a long investor.
There’s a small chance the NASDAQ will descend to the bottom line of the ascending broadening price pattern, by the way. If so, that would be really bad news and portend an absolute crash. I wouldn't call that right now, but I also wouldn't rule it out.
However, I do feel there's a lot of risk being long.
And that’s it for the week!
To summarize, I think there’s a great “off the grid” opportunity to go long EURCHF. I also like the long side of AUDUSD and AUDCAD. I like the short side of EURUSD, USDJPY and GBPJPY as well as both precious metals (silver and gold). The NASDAQ is neutral to short.
I wish you a very healthy and prosperous trading week.
Mark "EURCHFOff-The-Grid" Shawzin