Why Most FX Pairs Are Quiet (And Which Aren’t) Plus TSLA As a Tech Stock Proxy
For the last couple of weeks, I’ve limited my FX trading to GBPNZD (the British pound versus the New Zealand dollar). That’s because a lot of FX pairs are fairly range-bound right now.
That’s primarily due to the price action (or lack thereof) in the DXY (US Dollar Index):
On a long-term basis, there’s a very foreboding head and shoulders in place. This is very bearish and projects that prices will go lower over time. DXY even retested the neckline of that pattern before dropping once again.
But prices have been locked up within a large trading range for the last while.
DXY has reached a major support level. Even though the dollar is trading at or near multi-month lows, it’s simply going sideways. There’s even a trace of a double bottom.
And while there was a bullish key reversal last week where the market made a new high and then closed on the low, there’s nothing to suggest DXY is about to break out.
This could go on for the next couple of weeks, perhaps even the next couple of months.
And that’s why I've limited my trading in dollar-related FX pairs even though the long-term direction is lower.
If the dollar rises, I’d like to take a short position and therefore go long the AUDUSD or GBPUSD. But until then, prices remain trapped in this large trading range.
Here’s AUDUSD (the Australian dollar versus the US dollar) to give you more insight into what I’m talking about:
This is a weekly chart and on a long-term basis, AUDUSD has traced out a monster inverted head and shoulders price pattern. This suggests that over time, this pair should go higher.
But just as we saw in DXY, there’s a trading range here too, this time between 0.74 and 0.80. It would not surprise me to see AUDUSD going sideways for some time yet until it eventually breaks to the upside.
Any pullbacks are opportunities to keep adding to long positions in anticipation of a future breakout to the upside.
Another worthwhile dollar-related chart to watch is USDJPY (the US dollar versus the Japanese yen):
USDJPY has been traversing within a descending triangle. Every bounce is lower than the last, and I feel that once again, we’ll see the same behavior eventually.
In fact, it looks like USDJPY is forming yet another double top at the major resistance line. However, I’m still on the sidelines here because USDJPY could still move the other way and make this particular instance a trap.
To avoid that scenario, I suggest putting a sell stop around 108 level. If that sell stop is triggered, USDJPY is very likely on its way to the neckline several hundred pips below.
The sell stop also avoids that potential trap because if the pair breaks higher then the sell stop order isn’t filled.
Having said that, we could be still a few weeks away from any roll over in USDJPY.
Now here’s another pair I’ve been watching …
To take advantage of the anticipated decline in the U S dollar over the long term, I really love the shape of the USDCAD (the US dollar versus Canadian dollar) chart.
Much like DXY, there’s a massive head and shoulders price pattern here. Once USDCAD plunged through the neckline at 1.30, this confirmed that bear pattern and ushered in a steady channel-bound descent.
Recently USDCAD broke underneath the low of this channel and is now testing long-term support at 1.20.
USDCAD could continue to slide sideways or perhaps even bounce higher, but I anticipate any such bounce will be short-lived and should be used as an opportunity to go short.
Now let’s look at EURJPY (the Euro versus the Japanese yen):
Last week was the first rejection in this pair in a few weeks, but it’s not a complete shock as this pair is near historic multi-year resistance levels at 134 with 137 lurking above as well.
I'm going to sit back and see how EURJPY consolidates here.
The pair could drop back to the uptrend line around 132 or so and would look at that as an opportunity to add to long positions.
For comparison, here’s GBPJPY (the British pound versus the Japanese yen):
There are some massive bullish underpinnings here including a double bottom / inverted head and shoulders combination.
Once GBPJPY cracked through the neckline at 148, this indicated a breakout. What I really like about this price action is the successful retest which indicates the upward surge is intact and likely to continue.
Having said that, GBPJPY is paused major overhead resistance level at 146.
As with EURJPY, it’s not shocking to see a pullback last week. The two JPY pairs also share this common character: the more price consolidates at this resistance level, the healthier it will be for a new move up.
View any pullback as constructive and an opportunity to add to long positions.
In this chart, I'm looking at NZDCAD (the New Zealand dollar versus the Canadian dollar).
Despite a lot of back-and-forth price action here, the governing pattern remains the double top at the left hand side of the chart.
And while the 0.86 level has been holding as support, I feel there are further price declines on the way here due to the most recent bear patterns.
Any penetration below 0.86 is a signal to go short, but aggressive traders could look to short NZDCAD at present levels.
I would certainly welcome any bounce as an opportunity to jump on the short side of this trade.
Now here’s GBPNZD (the British pound versus the New Zealand dollar):
This pair has continued to be a bucking bronco for the last couple of months.
But based on the underlying bullish price patterns including a series of double bottoms, I continue to believe this pair will go much higher over time.
GBPNZD is currently hovering around overhead resistance at 1.98. Consider going long with a wide stop if you’re not already.
But if you want to play this more conservatively, place a buy stop above the 1.98 area.
There’s a lot of blue sky above that level for GBPNZD to start roaming and this pair represents a formidable opportunity on the upside.
Now let’s look at the precious metals …
I’ll start with XAGUSD (spot silver), which has staked out a number of bullish price patterns.
The inverted head and shoulders and an interim double bottom are the key patterns here. Silver is also building an ascending triangle.
Given this history, it looks like spot silver is going to bump and grind its way higher.
But I’ve taken my profits in both silver (and gold) and I'm just watching the price action now. That’s because I expect prices to be volatile around the current area for some time. I'm waiting for a better risk/reward opportunity to get on the long side.
So let’s look at XAUUSD (spot gold):
I've recently been viewing gold through the prism of a descending triangle, a pattern from which it’s broken out following a healthy double bottom.
While this is bullish, I don't want to jump in just yet. That’s because there’s still some formidable resistance at or near the $1,950 price level.
I expect gold prices to be volatile and so I’m sitting on the sidelines for now. As with silver, I'm waiting for further price history and an opportunity to establish a better risk/reward relationship for a trade on the long side.
Now onto the stock market …
Here’s the NASDAQ stock index which is a proxy for the tech sector:
The NASDAQ has been traversing within an ascending broadening price pattern for quite some time, with prices bouncing off the underside each time.
Last week the index made a key reversal with a new low and then a close at the high. That suggests the NASDAQ will once again attempt to reach or exceed its old highs.
However, there’s also some resistance from what could be an emerging double top as prices approach 14,000 again. I'm going to be watching this very intently.
That’s because all tech stocks remain at an inflection point. They could rocket up again or turn down and collapse.
If you’re looking at things from the bullish side, the chance of yet another bounce in tech stocks is nowhere more evident than with Tesla (TSLA):
There are several things going on here, including a breakdown below the long term trendline at $640 a few weeks ago.
TSLA retested this breakout area and broke down (both are bearish), and then bounced from last week's lows (bullish).
It's yet to be determined where Tesla goes from here, but I think this stock is very much going to be a proxy for how we trade going forward in the NASDAQ.
Tesla is also contained within the boundaries of this neutral symmetrical triangle:
Which way it exits this triangle will likely be very significant.
However, I still feel that Tesla looks like it wants to break to the downside, which is why I’m also evaluating it through the prism of a descending triangle:
Any retest of the lower boundary of this triangle would open up an enormous move lower.
For now I remain on the sidelines until I see decisive price action either way that also generates a favorable risk/reward opportunity.
And that’s it for the week!
To summarize, I’m bearish on USD but feel most all USD-related pairs will continue sliding sideways for awhile longer. It could very well be the same scenario for JPY-related pairs. I’m bearish on NZDCAD and bullish on GBPNZD.
I’m bullish but waiting for better opportunities in both silver and gold.
And I’m also waiting to see where tech stocks (especially TSLA as a proxy) go from here, although I have a bearish bias there.
I wish you a very healthy and prosperous trading week.
Mark "RUNDown" Shawzin