Why The Death Of The Iranian Major General Qassem Suleimani Caused Gold To Sky Rocket
I’ve complained at length about how ambiguous and directionless most FX markets are this year. There are only a few possible trades I see right now.
However, there’s a lot to be learned from ambiguity and how certain price patterns work … or not. In fact, what’s happening right now in several key markets could soon be pointing the way to extremely profitable trades.
Just look at recent price action in Tesla (TSLA) stock for the possibilities. (I’ll discuss TSLA’s meteoric rise later in this report and also which commodities could replicate that kind of explosive price movement.)
Let’s get started with the biggest market of all, the U.S. dollar…
In this chart, I'm looking at the U.S. Dollar Index (USDI) which measures the dollar against a basket of major currency pairs.
At the end of last year, we were left wondering whether USDI’s recent rounding top represented the end of a long-term bull market in the dollar. USDI was trading at or near a critical resistance level too.
Was it going to turn and roll over or was it going to find a way to dig in and preserve that long-term bull market?
it looks like USDI has dug in at current levels. You can see the double bottom reversal price pattern and right now USDI is sitting right at the neckline for that pattern. Notably, USDI carved out this double bottom at its long-term support line.
That’s why I feel the dollar’s future direction is higher for now. The only question is not if it's going higher, but when. While USDI has been trapped in a long-term trading range, it should resume climbing at some point in the coming weeks and months.
So let’s look at some USD-related pairs to see which appear to be the most promising ways to play this idea.
This is a chart of EURUSD (the Euro versus the U.S. dollar).
As with USDI, catching a profitable EURUSD trade has been a difficult and boring pursuit. The progress of this pair has been three steps forward and two and a half back.
However, EURUSD remains in a long-term downtrend. There was a continuation pattern in the form of a double top and the price fell significantly after breaking through the neckline at 1.15. After a couple of retests, it looks like EURUSD is now finding its way lower.
You can see in the short term there’s another mini double top that's just formed.
Within this emerging double top, there’s now an inside bar (sometimes called a compression bar). That’s when the high and low of last week's range was within the high and the low of the previous week’s range. A bar like this represents stored energy and when that energy is released, the price tends to move quickly and decisively.
I believe that release will be to the downside based on all the current bearish patterns we’re seeing in this chart. So how do we benefit from this?
Because EURUSD is in such a low volatility market, it’s tough to say whether it's worth incurring the swap fees to hold this pair for the drop. Right now EURUSD could just back and fill for quite some time before making its move.
Therefore, my suggestion is to wait for EURUSD to hit the 1.09 area before taking a short position. That price level might be just the catalyst for a larger move to the downside.
The pound looks more likely to deliver a result sooner when you look at GBPUSD (the British pound versus the U.S. dollar).
Because despite the fact FX markets have slipped into a low volatility funk, one of the more favorable USD-related trades could be shorting this pair.
That because I think the momentum generated from October 2019 looks to be over. GBPUSD found historical support that month and rallied on Brexit news and a changing of the guard in the UK government. However, this rally now looks like a dead cat bounce within a long-term bear market. And if that's the case, the next price move will be lower.
There even appears to be a mini double top forming at the current resistance area at 1.35.
I think any slip below the neckline of that double top will open up a move back toward the 1.25 level. If you have the patience and you’re willing to keep your stops wide, a short in GBPUSD could prove quite profitable.
In fact, there’s another GBP-related short I like right now.
In this chart, I'm looking at GBPNZD (the British pound versus the New Zealand dollar)
For many weeks and months, you've seen me extol the virtues of being long this pair. And I do believe that ultimately GBPNZD will find its way to the upside.
But in this ambivalent FX trading environment, I feel there’s a good possibility GBPNZD could drop back to a support low that could take it all the way back to the 1.90 area.
There’s a double top price pattern forming here too (similar to GBPUSD). If GBPNZD breaks under the recent support area around 1.95 that could trigger a reaction move back to the low 1.90s zone.
So if you’ve got an aggressive mindset, that’s also a trade you could consider.
Another pair I’ve been keeping a keen eye on is USDJPY (the U.S. dollar versus the Japanese yen).
USDJPY has bounced within the confines of a large descending triangle for over a year. Each bounce has been weaker than the last. So while there's still room for USDJPY to move up (considering the likely future strength of the dollar), I expect to see resistance right at or near current levels due to the strong key reversal that formed here earlier.
If USDJPY breaks through resistance and rises into the high 110s I would want to see if the rally fades or starts to firm up. That would be where I’d place my next short if the price action dictates it.
But it’s much too early to call. That’s why I'm still on the sidelines.
Now, of course, I recognize I left some pips on the table by not taking USDJPY trades to the upside during its recent rally. However, I still feel the long-term patterns say “down” here. I just can’t see a breakout right now.
I’ll defer to the market as price action develops. If USDJPY starts getting traction to the upside and start staking out some key levels then certainly I will get on board with a long trade.
But there simply aren’t any patterns to support a breakout yet. What some people might interpret as a triple bottom doesn’t look strong enough to act as a launching pad to me.
That’s because each bounce off the lows has been weaker and weaker. You don't want to see lower highs if this is truly a bottom.
And that’s why I’ll stay on the sidelines until I see something convincing enough that I want to pull the trigger with a good USDJPY risk-reward trade.
Now here’s crude oil, which we haven’t looked at for a while.
This chart reflects a lot of trading sentiment across FX and commodities right now.
Crude oil has been in a trading range for some time and I do think oil will break to the downside based on the double top pattern.
But lately, oil prices have started to dig in and show higher lows. That’s in spite of what looks like a new double top trying to establish itself.
So the question is how does the price action behave to support each scenario? Oil should drop if this really is a double top. On the other hand, oil should continue to rally if higher lows suggest a bull trend is emerging.
This means analyzing the market is a two-step process. First I draw my price structures. Then I defer to the market as I review the subsequent price action.
Remember that there's nothing set in stone when it comes to trading. We see all kinds of patterns all the time. But ultimately the market tells us which patterns are going to pay off and which ones are fake outs.
Right now I’m bearish due to the historical double top.
But if prices continue digging in and start showing the opposite of what “should” happen then I’ll gladly change my stance.
The perfect example is Tesla (TSLA) stock. Awhile back I was very bearish on this company. But then the price action didn’t confirm that stance. I then decided that because Tesla wasn’t going down, it had to go up. Since the price action wasn’t confirming the earlier bear patterns, I got into Tesla on the long side and it's up several hundred dollars since I spotted that divergent behaviour. (I’ll show you that chart in just a moment.)
But first I want to look at precious metals and the S&P500.
Let’s start with XAGUSD (spot silver) on a daily basis:
It’s easy to make a case either way in this metal which is why I’m showing a bearish case and a bullish one too. As we just saw with crude oil, it’s possible to come to opposite conclusions here.
On one hand, it looks like we’re trading at a major resistance area and the large and recent key reversal suggests silver should trade lower over time.
But if prices don't react as they should in that scenario, then we have to look at the bull case. If silver starts getting traction by digging in and trading back up again, then here’s how to justify that scenario:
It’s very easy to say there’s a double bottom here and maybe even an inverted head and shoulders pattern too. If so, then silver should start rallying with some energy.
The only thing I can say with certainty is that this market needs to start showing its true colors if we want to make a good risk-reward trade. There simply isn’t enough evidence in the price action to decide one way or another … yet.
And that’s why I’m simply waiting to see how the market plays out.
In a few days or weeks, the price action should tell us if silver can overcome a stronger dollar and continue higher … or not.
I'm looking at XAUUSD (spot gold) here:
The yellow metal should continue higher based on multiple bullish patterns such as the double bottom, multiple shoulders on either side of that double bottom, and a couple of breakouts to the upside from $1,380 and $1,480.
Certainly, it’s been profitable on the long side: I suggested a recent trade at $1,479 and got out at $1,607 to benefit from a nice $120 rally here.
But despite all my bullishness, I’m a bystander in gold too. That’s because right after the breakout, we got a bearish key reversal. If the price softens on the back of that reversal, we could see a significant price dip.
But if gold digs in and shows real strength, then we can discount the key reversal and look for the next rally of the gold bull.
So again, because the FX market has become such a low volatility market and therefore we’re not seeing a lot of follow-through rallies, I don't feel like there's any urgency to jump aboard a trade just yet.
There's nothing wrong with being in capital preservation mode, staying on the sidelines and awaiting a good risk-reward opportunity. If you’re uncomfortable staying out of the market, then think about how uncomfortable you’ll be if you’re losing money in an ambiguous market that could go either way.
It’s so much easier to stay on the sidelines once you realize that when trading, you only need to swing at the easiest and most obvious pitches.
So how about the S&P500?
Week after week, there's been no end to this bull market.
That’s because it’s a very virtuous environment for stock investors right now. You have low inflation and historically low or negative interest rates. There's nowhere else for money to go: pension money, insurance company money, German and French investors’ money and so on. All of it’s chasing the U.S. stock market yields because of negative bond yields in certain countries or just poor bond yields in general.
That’s why the U.S. stock market dance goes on and on. It’s a fool's errand to try and get in front of the thing and short it right now. While there could be some kind of correction, it would likely be short-lived and at worst the market would simply slide into consolidation for a while.
All this bullish price action means there are a number of fertile stocks out there worth examining.
I mentioned Tesla (TSLA) earlier in this report so let’s take a look at it now:
Tesla is, of course, the electric car company and it's been on a tear lately. This is the best example of why you have to be fluid and objective about your views on a given market. You should never be locked into a paradigm and you always ultimately defer to market action.
There were many reasons to short TSLA over and over again awhile back.
It started with a double top that dictated the price action for quite some time. TSLA kept topping out and dropping regularly.
And then I hypothesized that after all these tops -- and the way TSLA was reacting overall -- that it was set to go much lower. Especially when I saw key reversals on the most recent descent.
I recommended at short at $320 with a $180 price target. (I came up with that number by measuring the earlier move from the recent bottom to the top – roughly equivalent to the distance between the two horizontal blue lines on the above chart.)
I said Tesla was going to move to $180 and it went to a $179 and change. Quite frankly, I thought the move wasn’t over. I thought Tesla was going to drop even lower after this.
However, the price hit my objective and so I exited the trade.
At that point, it looked like the stock was setting up for another double top at a resistance area. That should have sent prices to a new low. And that was my expectation. But I learned a long time ago that what I expect has no influence over the markets.
Instead of following through with the double top, the market began tracing out a symmetrical triangle. That price action wasn’t consistent with bearish price action. Instead of breaking lower, TSLA broke out from the triangle to the upside.
Right then, I realized that the market had changed. If TSLA couldn’t go down any further, then it could only go up. And so it did … spectacularly.
At this point, I would look at any meaningful break or consolidation in this stock to buy it. That’s because I would not be surprised to see Tesla stock go to $1,000. Certainly, it will go much higher than $510 where it is now.
That’s because when a heavily shorted stock has taken out historical resistance, every rise just burns the shorts even more. Every uptick adds more fuel to the long side as the shorts try to buy at any price to escape a losing position.
However, the main reason I’m highlighting TSLA today is because it’s such a good example of how you can play certain patterns. Not just when they work, but also when they fail.
I shorted TSLA a number of times and made hundreds of thousands of dollars. In one case I made over a million dollars in a week just playing the short side. But eventually, things change. Then you have to adapt.
And this is how I'm looking at crude oil right now. And silver. And gold.
How is the price action playing out in each of these? Is it consistent with certain patterns or is it resisting them?
Once you see the price action develop, then you’ve just got to go with it and surrender to what the market’s telling you. That’s why I draw my structures and then defer to the market.
And that’s it for this week’s report!
To summarize, I’m on the sidelines for just about everything. The exceptions are possible shorts in GBP-related pairs and a potential long in TSLA.
I wish you a very healthy and prosperous trading week.
Mark "GBPDrag" Shawzin