Why This Is The Most “Opportunity-Rich” Trading Weeks in a Very Long Time
While some FX pairs remain range-bound in the current market, there are now some very promising patterns emerging that could be quite profitable.
The U.S. dollar itself isn’t one of them … yet.
That’s because the U.S. Dollar Index (USDI) remains tricky to judge. The dollar is getting stronger against certain currencies and weaker against others. And it’s why we’ve seen a log jam in USDI over the past couple of years despite the long-term uptrend.
Even so, right now USDI is at a major inflection point. Last week there was a bearish key reversal, which I’m taking seriously because they can set the stage for both small and large selloffs. And this one was at a major resistance area.
There’s no action to take yet, but I think USDI price action over the next few weeks is going to tell us a lot about its long-term direction.
However, other currencies are beginning to show strength or weakness against the range-bound dollar.
In this, in this chart, I'm looking at GBPUSD (the British pound versus the dollar) on a monthly basis.
In GBPUSD we've seen a crash from 2.10 all the way to 1.20 as panic set in after the Brexit referendum. It was thought that the British pound was going to suffer all kinds of chaos and had no hope of recovering.
Instead, we're seeing the makings of a major turnaround. This is early days (or early months) for that turnaround but clearly GBPUSD has grabbed a major foothold at the 1.20 level. We won’t know if this is a long-term bottom until GBPUSD takes out the neckline around the 1.44 level.
GBPUSD has a way to go before that can be confirmed, but this is looking very promising and at the very least I’m expecting GBPUSD to rise to the 1.38 area before it encounters resistance.
Here’s the weekly chart so you can see why I feel strongly about my bullish GBPUSD bias:
Last Friday it was announced that the UK was formally leaving the European Union.
There was all kinds of uncertainty in the media preceding that announcement. However, to my mind prices were well ahead of events. This is why I don't pay attention to events!
Because you can see that beginning last October (six months ago) before Boris Johnson stepped into a leadership position the market began rallying. Even though we didn’t “know” if there was going to be a soft Brexit, a hard Brexit or no Brexit, there was no confusion in the markets. The markets voted. They started turning around right at a major support level on this chart.
In fact, GBPUSD is showing an early stage Eve and Adam double bottom, so called because an Eve bottom is wide with multiple lows whereas there’s just a single low in an Adam bottom.
And since this is a bottom, it means this currency pair will only head higher over time.
Now of course there will be ebbs and flows and volatility along the way. However, I would view any kind of selloff as a buying opportunity. That’s because GBPUSD just broke through the small descending triangle pattern that had formed in recent weeks.
That descending triangle is now busted. The price didn’t drop all the way back down to the lows and instead broke through the trendline. That opens up another opportunity to go higher regardless of what you might be hearing on the news.
So shut down your TV, don’t talk to your neighbors about what you're doing and just objectively follow price action here. The market is telling us GBPUSD wants to go higher no matter what the media is saying.
The old highs are around 1.35. Any kind of thrust beyond this level should confirm a new direction in GBPUSD because, for the first time in years, this pair will be making higher highs instead of lower highs.
So I think it’s well worth taking a shot at GBP-related pairs.
That includes GBPNZD (the British pound versus New Zealand dollar), which looks even more bullish in the near-term and long-term future.
As you can see, when the Brexit referendum was announced in 2016 this pair crashed on the belief that Brexit would cause all kinds of disruption and chaos in the UK economy. However, as I keep telling you, hysteria isn’t very helpful when trading for the best and most reliable gains.
If all you do is follow the news, it’s hard to make money as a trader. Instead, you need to be objective and look at price action while shutting out your emotions.
That’s why I was able to predict in late 2016 and early 2017 that the double bottom that formed in GBPNZD would set the stage for a major rally. Since then we’re now sitting at multi-year highs in this pair with plenty more to come.
Aside from the double bottom, I believe GBPNZD has also formed a long-term cup and handle which should propel this pair much higher. If I draw a conservative neckline from where the very first support formed, we can predict the height of the overall rally. You just take the depth of the pattern and project it upward.
That would take us north of 2.20 in GBPNZD.
But if I draw a neckline higher at the highest point of the rally, that sets the stage for an even bigger moonshot in this pair.
Measuring from 1.70 to 2.05 would project to 2.35 here.
And frankly, I think there's every possibility we could achieve that target quite soon. Over the next few months and even years, GBPNZD is going much higher.
Now I understand that some people are reticent to buy things when they go to new highs. There’s often volatility and resistance when you reach all-time areas. But this is not the time to be fearful.
I think we're just about to kick the door down on these 2.05 price levels and soar much higher.
It’s time to be bullish on GBP pairs.
Now let’s review USDJPY (the dollar versus the Japanese yen) which is pretty much an upside down a version of GBPNZD.
By that I mean that patterns established three years ago have defined the price action all the way through to today.
With GBPNZD it was a double bottom, with USDJPY it’s a double top combined with a head & shoulders pattern.
That’s why I’ve been looking at every rally in USDJPY as an opportunity to go short.
Just like last week when I suggested taking a short position after seeing reversal price behavior within the large descending triangle. Last week’s reversal suggests USDJPY will attack the lows at 104 once again.
What’s more, my long-term prediction is that USDJPY will eventually breakthrough that 104 neckline and drop even lower. That could be the tipping point in the USDI, by the way. Bearish USDJPY price action might be the catalyst for USDI itself to drop significantly.
But the dollar isn’t weak against everything.
In this chart, I'm looking at AUDUSD (the Australian dollar versus the U.S. dollar).
This is a good example of why all U.S. dollar pairs are not created equal.
The U.S. dollar is very dominant over its Australian counterpart as AUDUSD is in a well-established downtrend. And last week it closed on multi-year lows, which suggests another move lower.
I think AUDUSD will continue to trade within its recent channel for the foreseeable future as AUD is one of the weakest currencies across the board. This pair is short on any rally.
Now before we go to precious metals, I want to take a quick look at the light crude oil market.
I've been contending for many years that oil is in a bear market and destined to go lower and perhaps much lower. We can't see it in this chart but oil crashed $105 to half that level today. That’s a long-term primary bear trend.
There was a continuation pattern with a double top and then a second double top more recently. Now oil is sitting right at the neckline. It’s ready to crash to new lows below $50.
I think we’ll see new lows down to $40 and perhaps much lower in crude oil in the months and years to come. This is a long-term bear market and I don't see anything in this chart to change that.
Now I'm going to move over to the precious metals markets starting with XAGUSD (spot silver).
To my mind, this still looks like a bear market. That’s because XAGUSD has only made lower highs despite its recent rally. I would be willing to consider the bullish case for silver if it starts making new highs.
If you’re a silver bull already, you could make the case that silver has established several bottoms. But until this metal takes out recent prices above $19 or $20, I can’t feel bullish here.
Last week silver did make a bullish change in a direction even though it still finished in the red. There’s even a potential double bottom in recent weeks that might point the way higher.
But silver needs to start making new highs to persuade me that a silver bull has emerged.
As it is, we might only have to wait only a few more days or weeks to see how silver is going to go.
Meanwhile, XAUUSD (spot gold) is already in a much more definitive bullish phase than silver, as you can see here.
What set the stage for a bull market in gold was the double bottom all the way back in 2015 at the $1,050 area. We then had a complex inverted head and shoulders with numerous shoulders on each side of that double bottom.
Then gold cracked through the neckline drawn through the entirety of this pattern. And then again through the more recent flag pattern. That’s very bullish price action.
Since then gold has been consolidating at the upper levels. That remains bullish because even though gold did endure a key reversal a few weeks ago there was no follow-through.
If the key reversal was truly the end of this bull market, the price should have followed through.
Instead, this looks like a market where you need to be long. The path of least resistance in gold certainly looks higher from here.
This is a chart of the S&P 500 stock index.
For several weeks I've had an objective of 3300 on this index. It rose to just a hair above that level and now there’s plenty of resistance. (I got the 3300 number by measuring the earlier range of 2700 to 3000. Since that range was about 300 pips, a logical target was 300 more at 3300.)
But now with a key reversal and then a bearish follow-through to the downside last week, I think the S&P500 could go lower.
A couple of bullish trendlines suggest the drop won’t be too severe though. I think it will find support at either of the lines I’ve drawn for you, perhaps around 3100 or so.
I don't foresee a major crash because this is still a bull market until proven otherwise. We’re most likely to see consolidation for a while with lots of backing and filling.
That makes this a market of stocks and not a stock market. While this consolidation lasts, you’ll need to look at each stock on its individual merits.
And that statement couldn't be more true than when we examine Tesla (TSLA) right now.
Tesla is moving independently of wherever the overall stock market goes right now. In fact, TSLA closed at an all-time high despite the selloff last week in the stock market. It looks like a moon rocket and is likely to continue to be one.
Tesla is on its own trajectory and is going a lot higher, possibly over $1,000 and even higher than that. This is a short-covering rally and TSLA was one of the most shorted stocks around. Now those shorts are running for cover.
This is a case where the trend is your friend and I wouldn’t fight it. In fact, if you haven't already done so consider adding some TSLA share in your portfolio.
Tesla’s price history is a good example of how I look at price action to capitalize on opportunities and also avoid the potholes. In 2017 I was actively shorting TSLA based on the first double top. I shorted it again when it put on another double top and a head and shoulders pattern.
I even projected that TSLA was likely to drop to $180 based on the height of the head and shoulders from a recent low.
As luck or fortune would have it TSLA went a hair under $180 and I got out, even though at the time I thought it would still go lower overall.
Then TSLA formed a symmetrical triangle. I was still bearish on this stock, but the price peaked above that triangle and failed to follow through on the bearish side.
This suggested a new outlook because TSLA was no longer going down as predicted. Since it couldn’t go down, it surely had to go up.
It's as simple as that.
Once TSLA broke through its $380 all-time resistance level, that set the stage for the moon rocket we’ve seen since. And again I see nothing in its way to stop it from hitting $1,000 or higher.
And that’s it for this week’s report.
To summarize, the U.S. dollar is bearish against the British pound and the Japanese yen and you should be considering going long GBPUSD and short USDJPY. However, the Australian dollar is weak and AUDUSD looks like a good short. I also like GBPNZD on the long side.
Oil is bearish while gold is bullish. I’m neutral on the stock market as a whole but Tesla looks set to run over $1,000 on current momentum.
And with that, I wish you a very healthy and prosperous trading week.
Mark "British-PoundTurnaround" Shawzin