Why This Usually Quiet Month is Presenting Some of the Biggest Trade Opportunities of The Year
For the past several years, the New Zealand dollar (NZD) has been the weakest currency against its major competitors and after a recent and brief uptrend, I believe NZD is set to resume that weakness.
Let’s look at how to take advantage of this …
GBPNZD (the British pound versus New Zealand dollar) offers a good risk/reward on the long side:
As long-time readers will know, I was shouting from the mountain tops since late 2016 and early 2017 that GBPNZD had bottomed and would likely go higher. What prompted me to call the change in direction from the historic (and massive) downtrend to the new uptrend was a very classic double bottom price pattern.
Once the price moved through the neckline of that pattern, the new uptrend was confirmed. GBPNZD even put in a bullish rounding bottom after the double bottom, making the 1.80 price level the main support line as it was the neckline for both patterns.
This market has risen from every subsequent test of that level.
In fact, GBPNZD has continued to establish higher lows and recently made a very subtle double bottom at the 1.90 level. After a successful test of this level I feel 1.90 will hold. This means GBPNZD is ultimately headed up once again.
So I'm inherently long-term bullish on GBPNZD at time this, even though it might take a while to get started. You want to go long GBPNZD now, if you’re prepared to wait. I feel any dips are buy and hold opportunities.
Now here’s NZDCHF (the New Zealand dollar versus the Swiss franc):
As the New Zealand dollar is weaker against most other currencies (perhaps excluding the US dollar), it’s no surprise NZDCHF as been in a pronounced downtrend.
After a brief counter-trend rally, NZDCHF has put in a bearish double top. Recent price action shows that this pair is now about to dip below the neckline of that pattern.
Therefore NZDCHF looks to be a good bet on the short side, even if it proceeds in fits and starts at first.
So how’s the US dollar doing in the meantime?
Here’s USDI (the US Dollar Index):
USDI hit and temporarily exceeded a major resistance level at the height of the pandemic. Traders who chased the new highs have been trapped in what’s known as a bull trap.
It now looks like the dollar is ready to turn lower over the long run. Note how recent price action has carved out a bearish head and shoulders pattern:
A head and shoulders is a reversal price pattern. Prior to this, USDI was a rising market. Now I expect USDI to be under pressure and continue lower over time.
Last week the price consolidated, which isn’t a huge surprise considering how fast the dollar has dropped and the fact it’s August. August is traditionally a very slow, inactive month for most markets as most traders are normally on holiday at this time.
That means we may see the dollar consolidate for awhile, but ultimately I expect a lower dollar sooner or later.
Here’s GBPUSD (the British pound versus the US dollar):
As I believe the dollar will be under pressure over time, one of the pairs I'm keeping an eye on is GBPUSD. I expect the pound to trade higher over time.
This pair hit a major low during the pandemic crisis to create what appears to be a bear trap. Since then, GBPUSD has behaved very bullishly with a strong rise from 1.13.
GBPUSD reached over 1.31 and last week hit a bit of a resistance patch which is also historical resistance.
Consolidation isn’t a surprise due to that price history, plus the August seasonality I’ve just mentioned.
Now of course with the background of fiscal stimulus, the coronavirus and so on, August 2020 could very well be an exception to the tradition of slow, low-volatility August trading periods. But on balance, August is usually quiet.
That gives us an opportunity. As I’m looking for GBPUSD to go higher over time, we can buy on any weakness or retracements as this pair prepares for a breakout past resistance and through its long-term downtrend line.
USDJPY (the US dollar versus the Japanese yen) is another key USD pair I’m watching closely.
As long-time readers know, I’ve been inherently bearish on this pair for the last couple of years:
It was my expectation that once USDJPY had most recently peaked again with a double top, it would drop to the 104-105 support area. So far that history is playing out again, and I wouldn't be surprised to see a bounce from current levels.
And while that descending triangle has been very constructive for profitable trading on the short side, there’s now another way to view this pair:
A symmetrical triangle is neutral rather than bearish. That opens the question of whether this market will stay bearish or turn bullish. It depends on which side the price breaks out.
The key price levels are 110 – 111 on the upside and 104 on the downside. For now, I’m going to defer to the market to see what happens.
Let’s look at EURJPY (the Euro versus the Japanese yen) for a quick comparison to help us gauge if the yen is truly starting to weaken or if USDJPY’s neutral action is purely due to USD action:
A weaker yen suggests EURJPY should head higher, and that's what we're starting to see.
EURJPY has been in a downtrend for the last couple of years but is now at an inflection point following recent bullish price action.
That definitely represents a potential trend change. After all, the governing price patterns for the last few years have been the bearish head and shoulders in 2013 – 2015 and then the bearish double top in 2017 – 2019. Both have dictated prices going forward … until now.
EURJPY’s momentum has started to change as we see higher lows and what looks to be a double bottom.
In fact, EURJPY recently broke through the neckline of that double bottom for the second time. I’m feeling that the momentum is on the bulls’ side right now and price could easily go to the 127 – 128 level until it hits long-term resistance.
Then we'll see just how weak JPY really is. For now, I feel the lack of follow through to the downside and this new momentum at the upside will be continued over the short run. EURJPY’s path of least resistance looks to be up, at least for now.
GBPJPY the British pound versus the Japanese yen) is also looking interesting, although its outlook is murkier than with EURJPY:
GBPJPY has been in a clear downtrend for many years starting from a clear double top at 195. That reversed the earlier uptrend into a prolonged downtrend marked with a rounding top. Within that rounding top was a double top flanked by multiple shoulders to make a complex head and shoulders pattern overall. All this is bearish price action.
That bearishness lead to lower prices until recently, but now GBPJPY has been holding to a rising trend line with a series of higher lows.
GBPJPY is failing to follow through on its previous bearish price patterns as it should have done.
If this pair can hold above its newest upward-sloping trendline, that would be a buying opportunity.
Otherwise it could be that GBPJPY is presently tracing out a bearish double top instead. If so, then the long-term GBPJPY downtrend is still in place.
I’m going to defer to the market in this case, as GBPJPY is looking promising on the upside but not as clearly as with EURJPY.
It’s coming down to just how weak JPY really is. We’ll find out soon. For now, I’m drawing my structure around prices and then watching to se how the market behaves.
Let’s take a look at the precious metals, starting with XAGUSD (spot silver):
Silver broke out of a seven-year downtrend line after tracing out a bullish inverted head and shoulders price pattern.
Since then, it’s been a smooth cruise to nearly $30. However, the price settled back in the most recent session. I wouldn’t be surprised to see some consolidation because of the very sharp recent run, but use any drop as an opportunity to get long silver for the long run.
Now for XAUUSD (spot gold), which is also very bullish and on an extended run:
Once gold broke out of its complex inverted head and shoulders pattern at the neckline around $1,360, this denoted a major breakout for the yellow metal. Once the retest was successful, It's been up, up and away.
It looks like there's no limit in gold but that being said, it did settle back somewhat from its highs last week. As with silver, it does feel like it's overbought and set for a potential drop.
Just look at the expanded volatility in the last three weeks. Compare the length of the last three weekly bars and note that the price ranges from high to low in each of these weeks has been $100 or whereabouts. This is very large when compared to the small bars (and lower volatility) preceding the breakout.
Once volatility expands, the more speculative the fever as more traders chase the market. However, that’s when you need to be more cautious.
Don't get caught up in FOMO (the fear of missing out). Don’t chase these higher prices for now. That’s why I would wait for some kind of setback and consolidation to take a long position in XAUUSD.
Let’s finish with a quick look at the NASDAQ stock index:
A few weeks ago this index broke out of its ascending broadening price pattern and it looks like prices aren’t going to look back. The past of least resistance is up.
Of course, there could be a pullback here, especially with the US elections coming up and a lot of other stuff that could potentially cause disruption in the next few weeks and months. As with the precious metals, be cautious and don’t give in to FOMO or you’ll likely buy at the worst possible time.
Be patient and wait for good buying opportunities before going long. So keep that risk in mind if you're inclined to trade these markets right now.
And that’s it for the week!
To summarize, I’m bearish on NZD, USD and possibly JPY too. I’m bullish on the precious metals and the NASDAQ, but cautious. Wait for pullbacks and don’t get caught up in FOMO (fear of missing out).
I wish you a very healthy and prosperous trading week.
Mark "GeopoliticalUncertainty" Shawzin