A Week of Opportunity in the Euro, Yen, Gold and the Stock Market Too
Today I'm going to touch on three general themes I see a dominating the market in the immediate future.
The first theme: I'm seeing support coming back into the US dollar despite the multi-week selloff.
Second theme: the British pound crashed last week, which some observers are attributing to continuing Brexit concerns and fears.
Third theme: I’ll look at the yen pairs to get a better idea of what’s going on with the Japanese yen. (There's something about to break there.)
Let’s start with the US dollar as represented by the USDI (the US Dollar Index), which measures the dollar against half a dozen of the world’s most liquid competing currencies:
Up until the last couple weeks, USDI has dropped as expected following a bearish head and shoulders price pattern. The head of that pattern coincided with earlier historical resistance.
Now it looks like USDI wants to rise up and retest the breakout area: the neckline of that head and shoulders. USDI is seeing support with some bullish key reversals where the market made a new low and closed on the high.
Perhaps the index will even rise above that neckline above before resuming the recent downtrend. Certainly there’s evidence accumulating that the dollar might have one more bullish run left.
What I’m seeing in the Euro, the British pound and maybe even the yen suggests one last USDI hurrah.
Here’s EURUSD (the Euro versus the US dollar) which shows the Euro’s tremendous run from 1.06 to 1.20.
However, that rally is starting to look tired. It’s likely we’ll see a retracement soon.
That’s because EURUSD is at a formidable resistance area around 1.20 right now. And over the last couple of weeks, EURUSD has traced out bearish key reversals where the price made a new high before it closed on the law.
I’m not expecting a huge decline, just a retracement. That’s because EURUSD appears to have made a bullish inverted head and shoulders, which indicates prices will go higher (but not just yet). As with USDI, it’s likely EURUSD could pull back to the neckline.
So I wouldn’t be surprised to see some kind of return to 1.15 to re-test that breakout area.
GBPUSD (the British pound versus the US dollar) got pounded last week on renewed concerns of Brexit and whatnot:
Previously I discussed the fact that GBPUSD had hit major price resistance at 1.35, a level which has held for quite some time. Then GBPUSD made a bearish key reversal that suggested prices were on their way down in accordance with the long-term downtrend.
We saw the results last week with a significant plunge.
How much further does GBPUSD drop? Will it make all-time new lows?
I can’t say yet. But I’m inclined to sell GBPUSD into strength. Sell any rallies here as I expect GBPUSD to be under continuing pressure over the next couple weeks at least.
Now I want to talk about USDJPY (the US dollar versus the Japanese yen.
Long-time readers will know I’ve spent weeks, months and even years saying USDJPY has been in a declining trend. It’s why I’ve been a huge short seller of this pair on rallies and it’s why I've made a monster amount of money doing so. I’ve been bearish because of the very well-defined double top at 126 which heralded a steady decline to as low as 102 within the confines of a descending triangle.
Until recently, I thought this would continue.
But on a monthly basis, USDJPY has been entering a coil where the range has been tightening significantly. When most traders see such very small ranges, they don't look like anything.
I think that’s a mistake.
That’s because coils represent pressure building up until the accumulated energy is released explosively.
Once we see which way this pair wants to go, I’m going to be all over it like white on rice.
Patterns help guide us toward an answer for this potential major opportunity.
As shown above, a descending triangle can represent a continuation of a previous trend (in this case, down) or potentially a reversal instead.
But you can also draw an even more neutral symmetrical triangle around USDJPY’s price action too:
The nice thing is that USDJPY is getting closer and closer to the mature end of this triangle.
I’ve also been looking at monthly USDJPY through the perspective of a diamond price pattern. We’re even closer to the mature end of the diamond than either triangle:
So USDJPY is getting very close to a major move either back to 112 – 115 or down to 95.
And increasingly, I'm starting to believe that the move will be higher. I’ve been bearish on USDJPY for a very long time, but if the market can’t confirm the historical bear price patterns then what doesn’t go down must go up.
The market is going to be the ultimate referee here and will tell me which way USDJPY wants to jump. But I’m feeling more and more there will be a “surprise” move up.
Let’s drill down a bit to see why I feel that way. Here’s the USDJPY weekly chart:
There’s numerous dominant bearish price patterns here, including not one but two double tops as part of head and shoulders patterns plus the descending triangle. Taken together, these strongly suggest USDJPY should move to the downside.
But the market has been struggling for the last six weeks as it forms that coil. USDJPY can’t go down anymore. It’s been trying to drop, but there's no appetite on the downside.
This gives special significance to the multiple bullish key reversals that have appeared in this market in the past, including one just before the formation of today’s unresolved coil.
That’s why I’m now alert to the fact that the next movement is increasingly likely to be “up”. And there's a great way to play this: put a buy stop above the coil let the market action work in your favor.
If I’m right, you’re in at the beginning of what could be a very explosive move. And if USDJPY goes the other way instead, then your order isn’t triggered and it’s no harm, no foul.
I want to look at another JPY pair as well, specifically AUDJPY (the Australian dollar versus the Japanese yen):
This pair has been dropping for a long time, which is consistent with the strengthening yen over the years.
But I'm getting a sneaky feeling that this long-term yen trend is getting ready to turn around. AUDJPY is showing what appears to be an inverted head and shoulders with a sloping neckline. That’s a very bullish price pattern.
And AUDJPY closed right at the neckline last week. That suggests this pair is ready to launch much higher. There’s resistance at the 81 area and then again at 84.
But there’s still lots of blue sky ahead for AUDJPY. As with USDJPY, consider placing a buy stop just above current highs.
Onto precious metals …
In this chart, I'm looking at XAGUSD (spot silver):
There are a lot of similarities here with AUDJPY: a long-term downtrend and then an inverted head and shoulders that propelled silver from $18 all the way to almost $30.
So you can see the implications for AUDJPY.
But as for silver, where is it going next? Is this a normal consolidation in a continuing bull market? Or has the silver market maxed out and we won’t be seeing new highs any time soon?
I'm starting to fall into the second camp: I feel silver is getting ready to roll over and perhaps retest the $20 - $21 price area again.
In the past several weeks, silver has seen a tremendous expansion of volatility where it moved multiple dollars each week in stark contrast to almost all movements in previous years. When you get such an expansion, it signifies an emotional element that makes for very wild and seemingly unpredictable swings.
That’s why I’m looking at silver as a stalled market after a huge runup, one that’s made only successively lower highs.
The next “release” from the tightening ranges is going to be lower as traders bail out in frustration at not seeing new highs quickly enough. Perhaps silver will drop as low as the breakout area around $20 - $22.
If you want to trade this do it with a sell stop below the previous recent lows. But be very careful because the volatility means having to set your stops very wide.
For comparison, here’s XAUUSD (spot gold):
Gold has behaved a bit like silver in that it last made a major high several weeks ago and subsequently established a cadence of lower highs. These fit inside a small symmetrical triangle.
And since symmetrical triangles are neutral, there could be a breakout either way. However, I think the most likely direction is down -- as far as the breakout area around the $1,750 level -- especially when you look at the daily chart for more detail:
Now of course that might sound like heresy if you’ve got some kind of emotional attachment to gold. But this is why objectivity toward price action is so important for trading.
Everything we've been hearing about inflation, central bank, printing, and so on means we've been hearing about $3,000 gold, $5,000 gold and so on. And so it takes some backbone to go the other way.
But all I do is look at what the price is telling me. And right now, prices are starting to bunch up in a symmetrical triangle. Add to that the presence of multiple key reversals that make up the lower highs, and that suggests gold is getting ready to break out from that triangle on the downside.
What’s more, gold is now in a narrow range which means the release is likely to have lots of energy.
And that’s why I'm playing this pretty aggressively. I went short on Thursday. I'm going to get short again under the lows on Friday at $1,937. Ultimately I think gold will reach $1,850 or perhaps $1,750 (where the latest breakout occurred).
In the short term, the short side favors the bold here. And yes, I’m venturing into this with eyes wide open that this is obviously a bullish market which could explode the other way. But price action tells me that lower highs aren’t bullish in the short term and this market looks like it's getting tired.
Speaking of another tired-looking bull market, here’s the NASDAQ stock index:
The NASDAQ has been trading within the confines of an ascending broadening price pattern until a recent breakout above the upper trendline. But now that move looks finished with a very bearish key reversal just two weeks ago. The NASDAQ looks ready to re-enter the interior of that pattern.
This is increasingly looking like a bull trap. Anybody who chased this breakout is now likely to get slam dunked as the market turns against them.
So chasing the long side here is not going to be the way to go. I wouldn't be surprised to see some kind of elongated consolidation here, but the upside has been maxed out and I would be inclined to short any rallies. If we get a bump off the upper trendline of that ascending broadening formation that would likely be a good selling point.
Here’s the DJIA (the Dow Jones Industrials) for comparison:
While the NASDAQ soared to huge all-time highs, the DJIA never went above the January high.
Now the price appears stuck at what looks like an ominous resistance level. That’s suggesting a double top around the 29,000 area.
I'm also looking at the DJIA through the prism of a reverse symmetrical triangle (also called a megaphone top for its resemblance to the megaphones that cheerleaders and coaches use on the sidelines).
If this truly is a top, the DJIA could be in for a massive move down. I’m not saying the market is about to crash, but we could see a sell off in the near term. Seeing as how the DJIA has been hugging a fairly steep uptrend line for some time, it could break through that very quickly.
So be careful now chasing the long side of the stock market.
And that’s it for this week!
There’s a lot to keep an eye on right now, including EURUSD resistance levels, a meaningful coil in USDJPY and potentially a large rise in AUDJPY, a symmetrical triangle in gold, plus the opportunity to short any decent rally in the stock market.
But just because there's a lot on deck doesn’t mean you have to chase everything. Set up your trades with a good risk/reward balance and let them work out for you.
It looks like there's going to be plenty of opportunity in the next couple of weeks for some very profitable trading. Be patient, remember the risks and act decisively.
I'm looking forward to what’s coming and hopefully you are too.
I wish you a very healthy and prosperous trading week.
Mark "EuroRollOver" Shawzin