Don’t Miss the GBPNZD Party … Plus My Favorite Short — Again!
Another week, another update on GBPNZD (the British pound against the New Zealand dollar).
That’s because I’m still very bullish on this pair and you really don’t want to miss out on this one.
For the last, while all pound correlated pairs have been buffeted by ‘on-again, off again’ Brexit news, news of agreements made and postponed, and so on. About the only regular theme is that the can might be kicked down the road yet again.
You’d go crazy trying to process all this news.
Yet price action is much simpler to follow. And as you can see, despite all this conflicting news, GBPNZD has kept trekking higher as ordained by its pre-established and bullish long-term price patterns. This once again supports the idea that price is ahead of the news.
It sure doesn't seem like there's any Brexit uncertainty in the markets at this point — the markets have already voted.
In fact, it looks like they started a vote even a couple of years back with the onset of the double bottom price pattern in late 2016 and early 2017. This double bottom set the course for the reversal that we’re seeing today. There was a double bottom at 1.65 and now prices are 4,000 pips north of where they were two and a half years ago.
So, not withstanding several administrations coming and going, the markets have spoken and they spoke a long time ago. GBPZND looks set to keep going higher despite all the Brexit uncertainty and background noise. In fact, we had another double bottom at the 1.82 price level and the price has now just cleared the neckline of that pattern.
I recommended buying above the previous week’s bullish key reversal 2.063, by the way. (A bullish key reversal is when the market makes a new low and then closes strongly at the high.)
And now we're about 300 pips higher. Is GBPNZD done yet?
Not at all. Quite frankly, I'm looking to add to my position as I feel that this pair is still headed much higher. If we look at GBPNZD in context of this long-term chart, there’s an enormous base that’s been built — almost like a cup and handle with this entire pattern being just a base for liftoff. As the saying goes: “the bigger the base, the more into space” with “space” being all that white space well north of the current price. This is where I anticipate GBPNZD heading over the next few days, weeks, months, and possibly even years.
So if you’re still looking to take a position, go ahead. But be warned this pair is very volatile. Don’t set your stops too close and trade with a position small enough to let you sleep at night.
Now onto the dollar, which is also very important right now.
Let’s take a look at the 42-year price history of the U.S Dollar Index (USDI, which is a measure of the U.S. dollar against a handful of major currencies). I’ve been focusing on this long-term chart because you can see we’re trading at a key resistance area right now.
This resistance area is even more important when we consider the descending triangle price pattern and the fact USDI is bumping against the downtrend line. If USDI starts turning here, this could become a major reversal to much lower levels over time.
How soon could it happen?
Well, here’s another look at USDI, this time at the weekly level where each bar represents one week:
Not only does the 42-year chart look ominous, but also on this weekly chart we’re seeing definite bearish signs. Until recently, USDI has soldiered higher above its ascending trend line.
But with last week's price action, we closed smartly under that support line. This reversal, combined with the resistance areas I’ve highlighted and the 42-year chart, has set up the potential for what could be a huge reversal top in USDI.
We could still go one way or the other here, so the follow-through price action in the weeks to come is critical.
But this is starting to look like the beginning of a significant turn in USDI at the moment.
Let’s look at how some other currencies have performed in light of the above development, starting with GBPUSD (the British pound against the dollar).
The pound has been a key beneficiary of recent dollar weakness, despite everyone writing it off due to Brexit uncertainty.
But once again, we can see how price is ahead of events. Because although we still don't have any clear resolution of how Brexit is going to get sorted out, nonetheless GBPUSD has soared over 1,000 pips in the last few weeks.
I don’t think it’s a coincidence that GBPUSD turned at an area of historical support.
More work needs to be done though. The 1.34 area is important here. Once that’s cleared, we’d have a much clearer path to go even higher. Such movement will not occur in a straight line, of course. and we’ll likely see high levels of volatility including sudden selloffs.
But if this market is real, we’ve just seen the second bottom of a major double bottom at the 1.20 price level. That’s very significant when you consider we’ve seen literally years of weakness in the British pound. We could be on the verge of a multi-year GBP bull market if this price action continues.
Now for the other pair, I’ve been watching like a hawk lately.
Let’s see how USDJPY is faring (that’s the dollar against the Japanese yen):
My views on this pair have been bearish for some time, as regular readers know. That’s due to the
long-term price patterns, notably the double top in 2015 and then the descending triangle and the behavior within that triangle.
I made a boatload of profits shorting USDJPY in late March and April this year from the 112 area. Now I believe we may be at another inflection point where we see yet another reversal to the downside at the 109 area.
That’s because we’ve just seen a narrow range bar last week. A narrow range bar is one where the week’s range was considerably smaller than the three weeks prior. A narrow range bar right at the resistance area indicates this could be a very fertile area to short USDJPY with a sell stop.
I’m actively looking to short USDJPY on this basis.
Bear in mind that earlier this year I indicated there was a huge risk: reward opportunity when the price was at the 112 area. I think we’re seeing the same kind of opportunity right now.
Place any short positions below last week’s lows and don’t get too greedy with the position size. I almost never risk more than 1% of my account in any one trade, even one as promising as this.
So what else is looking interesting this week?
GBPCAD is another chart that’s worth a look (that’s the British pound against the Canadian dollar this time), this time at the daily level.
As the pound increasingly grows stronger, we’re also seeing more weakness in the Canadian dollar. That should make for increasingly bullish price action in GBPCAD. This is bolstered by the clear double bottom at 1.59 we saw way back in the early August – September timeframe.
You can see how GBPCAD broke through the neckline of that pattern, then retested that neckline before catapulting higher. There will likely be some violent swings in this pair, but the overall trend should be higher.
Especially when EURCAD (the Euro against the Canadian dollar) shows signs of turning around at the weekly level.
Some time ago, I felt EURCAD was destined to go lower based on the double top and descending triangle price pattern you see here.
But subsequent price action didn’t follow through, so this is an excellent example of how you must defer to the market even after drawing certain patterns. You can see that even after breaking the support line of the triangle, the price has refused to drop lower with two very clear key reversals and a double bottom.
Now I'm looking for prices to go back inside the triangle and if ERUCAD breaks through the trendline, then we have what's called a busted triangle.
So EURCAD at the weekly level is a great example of how I draw my structure and then defer to the market. The market is always right. I'm not going to impose my will on the market and obstinately declare the price must go down “just because”. If the price action isn’t supporting what I'm seeing and starting to reverse, then I’ll change my opinion to match the market.
Let’s look at the precious metals now, starting with spot silver (XAGUSD).
On this monthly chart, I’m bearish on silver because of the huge key reversal right at a major resistance area. I still feel that this development was a dagger in the heart of the longs and that eventually, we’d likely continue lower. But for now, I'm just going to stand aside and watch to see if that’s actually going to occur. If the market supports what I'm seeing, XAGUSD will return to the $14 level or thereabouts and I’ll short it at an opportune moment along the way.
But if it doesn't — if silver starts grabbing a foothold and digs in at current levels — then I won't be afraid to pull the trigger and I’ll go the other direction. For now, I’m content to wait and see what happens first.
Let’s look at spot gold (XAUUSD) to compare.
Based on recent reversals at the $1,555 area, I suggested gold was going lower in the short term and indeed that’s what we saw. It broke from the $1,540 area when all the way to $1,460.
Now gold is consolidating. Is this just the pause that refreshes on a long-term bull market or will prices roll over and drop even lower from here? I'm ambivalent at the moment and that’s why I’m watching to see what clues the market gives me – just like with silver.
One last chart before I sign off for the week: the S&P500.
As with the British pound, there’s been a tremendous amount of background noise about the stock market’s prospects such as an inversion of the yield curve, recession, an impeachment inquiry, all kinds of drama with Syria, and so on.
But this is why you need to be objective and just look at the price action. And if you stand back, you can clearly see the S&P has been traversing within the confines of a long-term ascending triangle. That triangle’s been marked by a series of bullish key reversals along the trendline and they’ve established a lot of support for this market.
So ultimately the path of least resistance still looks higher for now.
I would be cautious about a breakout to new highs, though. It would likely be a bull trap — so be careful and don’t get carried away by your emotions. Watch the market action, not the news.
And with that, I’ll wrap up this week’s report. I’m very bullish on GBPNZD and bearish on USDJPY again. I’m bullish on GBP and bearish on CAD pairs in general. Plus I’m still on the sidelines with precious metals and the S&P 500.
I wish you a very healthy and prosperous trading week.