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GBP Turnabout Plus Other FX and Precious Metals Thoughts

Mark Shawzin
March 13, 2019

It’s been a very interesting week for the British pound, especially when you consider how things looked last week.

So I’ll cover everything GBP-related in just a moment.

But first a big-picture view of the USDI (U.S. Dollar Index) to see where the dollar is right now.

Despite a disappointing Non-Farm Payrolls report, the dollar rose within its channel for the second week in a row. At the moment the USDI uptrend remains intact, especially when you consider the dollar’s strength since 2015.

Now the recent strength doesn’t imply we’re going to get a meaningful breakout soon. But a decline seems increasingly unlikely and USDI is knocking on the door of higher future prices.

Another way to get an idea for the dollar’s future direction is to look at EURUSD, since the Euro is the largest component of the USDI used to measure the dollar.

While the price rebounded from the 1.1175 lows earlier in the week, EURUSD did in fact break below the critical 1.12 price level I identified in earlier articles.

That means things are now looking very bearish for EURUSD. The earlier head and shoulders pattern can now be joined by a new rounding top with a breached neckline.

The combined weight of these patterns implies this pair will be going lower. It’s just a matter of time and nothing short of a major reversal is going to do anything except delay the (seemingly) inevitable.

Now for the British pound (GBP). After a recent substantial rise in GBP correlated pairs over the past few weeks, GBP looks to have run into major headwinds at current levels.

The pound now appears set to resume its primary downtrend as a second double top forms.

As we can see, GBPUSD fell significantly after the first double top. Now we have a key reversal in the most recent week to complete the second double top.

GBPUSD closed on the low after failing to exceed last week’s highs. It’s notable that the price turned around at recent resistance.

And if price goes below 1.27 (the neckline for the most recent double top), GBP should eventually travel much lower than that.

GBPUSD itself could be worth a short, in that case.

But let’s look at some of the other GBP pairs on which I’ve been quite bullish until now.

With respect to GBPAUD (the pound against the Australian dollar), last week’s key reversal within a triple-top bear price pattern suggests prices may have topped out and are poised to go lower.

The reverse symmetrical triangle pattern also implies lower prices.

Yes, there is a bullish case with the triple bottom earlier in the price history. But right now I think the triple top and the reverse triangle are more important and influential.

I don’t think we’ll see further significant gains in GBPAUD for now. In fact, this pair could very well go sideways for awhile before it falls.

Therefore I’m looking to exit but not too quickly.

Here’s how I’m doing it: I’ve placed a sell limit to get out midway along the most recent bearish bar. This gives a little more profit than simply selling out immediately without adding too much risk. We benefit from the sideways action while still taking a good profit.

Of course, I’m not thrilled about having to re-evaluate my earlier bullish analysis. But in the trading arena you have to beflexible– and objective – to prosper and survive. As always, the market is always right…

We’re seeing similar action in GBPJPY too (the pound against the Japanese yen).

The long-term prognosis on this pair is bearish due to the historic head and shoulders.

In 2017 the price simply bounced off the bottom of the downtrend heralded by that pattern. But now, with multiple tops showing up (and a renewed downtrend since 2018) things are looking very bearish again.

Last week’s major key reversal is very negative price action and it’s time to think about a short.

However, don’t jump in too quickly. Due to congestion in this area over the past year, I want to see a price rise before going short GBPJPY.

Now let’s take a look at a couple of non-GBP pairs that look interesting.

The AUDUSD pair (Australian dollar against its American counterpart) is now more bearish than ever.

See how the price dropped significantly after AUDUSD crashed through the neckline of the earlier double top?

Now we recently hit another resistance area with a double top, last week AUDUSD reached the precipice of the 0.70 support line for that double top.

While the price might slight sideways for awhile, AUDUSD ultimately looks to be going much lower, perhaps even lower than the bottom we saw during the Christmas holidays.

Now for a pair I haven’t reviewed for some time: EURNZD (Euro against the New Zealand dollar).

There’s a bearish head and shoulders that’s just finishing up right now.

And the price is rapidly approaching the neckline for that pattern. We saw an inside week bar last week, which represents a coiling of energy which will most likely be released on the downside.

The breakdown here could be dramatic. Any price below the lows of the last four weeks should open up much lower prices in EURNZD.

While there hasn’t been truly significant price action recently, I should also update you on the behavior of the precious metals against the dollar.

Let’s start with spot silver (XAGUSD) on a monthly view (each bar represents one month so this is a long-term chart).

I find silver worth watching as the gold/silver ratio is at 85. This is very unusual and should correct at some point, meaning silver should appreciate far faster than gold when they both rally.

That’s music to the ears of silver bulls, I’m sure.

But so far silver isn’t budging and a meaningful rally looks unlikely. By extension, that means gold is unlikely to rally either.

Silver has never recovered from its double top in 2011 – 2013. Once it broke that neckline, XAGUSD has failed to even come close to that level again at $28/ounce.

We’re also seeing a descending triangle here.

Normally you want to see descending triangles after substantial rallies. That’s when they often act as reliable reversal patterns. But at the end of a drop?

When you see one at the end of a major selloff, a descending triangle tends to act more like a continuation pattern instead.

That means lower prices ahead for silver, maybe even below $14/ounce.

If silver is to avoid further price deterioration, it has to break out of that triangle soon. I don’t see it at this time, though.

It’s more likely we’ll have to wait for a double or triple bottom (or an inverted head and shoulders) before silver can make a substantial rally.

​Things aren’t looking bullish for gold either.

XAUUSD (spot gold) broke out of its long-term monthly symmetrical triangle price pattern, but the yellow metal turned back at the 5-year resistance level between 1340 and 1360 yet again.

It’s feeling like last month’s advance was nothing more than a “bull trap” or a false breakout.

The price has already drifted beneath last month’s lows, which makes me feel even more bearish. I think we’ll see lower gold prices for now, although at this time it doesn’t feel like substantial moves are imminent.

Now for one more chart before I sign off for the week:

American stock indices, following a rally of over 20% from their respective December lows, hit significant pockets of resistance. The key level for the S&P500 was 2800.

Last week's key reversal suggests prices have topped out and further rallies are unlikely.

Could we see a major drop once again? I think that’s also unlikely. The S&P500 is most likely to be confined to a range-bound environment for the next several weeks.

So there we have it – it looks like bearish times lie ahead for GBP, AUD and possibly EUR too, with the USD looking stronger rather than weaker. In the meantime the precious metals look more bearish than bullish and the stock market should move in neutral for awhile.

I wish you a very healthy and prosperous trading week,

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Mark “GBPBuzzSaw” Shawzin

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