Is Gold Signalling Systemic Risk? Plus Other Pairs I’m Watching For Profitable Trades
I hope you’re enjoying a haappy July 4th holiday week if you’re in the US, and that you enjoyed July 1st if you’re one of my Canadian readers!
Before we get into the charts, I’d like to point out a few things about the trade war “news” we’ve been seeing lately.
President Trump and President Xi had another “excellent” meeting at the G-20 soiree over the weekend. Trump declared relations with China were “right back on track” as he and President Xi Jinping sought to de-escalate a prolonged trade war between the economic powerhouses
Trump also said the U.S. would hold off on threatened additional tariffs on Chinese goods.
Color me skeptical, but haven't we been to this dance before?
The difficulties between the US and China are about global domination, not trade. China needs to keep stealing US technology, intellectual property, and so on to grow their economy. Hence, despite all these gratuitous attempts to placate the electorate and the markets, I expect this struggle will continue for a long time.
Meanwhile many key markets (including the dollar, gold and stock markets) are at critical inflection points. When you combine that reality with the fact we’re now meandering our way through North American summer, I expect markets will be range-bound for the immediate future.
So while certain markets appear on the cusp of breakouts: Gold (higher), CAD (higher), GBP (lower), I’m increasingly reluctant to make trades.
There are definitely some very promising setups available. Those include going short USDCAD (U.S. dollar against the Canadian dollar), EURCAD (Euro against the Canadian dollar), GBPAUD (British pound against the Australian dollar) and GBPNZD (British pound against the New Zealand dollar).
I also favor going long XAUUSD (spot gold).
However, thanks to seasonality, I’m counterbalancing my enthusiasm for these trades with my skepticism that they’ll follow through in the anticipated direction.
And yes, that means the summer doldrums we typically see at this time of the year. It’s been my experience that July and August trading conditions are likely to be very challenging.
Accordingly, there are likely to be numerous breakouts that quickly lose their momentum, go into reverse and remain range-bound as they were before.
These are trades that would work in other time periods, but typically don't muster the follow through during the summer.
For me, the frustration of losing in a trading range environment is far worse than the feeling of missing out on a trade. That’s why I’m willing to let “good” trades go by (if they actually happen), in exchange for not feeling the frustration when they don't.
First a couple of examples to show you what I mean. Then I’ll look at some prospective trades that show promise and of course gold which is the most interesting trade available right now.
Let’s start with the U.S. dollar on a monthly chart:
There’s significant overhead resistance here despite a long term uptrend line. I don’t see it breaking that resistance any time soon. But neither will it plunge. The most likely scenario is that the dollar will drop a bit, perhaps enough to test the uptrend line once again.
When we see if it holds there, or breaks down, then things will get very interesting in U.S. dollar trades.
AUDUSD (the Australian dollar against the U.S. dollar) is a pair I’ve been bearish on this year, but last month handed us a bullish key reversal.
If you’re not familiar, a key reversal is when the price makes a new extreme high or low (low, in this case) and then finishes at the other extreme (at the high, in this case).
Since this key reversal happened where AUDUSD has seen previous strong support, it feels like AUDUSD’s multi-month decline may have been arrested for now.
I’m not saying the bottom is in for AUDUSD. I’m not sure if it’s a real bottom or just a sign this pair will slide sideways for awhile between 0.70 and 0.75. (In fact, considering the seasonality factor, it’s more likely to be the latter and therefore not tradable at this time.)
I won’t be buying AUDUSD nor selling it. After all, there’s still a recent downtrend line AUDUSD would have to break for me to feel bullish on this. And as I’ve just pointed out, I can’t remain bearish either.
Stay on the sidelines in AUDUSD for now.
Now let’s look at some pairs that appear to offer the best risk-reward relationship for us as traders.
First, USDJPY (the dollar against the Japanese yen). If you’ve read this report previously, you’ll know I’m very bearish on this pair based on long-term patterns going back to 2015.
Those patterns include a head and shoulders with the head being a double top. Plus the more recent descending triangle which I suspect will be broken on the downside at some point this year.
There’s been a recent downtrend in USDJPY from 112 to 106 and now we have a bullish key reversal last week (just like the monthly bar in AUDUSD).
However, I still feel strongly about the short opportunities here. Use any USDJPY rallies as an opportunity to get short again if you aren’t already. Just remember this week’s trading is likely to be very illiquid and erratic due to the holiday week.
Now let’s look at EURCAD (the Euro against the Canadian dollar), which is showing a descending triangle just like in USDJPY:
CAD appears to be strengthening against many other currencies, not just EUR. As with USDJPY, use any rallies as an opportunity to go short this pair.
I think EURCAD could drop significantly once the long term uptrend is broken. Just be aware that when that happens, a rally back to the trendline is likely before the big drop.
GBPCAD (the British pound against the Canadian dollar) looks even more promising as a short. That’s because GBP is looking weaker across the board while CAD is looking stronger across the board. That’s a potentially explosive combination (or it would be, if this wasn’t the summer months).
Price action should continue going lower. The dominant historic pattern was the Adam and Eve double top. That’s a double top where one top is rounded and the other is more spiky.
You can see that once GBPCAD broke the Adam and Eve neckline it was all over for the bullish case in this pair.
There was a much more recent mini-double top where the same thing has happened: a broken neckline and a plunge.
It now looks like we’re going to break the support level down around 1.50, but not before some consolidation and sideways trading.
Everything on this chart suggests we should go short soon (if not now), but again seasonality is a factor. Use caution when looking for an entry on the short side GBPCAD.
There’s one more GBP trade you should consider: GBPAUD (the pound against the Australian dollar).
This pair has been carving out a reverse symmetrical triangle, one I feel is destined to be broken on the short side thanks to the double top we’ve just seen. Especially since there was a key reversal at the second top.
At the moment, GBPAUD is at the neckline of that double top and should drop significantly to the bottom of the triangle. Don’t rush, though. We’ll likely see a bit of backing and filling before the real action starts.
Remember, trades that would normally work are likely to be on delayed fuses for the immediate future. That’s why I’m cautious about actually putting on trades at this time.
So how about the precious metals?
XAUUSD (spot gold) remains the pair that’s most firmly on my radar.
But before we get to that, let’s take another look at XAGUSD (spot silver) at the monthly level.
This chart has a very bearish pattern with the large double top. XAGUSD’s price hasn’t even come close to recovering since the neckline of that pattern was breached.
Since then we’ve seen a bearish descending triangle. What’s new is that silver is weakly challenging the long-term downtrend line on that triangle.
The $14 area at the baseline of the triangle has been tested several times but the last drop stopped well short of that level. Is that bullish?
Not really. Because when we look at silver’s weekly chart, there’s not much to suggest this is ready to head higher
If anything, it still looks like silver is more likely to break down rather than break out to the upside.
Silver needs to break the $17 level and hold there before I can start feeling bullish about this metal.
In fact, I’d need to see the kind of action in silver that we’ve already seen in gold.
This month’s price surge in XAUUSD to $1,440 smashed through the downtrend line of a 10-year symmetrical triangle price pattern. This suggests gold is ready for a dramatic move higher.
Since soaring to $1440, XAUUSD re-tested the $1,400 level before ending the week at $1,409. I would like to see further consolidation between $1,380 and $1,420 before jumping in with both feet.
This kind of re-test is normal after a major breakout, by the way. Consider buying any dips as they happen.
Now here’s something else to think about: as gold was soaring to $1,440, Bitcoin (BTC) soared to $14,000. This is likely not a coincidence, and the price action in both instruments could be leading indicators of heretofore unforeseen systemic risks in the global markets.
Price is telling us something in advance of events, and that something is “watch out”.
I’m not pushing the panic button here by any means. Just understand that a surge of money into “alternative” assets like gold is often a sign that big players are uneasy about the unfolding risks in the wider markets.
We’re seeing a bit of uncertainty in the NASDAQ100 stock index, anyway.
The NASDAQ made an impressive key reversal at the end of 2018, but has so far failed to make any meaningful penetration over the significant double-top resistance area.
Accordingly, I’m remaining on the sidelines in the stock market too. I need to see more evidence of breakout in one direction or the other before I commit to a trade.
For now, understand that last week was an inside-week bar. That suggests this index could be losing its upwards momentum. The other interpretation is that energy is being stored for an explosive upside breakout.
Right now I don’t know which scenario is more likely, so I’m remaining on the sidelines.
So here’s the summary for the week: AUD may have paused its downtrend, CAD and gold are looking strong, and GBP is looking weak. Everything else is inconclusive and July-August are likely to be challenging trading months for all of us.
I wish you a very healthy and prosperous trading week.
Mark “SystemicRisk” Shawzin