Playing the Waiting Game: Where I Expect The Gains To Come
Sometimes the markets are poised to give great trades, but not just yet.
That’s the story this week with the pairs and stock indices that I’m watching. I do have some trades ready to trigger if things move more quickly than expected, so read on to see where the most promising opportunities lie.
First, a shorter than normal discussion of the US Dollar Index (USDI).
USDI was boosted by a better than expected CPI Report plus the increased likelihood the US was going to avoid another government shut-down. However, by the end of the week price action in USDI waned as strength in the British pound, Canadian dollar and Japanese yen took hold.
That means USDI remains locked in a tight trading range – nothing has happened for the last couple of months and therefore we won’t bother with a USDI chart this week.
But the bottom line is that the U.S. dollar continues to play chicken within a narrow trading band. When the dollar is likely to break the current gridlock (either higher or lower) remains to be seen.
The uncertainty extends to the stock market too as represented by the QQQ ETF, the tradeable proxy for the tech-heavy NASDAQ100 index:
Over the last few months, trading QQQ (and many of the underlying tech stocks) has been very profitable for me and subscribers.
Following on the bearish double top (forming a perfect M-top), QQQ penetrated the neckline and gave the signal to go short. I did so with options for maximum leverage. Going short proved to be very profitable, as were similar trades in Apple (AAPL), Facebook (FB) and others where the stocks (or ETFs) dropped by 25-50%, never mind the options themselves.
The huge drop was followed by huge key reversals which heralded the rise back up to current levels.
Today QQQ is back trading at key resistance levels – any meaningful break above 175 would signal that the long term bull market is back in force. A failure to do so indicates we really are in a bear market.
But the key point is that right now we don’t know. And therefore we have to stay out … for now.
That’s because waiting for great trades is as important a part of trading as actually making the trades themselves. There are times to trade based on clear patterns, and times to sit back and watch until we see where the market tells us it wants to go.
This is one of those latter times.
We can make a fortune as a bear or a bull when volatility is high, but not until then. I personally made millions of dollars both ways when the getting was good from September through to January, but right now I’m keeping my powder dry until we see a clearer view of the market direction.
Right now we seem to be entering a low volatility / consolidation period in the market. The magnitude of the daily bars is getting much smaller and the overall range of the market is narrowing as well.
I’m not making any USD-based trades or any stock market-based trades at the moment. There just isn’t a good enough opportunity.
So having said that, how are some of the other markets looking?
I continue to be very interested in the short side of AUDUSD (the Australian dollar against its American counterpart).
That’s because AUDUSD has largely been constricted and confined to a tight range between 0.71 and 0.73 in recent months despite its very bullish key reversal bar over the holidays.
Since there was no follow-through from what should have been a very bullish springboard, this pair looks increasingly vulnerable to going lower despite last week’s small bounce.
Look for a close under recent support (under 0.70) to take a short position here, but there’s no need to be particularly aggressive yet. Just keep an eye on it for weakness in the foreseeable future.
I think we’re more likely to see more interesting action in GBPAUD (the British pound against the Australian dollar).
The triple bottom is key for me here. Plus the fact that GBPAUD’s price has bounced off the neckline on several occasions. There’s even a new uptrend line which started with a key reversal and continued with another key reversal or two along the way.
Now here’s the catalyst that caught my eye: last week we saw an inside bar. An inside bar is where the high and low are completely contained within the previous bar.
This represents a coiling of energy. And coiled energy will eventually be released explosively.
So the upward pressure in GBPAUD is building here. And sooner or later this pair is going to rise sharply on a breakout. I expect it to run as high as the 2.00 level in the foreseeable future.
The best way to play this move is with a buy stop order just above recent highs. A buy stop ensures you have the bullish momentum in your favor as the coiled energy releases, but not before.
I hold similar views and enthusiasm for the long side of GBPNZD (British pound against the New Zealand dollar) as well. I have a buy stop in place with the same setup and reasoning as for GBPAUD.
Don’t worry too much about a bit more sideways action in either of these pairs. The upside move is surely coming.
We just need to be a bit more patient about the market confirming the long opportunity I see in both GBPAUD and GBPNZD.
Now let’s look at gold.
Last month, XAUUSD (spot gold) broke out of a long-term symmetrical triangle as I’ve discussed previously. While it’s entirely possible that gold could trade lower or consolidate at current levels, any meaningful penetration above $1360 would suggest a move much higher.
Now I realize I might miss the first part of gold’s bull move by sitting on the sidelines until I see confirmation of the breakout. But that’s the best way to play this or any pattern trade: wait until the odds are tilted heavily in our favor. Then we go in.
You can see why I urge patience when you look at the XAUUSD weekly chart:
Gold has to break that historical resistance before we’ll see some real fireworks.
It’s setting up nicely from the double bottom and the long base (like a long right-hand shoulder of a head and shoulders pattern) that’s formed since that double bottom.
But being patient will give us a higher probability of large profits in the future.
That doesn’t mean we’ll win for sure, of course. It’s completely unrealistic to assume we’ll win on every trade no matter how good the setup. Winning every time isn’t the objective of trading and you’ll be sorely disappointed if you try to do that.
As a matter of fact, I don’t win on more than 50% of my trades in any given month. That was the case last year, and yet my net profit was still over 10,000 pips because the winners were much larger than the losers due to the type of explosive moves I look for. (And wait for!)
I expect gold to go over $1,600 an ounce once the breakout happens. But until then we need to wait for confirmation that the move is “on”.
Remember: the larger the base, the larger the move into space. In other words, the longer, better and more defined the setup, the bigger the eventual move into uncharted – and very profitable – white space on the chart.
That’s what I expect from gold this year. We just have to wait for it while we see where the dollar and the U.S. stock markets want to go.
In the meantime, keep an eye on any AUD and NZD pairs (but especially GBPAUD and GBPNZD) for weakness.
I wish you a very healthy and prosperous trading week.
PS There are 5 stocks that are rapidly about to move. And i will show you how i intend to make a fortune trading them.
Just check out the link below.
Mark “USDInflectionPoint” Shawzin