Why you should be focusing on “The Path to Least Resistance” on the NASDAQ and how to be part of the renewal of this MONSTER
There’s one currency I strongly believe will strengthen in the coming weeks and months, and another that I strongly believe should weaken.
But before I get into those, let’s begin this week’s analysis by looking at some of the major asset categories from a global view. Then I'll zoom in and examine specific opportunities
The US Dollar Index (USDI) measures the US dollar against half a dozen of the major currency pairs:
USDI is establishing a slight bottom in the dollar. I don't expect this to prompt a major rally, but I do expect more strength than weakness in the near future.
Countering that is a major resistance pocket to act as a bearish force. That suggests USDI is now caught between support on the lower side and the resistance on the higher side. I feel the index could be trapped in a sideways trajectory all through the summer, perhaps with a slight upward bias.
Therefore dollar correlated pairs like EURUSD (the Euro against the dollar), AUDUSD (the Australian dollar against its US counterpart), and GBPUSD (the British pound against the dollar) should weaken to some degree over the next few weeks.
Let’s start with EURUSD where the major trend has been down for a long time:
Within this downward trajectory, a prominent head and shoulders pattern has acted as a continuation pattern. You can see that once EURUSD dropped to the neckline of that pattern, it kept on falling in line with the primary bear trend.
EURUSD does not look like it's going to stop falling anytime soon.
In the meantime, there’s been a coiling effect over the last six to eight weeks where a group of inside bars have all been contained within the larger trading range established back in late March.
This coiling effect builds up pressure which I expect to be released to the downside soon. That being said, EURUSD has a lot of price support all through the 1.04 – 1.06 area, so EURUSD’s continued drop will occur in fits and starts.
Eventually, I expect the Euro to reach parity with the US dollar (1:1) at some point in the future.
In this chart, I'm looking at AUDUSD (the Australian dollar versus the US dollar).
During the February – March – April time frame AUDUSD spiked down as it triggered all the sell stops under the 0.67 price level that was sitting there for some time. It spiked as low as 0.55 and then retraced substantially.
However, that rally appears to be over and the long-term downtrend is now likely to resume. I think it’s very likely that AUDUSD has hit significant resistance at the 0.65 level and that a re-test of the lows is on the way.
Because this is the summer season, we could see some sideways trading behavior in a kind of “three steps forward, two steps back” opportunity. But for those who are willing to be patient, shorting AUDUSD should be rewarding in the foreseeable future.
Now here’s my long-time favorite short pair: USDJPY (the US dollar versus the Japanese yen).
As regular readers know, this is a pair I've talked about at enormous length for many weeks, months, and years. This pair has established overwhelmingly bearish price patterns on just about every time frame I've examined, even when you go 45 years into the past with a very long-term chart.
On this weekly chart, there are multiple bear patterns including the head and shoulders with a double top. That pattern halted the existing rally and then the descending triangle (marked by a series of lower highs off a common low) piled on the bearish pressure.
USDJPY has bounced off the 104 area multiple times with a recent spike below that level. That spike subsequently became part of a bearish H top (or steer top, if you think it looks like the horns of a steer instead).
This combination of multiple bear patterns makes it very difficult to see USDJPY turning around with a bullish rally. Therefore the price action will be anywhere from sideways to downward over the next few weeks.
The only risk I see with shorting this pair is that it could continue to ramble back and forth for a while before it finally breaks down as expected.
Because this is the summer, I don't expect a lot of fireworks but if we see a sharp breakdown I'll happily take it. That’s why I intend to stay short and I view any rallies in USDJPY as an opportunity to establish further shorts.
Overall I see the yen strengthening across the board and, despite the fact that I also see some near-term dollar strength, the yen should be even stronger which means USDJPY will go lower over time.
That’s why there’s another yen pair I’m following quite closely right now: AUDJPY (the Australian dollar versus the Japanese yen):
By the way, I should clarify something for any beginning forex traders reading this. You might be wondering how a chart like USDJPY (or AUDJPY, as we’ll see in a moment) could go down if JPY is strong.
Note that JPY is in the cross position (second position) in the “USDJPY” and “AUDJPY” quotation format. If a currency in the cross position is stronger than the one in the base position (USD or AUD, in these cases), the base currency is, of course, the weaker of the two and therefore will drop against it.
Therefore AUDJPY will drop if:
- AUD is weak relative to JPY
- JPY is strong relative to AUD
Right now AUD is looking weak across the board and JPY is looking strong across the board. So shorting AUDJPY looks particularly attractive right now.
Looking at the chart, you can see there’s a double top acting as the governing price pattern for AUDJPY. Once the price dropped through the neckline of that pattern, it was unable to sustain any upward momentum, and attempted rallies fizzled out. Those rallies culminated with a double top with a shoulder on each side.
Since the neckline for that pattern was breached, AUDUSD has kept dropping within the confines of a wide channel. The market's been going back and forth within the channel and I feel that the recent key reversals in the middle of the channel signify a resistance area.
AUDJPY is likely to go lower and again -- given the trading range type environment – the main risk is that this pair may just go sideways for a while before the drop begins in earnest.
Now I'm going to shift over into the commodities area with XAGUSD (spot silver).
Spot silver has traded within a very long bearish descending triangle for some time. That’s why I wasn’t surprised when it took out the base of the triangle (the $14 level) earlier this year. After all, it hit that level so many times it wasn’t really “support” as much as “something to lean against until it falls over”.
However, it was very interesting that XAGUSD didn’t stay down long. Instead, it rocketed right back up before pausing for several weeks. That suggests the drop below $14 is a bear trap and all the bears who had their sell stops under $14 are now looking at losses. Once these traps are laid in the market, they can go the other way very quickly.
However, this is still on balance in a declining market. Silver has for the most part just making lower highs, which is hardly bullish. That’s why I feel silver needs to pierce the upside of $19.65 or even $20 and hold there before I can say it’s in a bull market.
Yet for the first time in months, silver is starting to show that kind of potential. It’s far too early to tell if there’s an enormous breakout on the way, but I certainly wouldn’t rule it out. In the meantime, I’m waiting for more evidence before I commit to a trade.
If XAGUSD starts bursting upwards, I might take a poke at this. However, be careful. You can see that silver’s last attempted breakout last year ended in moribund sideways action and a plunge below $14. This latest rally could be more of the same. Only time will tell …
Now here’s the NASDAQ index:
The NASDAQ has been trading within a large ascending broadening formation which is normally a reversal pattern. It can be a continuation pattern too, but right now it's an open question as to whether the NASDAQ will continue rising above its old highs or if we’re going to see a reversal to the lows (and below).
The robust reversal price action at the lows along the support line of this descending pattern suggests strong support. These lows will be difficult to take out.
That suggests the path of least resistance is still higher.
I feel the most likely result in the near term is consolidation at current levels. We may not get fireworks on either side for a while. After all, the NASDAQ has retraced 70% of its plunge earlier this year and looks to be settling down after a huge rally.
By the way, this type of price action is concrete evidence of why you can’t trade based on reading the news. Because against the backdrop of 36 million unemployed in the United States and a GDP that's expected to contract as much as 30% in the next quarter, we've seen a market that's up 30% - 40% in a month. That’s supposed to be “impossible” according to all the fundamentals, yet here we are.
Understand that the markets discount the news and fundamentals. Those are reflected in the price action already, meaning you can’t trade by looking at current news.
For comparison, here’s the S&P 500 index:
see in the NASDAQ.
A reverse symmetrical triangle can also be called a megaphone top, and as you might suspect of a pattern with the word “top” in it, this suggests prices could go lower.
The price appears to be approaching resistance. And a couple of weeks ago the index made a bearish key reversal.
However, that doesn’t mean we're going to get tremendous amplitude to the downside. I think we’ll see choppy trading range markets here, which means you should keep any short position small or your stop loss wide.
So while I’m cautious about the U.S. stock indexes and silver right now, I do like the opportunity of shorting AUD pairs as I feel there are some headwinds in the Australian dollar following that large bounce earlier this year. The main risk would appear to be extended sideways action before AUD pairs drop.
And with the yen pairs, I expect the yen to strengthen over time. That’s why I’m building long-term short positions in USDJPY and other positions. If you're more aggressive, I'm also short GBPJPY and AUDJPY if you want to join me on those trades. I believe betting on a stronger yen overtime is going to be a winning play … if you're patient.
In the meantime, I wish you a very healthy and prosperous trading week.
Mark "AUDJPYLayUp" Shawzin