The U.S. dollar had a strong week on the heels of an escalating trade war between the US and its counterparts, and there’s every indication US President Trump will push harder for $200 billion of new tariffs on Chinese goods.
So what does that mean for the dollar?
Well, the backdrop of escalating trade tensions and an increasingly hawkish Fed bent on higher US interest rates to come means more dollar strength over time.
The key phrase here is “over time”.
That’s because the summer doldrums are likely to remain an anchor holding back significant FX market trends until September. So even though last week’s surge in the dollar looks impressive, I think we’ll mostly see sideways action for the next several weeks.
That’s why I’m not inclined to go long the USD right now.
In the future, things do look very bullish. We’re seeing the possible formation of an inverted head and shoulders pattern right now. The price is right at the neckline now with last week’s key reversal too.
But I suspect that even if we get a breakout, the dollar will probably back and fill for the next several weeks before a truly significant run to the upside.
That’s not to say there hasn’t been a good trade or two this summer.
Even though these are the summer doldrums, you can still make money:
The secret is that you have to be very selective about your trades.
The 727 pips I and my Pattern trader followers have made so far should continue to grow over time. One of my secrets is that once a big trade is working, just stick with it.
So let me show you the reasoning behind being short spot gold (XAUUSD) and long GBPNZD (the British pound gains the New Zealand dollar) positions.
I’ve long been a fan of buying and holding (with some profit-taking along the way) in the GBPNZD pair. All last year, in fact!
That’s because the chart is so very bullish with a double bottom followed by a rounding bottom and a neckline breach from which the price has never looked back.
The current ascending triangle is also very bullish. We bought at the base of that triangle (where I’ve drawn some green arrows) and ridden GBPNZD higher.
Even if the price slides sideways for a bit longer, the next move is likely to be higher (again). Especially when you look at the key reversal we saw last week.
Sooner or later, GBPNZD is going to run hard to the upside. Just hang on and wait while buying any weakness if you care to add to your position.
I’m short spot gold too.
That’s because the market has broken down from its ascending broadening formation which it established last year.
That breakdown, and the fact the market has descended from the $2,000 an ounce level (too far into the past to show on this weekly chart) strongly suggests the next breakout will be lower still.
We even saw a key reversal last week where XAUUSD struggled higher and then closed on the low. We’re at a support level at the moment, but ultimately gold is likely to go down long term.
Even if it goes sideways for the next couple of weeks due to historic support (red circle), I’m sticking with my short position.
So what about some other pairs? Is there anything else worth a look?
While I have no position in this pair at this time, I suspect USDJPY (the dollar against the Japanese yen) is heading into meaningful resistance at current levels.
The price has broken out of the bearish descending triangle I’ve drawn.
But it’s now hard up against historic resistance. I doubt we’ll see USDJPY run much higher. This recent price movement should prove to be a false breakout — a bull trap, as it were.
It’s too early to place a trade right now, though. Wait for the market to give an indication for when USDJPY has truly topped out.
Here’s another worth keeping an eye on: the NZDUSD (New Zealand dollar against the U.S. dollar) pair.
I’ve been following this pair for the last six months as NZD is weak against most other major currencies including USD.
The dominant pattern is the large double top, and just recently NZDUSD has dropped below the neckline at .6800.
That’s very bearish but be careful here. We did see a key reversal last week that may hold the decline in check for the next couple of weeks before the next leg of the NZDUSD bear.
It’s also worth considering a future long position in USDCHF (the dollar against the Swiss franc).
There’s lots of upward momentum here, as the price rocketed back inside a long term ascending triangle after a drop below the trendline earlier this year — this turned out to be a bear trap.
Moreover, the significant movement last week suggests USDCHF is looking to hit the 1.03 area at the neckline and then eventually break above it.
This pair — as with all FX pairs this summer — could very well slide sideways for awhile yet. But long term USDCHF is a buy. Just wait for pullbacks and buy the dips.
Hang on to this one and you’ll be rewarded as the year goes on.
Now let’s take a look at stocks, specifically the major U.S. indices.
In the past few weeks, the NASDAQ 100 has soared to all-time new highs while the S&P500 and DJ30 indices have closed well short of their respective highs.
This disparity in price action could represent a bearish divergence, meaning NASDAQ is headed for a nasty fall soon.
The other possibility is that the other indexes could play catch-up to the NASDAQ’s lofty levels.
With the S&P500, we see some solid foundations at the 2550 level with a double bottom and some rising strength. The S&P might just make a run to establish a new high soon.
But on the other hand, the DJIA is lagging far behind.
In fact, it’s trading within the confines of a symmetrical triangle and the index is at a very interesting inflection point right now.
Braced as it is against the upper side of the triangle, we’ll soon see how the DJIA turns out: bullish, bearish or neutral. It all depends on how it emerges from the triangle.
Now for my current favorite stock.
In a subscriber email last week, I included my analysis and trade set-up for the stock ticker symbol MELI. MercadoLibre is an e-commerce firm focused on Latin American markets, but for the purposes of my analysis, I’m focused completely on the chart.
I recommended a long position in this stock based on an emerging H-bottom pattern as I’ve shown you here.
Unfortunately, I also recommended a stop loss at exactly $300. This turned out to be the precise low of the week … and so my stop-loss was triggered.
Now that’s a bummer. But because the underlying — and very bullish — price pattern remained intact, I re-entered on the long side at prices 308 and 316 respectively as the momentum kept on going.
Then the stock finished the week at $327.68…and looking higher already.
Remember, the underlying pattern is what will drive the price action over time — UP in this case. Even if the short term volatility might take us out for safety reasons, you can still rely on the underlying pattern once the price action reasserts itself.
This is the same idea behind my GBPNZD trade and its foundation double bottom, rounding bottom and ascending triangle.
And just like with GBPNZD, the H-bottom in MELI indicate we’re going to see a bull market here with continued strong action. We might see a re-test of the neckline, if so that’s a likely buying point.
That wraps up this week.
The summer doldrums are still here, but there are at least two FX trades worth considering right now plus a stock trade too.
Just remember the seasonal summer environment. Don’t rush things. Keep your risk low by being conservative and selective about opportunities right now.
That doesn’t mean you can’t learn a lot and prepare for what’s coming later this year.
The key point is that once you learn the ideas and concepts, they’re with you forever.
So if you’re interested, just check out that link.