An Explosive Stock Market Ahead? Plus Two FX Pairs Worth Trading

By Mark Shawzin

As you're probably aware, the Federal Open Market Committee (FOMC) raised interest rates by 0.25% last Wednesday which was consistent with market expectations. The Fed also announced its intention to raise rates one more time in 2018 (in December), and three more times in 2019.

So while the Fed laid out a definitive path toward normalizing interest rates, the market hasn't responded with a definitive path for many USD forex pairs.

That's because even though the U.S. dollar strengthened with the US Dollar Index (USDI) challenging recent weekly highs (as you see below) ...

... the USDI still confronts major resistance not far from current levels. That key reversal from several weeks back represents some serious headwinds to any upside move.

And that's why I'm not ready to hop on the U.S. dollar freight train until I see how the market handles the overhead resistance in the weeks to come. We need to examine USDI behavior as the price butts up against the upper edge of the channel I've drawn for you.

A potential opportunity to see what happens might happen next Friday.

That's the release of US Non-Farm Payrolls - a crucial report and sure to affect the dollar significantly if the numbers differ even slightly from market expectations. Given the important zone the dollar is trading, the NFP report could be very instructive as to the next "leg" of the dollar. Up? ... or down?

There's only one possible exception to the current USD ambiguity, and that's USDJPY (the dollar against the yen). This pair is probably the best prospect for near-term gains right now.

Quite frankly, I've expected this pair to (eventually) break to the down-side over the last few months. (That's primarily due to the historical head and shoulders pattern on the weekly chart.)

However, in last week's price action, USDJPY broke out to the upside from a symmetrical triangle price pattern. That triangle's visible on both the monthly and weekly charts. (See above and below.)

And it now appears feasible for USDJPY to challenge the previous long-term 118.00 resistance level.

The weekly chart is what gives us a target here ...

Remember, even though my expectation was that USDJPY would go down, not up, the market is always right in the end.

No matter what your initial analysis says, you have to keep an open mind when the market doesn't agree and goes in the "wrong" direction. Try to avoid confirmation bias and look for what the market is telling you, not reasons to believe in your own analysis once it's clearly wrong.

So where's this pair going now?

With the historic strong resistance now broken by recent USDJPY action, the most likely path is up and I see this pair challenging the 118 highs made way back in late 2016.

So consider going long here to profit from a 300 - 500 pip sprint to the 118 level.

Another fertile trading opportunity could lay in waiting on the short side of certain GBP correlated pairs including GBPCAD, GBPAUD & GBPNZD (that's the British pound against the Canadian dollar, Australian dollar, and New Zealand dollar, respectively).

A few weeks ago these pairs suffered massive price reversals at major resistance levels. These reversals could be the precursor of further (and major) downside action in these GBP-pairs in the near future.

Let's take a closer look at GBPAUD. Last week I suggested shorting this pair with a wide stop-loss. After drifting higher above my entry, this pair came down to earth.

I remain short with a stop above last week's high (1.8227).

Yes, I'm very bearish despite the historic triple bottom formed awhile back.

That's because last week's key reversal was very important. I now believe it was the death knell for any rally. After all, this event happened at previous strong resistance which looks likely to hold up.

Another key point that's going to be a theme for the rest of this article:

The most recent week is an inside bar. That's where the high and the low fits completely inside the earlier bar.

Most traders think these bars are unimportant because they're so small.

I strongly disagree.

I believe they represent a "coiling" of energy which winds tighter and tighter the longer short inside bars persist on a chart. Then -- finally -- that energy gets released in what's often a very explosive action.

Sometimes you can predict which direction the explosion will go and place your bet accordingly.

At other times, you could place a buy stop above the inside bar's high and a sell stop below its low to hedge your bets.

Now let's look at some coiled energy again, this time in spot gold (XAUUSD).

For now, spot good appears to be directionless. My bias is that it will fall soon based on ...

1) Its historical downtrend from the $2,000/oz area a few years back
2) Its decisive breakdown from the ascending broadening formation it held for so long

However, gold is at or near a key support area right now. While it might fall to $1,160/oz shortly, I don't see a great risk/reward opportunity at the moment.

That's because the stored energy inherent in those short bars is more likely to burst up off recent support than plummet down again. Gold's downward momentum has been temporarily exhausted from its recent long drop, in my opinion. It needs a bit of breathing room to rise a bit before another significant decline is possible.

Yes, I do want to short XAUUSD. But I also want to wait for a rally first. Once the upside momentum in that coiled energy is dissipated, then we'll see another large drop.

For now, just wait. Or -- if you're very aggressive -- try to play that coil of energy with both a buy stop and a sell stop order above and below the coil.

Now for the stock market, which I've been leading up to after discussing the concept of stored energy in inside bars.

Last week closed with weekly reversals/inside week bars in both the S&P500 and DJIA US stock indexes at the apex of all-time highs in these respective indices. Remember, these benign inside bar reversals often signify major trend reversals (and sometimes trend continuations too!). Either way we could get explosive price action from these "coil" bars.

But first, the index that didn't feature an inside bar: NASDAQ.

The NASDAQ currently looks strong and set to make a new high soon. There's no inside bar there

But there is a small inside bar in S&P500 right after new highs were made.

That coiling of energy will be released explosively, sooner or later. The price could be catapulted either way. Up or down is possible considering that ...

a) we're still in a long term bull market here, and
b) it could very well be time for another violent correction like the ones we saw earlier this year

So a strong movement in either direction is possible in the S&P.

We see the same situation in the DJIA (Dow Jones Industrial Average) too.

This chart's even more interesting because we're sitting near a double top. Will it actually prove to be a double top (and thus the inside bar heralds a reversal/correction)? Or is this just a pause before the bull market relentlessly charges higher?

I'm leaning toward a correction myself. Here are a couple of examples where inside bars heralded trend reversals ...

With EURGBP, those small inside bars at the bottom of the chart gave us warnings of the reversal in direction to a bullish trend:

And with GBPCAD, we see another inside bar was part of the catalyst for a new bear trend:

Now, I'm not saying that the U.S. stock market is destined for a harsh correction for sure.

What happened in EURGBP and GBPCAD won't necessarily happen in the stock market. But it's just something to keep in mind about the importance of these small inside bars.

They are NOT insignificant and that coiled energy they represent can herald explosive moves.

That's because the exact same profitable patterns show up in the stock market as well as forex. Once you learn them, you can trade anything profitably.

I’ve put together my 21 most powerful Forex strategies for you.

[Download my 21 power strategies here at this link]

The key point is that once you learn the ideas and concepts, they're with you forever. You'll know when to trade and when NOT to trade for the biggest profits from large moves.

So if you're interested, just check out that link.

Talk soon,
Mark Shawzin



Hi, I'm Mark Shawzin. After working on Wall Street as a trader for 23 years, and managing private client accounts for the past 13 years, I've put together my 21 most powerful Forex strategies.

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