Let’s start off with a look at the US Dollar Index as we usually do here at the Pattern Trader.
A couple of weeks ago the Index had a key reversal at the support level I’ve shown you here. At the time, I anticipated this would prompt an uptrend in the U.S. dollar and that’s exactly what we’ve seen.
Meanwhile we’ve got a week ahead that’s filled with event risk and policy statements, including a Fed statement on Wednesday, a potential new Fed chairman pick by Donald Trump also on Wednesday, and a Bank of England statement on Thursday.
We also have a Bank of Japan policy statement this week and then we cap off the week with the NFP (Non-Farm Payrolls) report with the jobs number for September.
All these events will likely help to firm up the U.S. dollar. I’ve been considering the possibility that we may be getting a future right shoulder to match the one on the left, but there’s a bit more distance to go before we can truly test that idea. The market is anticipating a rate hike in December and may very well be what’s driving the Index right now.
Once that’s announced one way or another, then the dollar would be vulnerable to a decline back to its support area. But until then, we’ve still got a bit more dollar upside to go against the Swiss franc, the Euro and some other pairs. I expect NZDUSD to continue lower, for example.
That said, it’s going to be selective trading in the dollar pairs. The real action should be some of the more exotic pairs I’ll discuss right now..
EURGBP Headed South
As I’ve said to those in my Master Pattern Trader groups, I’ve been looking for a return back to the 87 level in EURGBP based on the fact that we’ve touched the support area so many times. I don’t think the normal perceptions of double bottoms and triple bottoms hold true here because once you hit a certain area seven or eight times, it’s probably destined to fail as support.
That’s why I ultimately project a return to the 87 level. It was made easier when we had a recent double top characterized by two price spikes to the 90 level. This pattern coincided with key reversal price action where EURGBP made a new high and then close on the very low of the bar repeatedly.
When we see these key reversals they very often point in the direction where the momentum is likely to carry. So when we look at the double-top, the reverse triangle, and the key reversals, I believe EURGBP is well on its way to 87.
For those in my Elite group we’re already short this and I also believe we got short last Sunday in the Accelerated program so we’re well short this pair and expect more follow through to the downside.
Still Bearish on NZD
That’s exactly what we’ve seen and I expect this trend to continue. In this chart I’m looking at NZDCAD and we see some very classical technical price patterns here:
First of all, there’s a double-top right above the 97 area which is a key reversal pattern. In addition to the double top we also have another major bear price pattern in the form of a head and shoulders.
As you probably know, this normally looks like a man or woman’s head and shoulders but here we have a neckline that’s somewhat sloping (rather than horizontal) because the right shoulder is lower than the left shoulder.
This sloping neckline denotes a market that’s going down and likely to go down very quickly. In fact, we’ve been in a trading range below this neckline for some time and we could still have some turbulence here. However, I expect this pair to ultimately resolve to the downside.
That’s why we’re short NZDCAD in my Accelerator program right now. I would advise some patience as this trade is likely to slide sideways for a bit longer before moving down once again. Just remember the bearishness of the head and shoulders price pattern if we get a significant rise — instead of being frightened out of your short positions you should be looking at a potential opportunity to actually add to them in NZDCAD.
What’s Ahead for GBPNZD (My Favorite Trade)
As the New Zealand dollar continues to weaken, one of the key beneficiaries of that weakening will be the GBPNZD currency pair. I’ve been looking at the double bottom pattern from late 2016 and predicting it would ultimately translate into a huge turnaround in GBPNZD.
The ride seems to be only beginning.
Just last week we saw a brief rally above the last year and a half resistance area. That didn’t hold but that doesn’t concern me because I’m looking at the long term with this one. Quite frankly, any selloff in this pair is likely to be a great buying opportunity as I expect this pair to work its way higher and potentially much higher going forward.
So again I expect the current weakening in tthe New Zealand dollar to continue against the yen, the Canadian dollar, the US dollar and certainly the British Pound going forward.
What’s Up With the Yen?
The other major currency on my radar this week is the Japanese yen. I’m observing a potential turn in the yen against a number of major currency pairs. For those of you who are not totally familiar with how currency pairs work, we’re looking at the Euro versus the Japanese yen here (EURJPY):
My observation is that the yen is going to strengthen against a host of major currencies including the Euro. So if the yen is going to strengthen it means EURJPY is going to weaken. That’s because the yen is in the cross position and the Euro is in the base position. A weak EUR or a strong JPY will push down the price of EURJPY.
And right now we’re seeing a huge key reversal in EURJPY last week where it made a an new high for the last several months and then closed on the very low of the week. That key reversal indicates the sellers won the week at the 134 level. We’re also hugging an ascending trend line — a channel, actually — and any price behaviour below this could open up a move lower in EURJPY.
So this is an early call , but the yen pairs have been weakening substantially over the last weeks and months and I’m seeing these reversal signs everywhere. We could be on the precipice of a major turn as the yen looks to strengthen against the Euro as well as other pairs.
Just to reinforce this theme of my observation of a potential turn in the Japanese Yen, let’s look at the Swiss franc versus the yen. If the Yen is going to strengthen, then CHFJPY is going to weaken also
My guiding position here is the long term descending wedge. A descending wedge price pattern is typically a bear price pattern once the neckline is broken.
In recent weeks you can see CHFJPY has risen back to that neckline again, but now it seems like we’re rolling over to the downside once more. It looks extremely heavy and it looks like we’re forming an interim double top right now. If we dig within last week we also see there was a key reversal where there was a new high in the first part of the week and then the price closed on the low of the week indicating the sellers were in charge.
In context with all these other bear patterns it seems the case is increasingly being made that the yen will pick up steam here.
Any penetration below the most recent neckline at 112 would send prices much lower and potentially to fill the gap around 109.
Spot Gold in a Rough Spot
Now I’m going to cross over and look at the XAUUSD pair, otherwise known as spot gold.
I’m going to start with the monthly chart here and just like with CHFJPY, the dominant governing pattern here has been the long term descending wedge. Spot gold fell out of bed a number of years ago but this wedge has been dictating price behavior ever since the descending wedge was consummated.
Just last month we saw a huge key reversal where the market made a new high coinciding with a number of attempts at the 1,380 area before it failed.
As with other key reversals, it indicates the sellers were in control last month and very often these key reversals point where the market is likely to go. There’s several on this chart already and the vast majority did in fact point the way to lower prices.
So I think gold is headed lower even though this month is likely to be a consolidation month where XAUUSD builds some space before it begins dropping in earnest.
Again, we may have a lot of volatility this week because of all the rate announcements, policy events, the Fed chair pick and then of course NFP at the end of the week. But I do expect the gold price to resolve to the downside eventually.
Let’s drill a bit deeper now and look at XAUUSD on a weekly timeframe. Every time we got into the 1,380 area this presented a ceiling that was just too difficult for this market to penetrate.
Last month we also observed a breakaway gap in this market and since this has not been filled this reinforces the likelihood that this market is going to continue lower.
That’s why we’re currently short and I have a very short stop loss on XAUUSD right now.
But for you longer term traders, I think there’s going to be a lot of volatility in the very near term. Despite all the back and forth I would advise staying short. Because unless gold gets above 1,300 again I don’t think there’s anything to be concerned about now that we’re operating below the breakout area.
Now let’s examine spot gold on a daily chart. I see a number of patterns converging in this market, especially the ascending broadening formation where it starts out narrow and then widens out at the top.
There’s also a number of other short term patterns that appear within this, but you can see that every time we’ve held at the support area.
Last week we had a key reversal right at that area which would normally lead you to believe that we’re going to bounce from there. However, I think this will ultimately give way because the sheer number of key reversals as the price has been descending on its latest drop.
It seems these key reversals are dominating the market so we’ve got short gold at 1,270 on a limit order.
Despite the expected volatility I’m staying short because I’m going to give this a bit more time to work its magic.
Now for a quick recap of the week:
The key currencies to watch are NZD and JPY. I expect a turn as the yen-correlated pairs drop on a strengthening yen as well as continued weakness in NZ-correlated pairs.
I especially like:
For the US Dollar Index (USDI) I expect, the recent firming trend to continue to the target zone I’ve outlined, and that may benefit traders going long USDCHF and short NZDUSD.
EURUSD should be under further down-side pressure from current levels.
Meanwhile GBPUSD remains sitting on major “inflection points” of a symmetrical triangle price pattern on the weekly charts. I think it’s likely to consolidate between 1.2800 and 1.3200 for next several weeks with massive support and upside potential in GBPNZD, GBPCAD, GBPCHF and GBPJPY.
USDJPY hit a major resistance area at 114 on the weekly charts and key yen pairs (EURJPY, CHFJPY) feel like they will be under further downside pressure from here.
XAUUSD has been showing some lackluster price action following the huge negative key reversal on the monthly chart which suggests much lower prices from here. Penetration below the 1,240 price level will open the potential for a major leg lower.
Light crude oil is still trading at the upper level of a major support and resistance price zone (42 and 55).
But the US Stock Indices including the S&P500, NAS100 and DowJones30 exploded to all-time new weekly highs. This big, bad bull market remains intact…
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If you have any questions please email me: [email protected]
The Pattern Trader