Let’s start by looking at the U.S. Dollar Index to get a decent overview of what’s happening there. However, I think the main action is in other pairs and that’s where I’m going to concentrate most of my remarks today.
Here’s why: the U.S. dollar index looks like it’s in a downward trend for the long term but may very well rally back to the breakout area of the bearish descending wedge triangle I’ve drawn for you.
If we do see a firming tone in the dollar I favor the long side of USDCHF and USDJPY. We’ve also got some central bank remarks out of the Bank of Canada and maybe the Canadian dollar can resume its trend higher.
In support of that, we also have a bit of an inverse head and shoulders which should help push the dollar higher but frankly I’m a little bit ambivalent about this.
That’s because I don’t see any kind of dynamic move ahead in dollar correlated pairs right now. At best we’ll see a mild rise in the dollar and at worse it will simply slide sideways for awhile.
So let’s focus on a couple pairs where I really see the action in the next couple of weeks.
For example, I see a general strengthening in pound correlated pairs. We’ve got a rate hike announcement out of the Bank of England in the next couple of weeks and we’ve also seen a significant weakening in the New Zealand dollar. This is something I’ve been talking about the last three to six months and in the last couple of weeks we’ve really seen an acceleration of that NZD weakness.
I’ve been somewhat ambivalent about the yen and which way it wants to go but it does feel like the yen is starting to weaken against some pairs, notably the US dollar and the pound. I’ve also seen some weakening in gold so these are the general themes I want to pick up today.
GBPUSD Likely To Keep Gaining
So I’ve been predicting a turnaround in the British pound since the double bottom back in October 2016 and January 2017.
And recently we punctured a long term weekly trend line that’s been in force for quite some time. You can see right around the time of Brexit that we briefly peaked above that line and then ultimately closed well below it.
However, in the last couple weeks we’ve hovered and even closed above it even if the price has slightly retraced since then.
The result has been a range between 128 to 135 in the GBPUSD.
I anticipate this sideways action will continue with a firming US dollar. And that’s why I’m much more keen on the British pound against the Australian dollar, Canadian dollar, Swiss franc, yen and notably the New Zealand dollar.
So let’s take a look at a few select pound correlated pairs now.
GBPCAD Ready To Move Up
I’ve been saying since the GBPCAD double bottom that it’s likely that we were about to see a turnaround in this pair. And recently we formed a triple bottom to make that conviction even stronger.
So why should it start to really move soon?
It’s because we have two inside week bars where both bars exist within the larger range three weeks ago — they literally sit within the longer bar.
This is setting up for what I call a coiling effect. That’s where we’re likely to see an explosion in the north bound direction in GBPCAD. This could take a few more days or weeks to really accelerate. But nonetheless I expect a strong uptrend over the course of the next several weeks and months in this and most other GBP pairs.
GBPJPY: A Copy of GBPCAD?
As with all the other pound correlated pairs we’re in a transition from a huge bear market to a turnaround situation in GBPJPY.
We recently punctured the neckline of the ascending wedge triangle and made a high before retesting the neckline again.
And now like GBPCAD we’ve got inside bars where the two little ranges sit within the larger range three weeks ago. Again, this represents a coiling effect and an opportunity to explode higher out of this ascending wedge triangle.
GBPNZD: Potentially the Trade of the Decade
The granddaddy of all pound correlated pairs is GBPNZD right now and I’ve been saying all the way back from October 2016 where we saw a huge key reversal where the market made an all-time new low and close on the high.
At the time, I alerted my members to a potential massive turnaround in GBPNZD, then we saw the second bottom coupled with additional key reversals.
This confirmed my belief we were looking at a major bottoming opportunity.
And I was saying all the way back in February that this looks like one of the trades of the decade with regard to both the pattern analysis (the double bottom) and then within the double bottom multiple key reversals where the market went to an all-time new low and then reversed for the week to close on the high. These are the long blue bars I’ve highlighted for you.
All these things coming together is very exciting, because sometimes the markets point to where they want to go.
That’s because when we see all these key reversals, they collectively start pointing in the market’s future direction. In fact, this week we saw another key reversal where the market made a new low and closed on the high.
That’s especially important because that key reversal came after five inside bars, all consolidating within the range of the bar six weeks ago.
Much like a beach ball held underwater and then suddenly released, these inside weeks (and now the new key reversal) represent a suppression of energy which is going to be unleashed in a big way as it breaks out.
For my members, I suggested placing a buy stop above last week’s high and if you followed that idea you’d be looking at several hundred pips to the upside already. But I don’t think we’re done yet.
I believe we’re going to rocket higher out of the recent resistance area sooner or later.
Even if we see some short-term turbulence, we’re looking at a substantial move higher in the pound New Zealand again by virtue of the double bottom price pattern set in October 2016 and the early part of 2017.
In fact, I feel especially strongly about this trade.
That’s because there are certain times where I see patterns that give me such confidence that my mindset is that I want to take this trade for the long term. I feel we’re ultimately going to 2.25 and even higher than that.
So there are GBPNZD lots I’ve set aside in my account with the view of holding them 12 months or more for the biggest possible gains.
I’ve been consistently and unrelentingly saying this since actually October of last year so hopefully you took my advice last week and have a position in GBPNZD now. It’s not too late for a buy and hold strategy, after all.
Just be warned that this is going to be a very volatile pair and you might have to withstand huge whips in the price. But ultimately I believe this pair will find its way significantly higher.
NZDUSD Doomed To Weaken Further
My New Zealand dollar analysis for the last couple months has been a combination of both technical and fundamental factors.
We’ve run into technical price resistance in NZDUSD at about the 0.7400 area. Most recently we saw a double top created.
This formation coincided with remarks out of the RBNZ (the New Zealand monetary authorities) which said they were going to stand back and not raise interest rates in New Zealand. They even went one step farther and said they would actually intervene on their currency’s behalf if it got too strong.
In comparison, the Fed is anticipated to raise U.S. rates in December and the Bank of England is anticipated to raise rates in England. Meanwhile, New Zealand is talking the New Zealand dollar down and the price action is now confirming that.
So with the recent double top in the 0.7400 area and then this week’s decisive price action where we thrust through the neckline of that top, NZDUSD is now squarely on track for a trajectory back to the 0.6800 support area and probably lower.
NZD is going to be weaker across the board, especially against the British pound.
My Latest Conclusions On Spot Gold
Spot gold (XAUUSD) has been a bit of a conundrum for me but I’m now falling into the bearish camp once again.
Let me explain by looking at the monthly chart first. As you can see, the governing descending wedge triangle pattern has underlined the bearish price action for the last couple years in XAUUSD.
This is a reversal pattern. See how the bull market that was leading up to that pattern reversed once it penetrated through the neckline? The XAUUSD market basically fell out of bed after we saw that formation.
That’s why for the last couple of years I have by and large been bearish on gold.
Recently we’ve been poking around the resistance area at 1400 but last month we got a key reversal which usually point out the direction of the next move: lower, in this case.
Now there’s a little nuance that even when we see key reversals it sometimes takes a bit of time before we actually see the price action from that key reversal. It’s like a magician trying to hide what he’s doing. The market also tries some sleight of hand to fool us before the decisive move.
This shows up in the charts as what I call a build out where the market creates some space in order to fall later. We might be facing a bit more of that, but it really does feel that we ultimately want to go lower out of the current price level.
Now let’s take a look at XAUUSD spot gold on a weekly timeframe to see what evidence we have to support that bearish stance:
You can see again the substantial ceiling that XAUUSD. has run into at the 1,360 to 1,380 price level and the recent run up was no exception.
Spot gold bumped up against the ceiling and then gapped lower: from the Friday close to the Sunday opening it created this weekly gap which has so far not been filled.
If this isn’t filled right away, it’s called a runaway gap and it denotes a huge transition from one side of the market to another (the downside, in this case).
Last week’s price action was pretty ugly too. We started out the week higher and then closed on the very low. As you know, I take these reversal bars pretty seriously.
Therefore the weekly chart adds to my feeling that the weight of this market is growing and that ultimately we’re going to find a way lower in XAUUSD again.
Let’s drill down a bit more to the daily chart:
Now we see the emergence of a reverse triangle (megaphone top) which won’t be confirmed until we come all the way to the 1,200 level. However, if we do so this would project much, much lower.
In the meantime spot gold has suffered a series of key reversals on the downside. These are pointers as to where the market wants to go, and that’s I’m suggesting probing the short side of XAU USD right now.
Let me summarize what we’ve discussed today:
I expect the firming tone of the past several weeks in the dollar (USD) to continue. In particular, I like the long-side of USDCHF and USDJPY if you decide USD is going to move enough to make any such trades worthwhile.
Markets are also looking forward to the next Bank of England (BOE) policy announcement on November 2 with expectations running high of a 0.25% interest rate hike.
Meanwhile the real action is in non-USD pairs. I continue to favor the long-side of most GBP-correlated pairs especially long GBPNZD, GBPCAD, and GBPJPY.
Long GBPNZD is my favorite and since last February I’ve vociferously advocated tucking away a GBPNZD long position with the view of holding this position 12 months or longer.
Last week NZD got hammered against 7 of the top 10 major currencies, by the way.
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If you have any questions please email me: [email protected]