In a moment I’m going to give you some in-depth analysis on what appears to be an emerging situation with the British pound (GBP).
But first, I’ll cover some of the key points about the way I view and trade the markets so you understand why I think this could be very significant. Plus how important it is for our profitability later this year and into the next.
Let’s talk about big trades …
I’m sure most of you out there have heard that the prudent way to invest is to diversify your portfolio.
And it’s why most people invest in mutual funds to diversify across hundreds of companies, for a normal return of 4% to 8% a year. That’s conventional wisdom. But it’s never been satisfactory to me. That’s why I’ve developed enough confidence in my skills to seek out certain patterns that provide very profitable opportunities.
You see, I look to focus on just a few trades. Sometimes even just one big trade once I’ve assessed the risk/reward opportunity. Once I have the confidence in that trade, then I “gang up” on it.
For example, back in late March and early April, I talked about shorting USDJPY (the U.S. dollar against the Japanese yen). based on long-term price patterns.
The double top at the 126 price level as part of a larger head and shoulders top suggested the market would ultimately reverse and go lower. And we’ve seen over the course of four or five years that the market has dropped from 126 to 108. Not in a straight line, of course – there were multiple opportunities to go short.
The most recent was in late April of this year. USDJPY made a narrow range bar at previous resistance to create the second top of a double top. Then we saw a key reversal (where the price made a new high and then closed on the low) followed that.
That marked the point where this pair was going to turn lower.
And I really went for it. I loaded up on my positions and made a giant sum of money on that particular trade. That’s why I’m a pattern trader. I home in on special opportunities.
They don’t come around every day, of course. Or even every week. That’s why you need some patience and discipline.
You see, most people trade for five or seven pips and try to do it hundreds of times a month or year and emerge with a profit. To me, that just makes no sense. Ultimately you’re going to lose with that strategy. Never mind all the time you consume trying to make it work!
But going for big trades and sticking with them is just the opposite. It doesn’t take much of your time. You just bet big on your super-confident trades and wait.
Let me show you another example that really paid off for me: GBPNZD (the British pound versus the New Zealand dollar).
For the past two years, I’ve been saying GBPNZD was going to go a lot higher. Let me share a couple of emails where I was on the record on this call:
I talked about the emerging double bottom and reversal and recommended going long at 1.7509 due to its bullish price pattern.
Another email a month later in April, 2017 where I was still long GBPNZD and recommended adding to the position 400 pips higher:
Remember, most people are jumping in and out of their trades after they get 30 pips or 50 pips.
But I already had 400 pips profit. And instead of jumping out, I was actually looking to add to my position at 1.7931.
GBPNZD eventually went to 1.89 and I cumulatively made over 2,500 pips on that particular trade.
So what about something more recent?
Here’s an email from August 2019, about a month and a half ago:
There was another double bottom in GBPZND and I told readers this pair was ready to move much higher. I recommended buying it at 1.8672 and we’re trading around 1.96 now.
That’s almost 1,000 pips higher than a month ago.
But before that point, I sent another email in late August that alerted you to another opportunity to buy GBPNZD anywhere on dips or breakouts because of this very clear double bottom, inverted head and shoulders price pattern:
I said the question was when not if prices would go higher. Plus I cautioned you about volatility too.
As it turned out, there was a lot of volatility between the 1.90 and 1.94 area. But we did break out above that level and now GBPNZD is again only going to head higher.
Here’s another email that went out Monday, September 9th recommending that readers buy GBPNZD at 1.9242.
And another that went out last Thursday to buy GBPNZD at 1.9287:
As you’ll see in a moment, we’re 300 pips above that level already.
The takeaway here is that I’ve been consistently advocating buying GBPNZD based on the double bottom price pattern on the daily and the weekly price patterns. This pattern was so strong that this was “almost” a riskless trade because we were going higher despite a lot of volatility.
Here’s where we are today with an up to date GBPNZD weekly chart:
You can see the initial double bottom way back in 2015 after this pair crashed all the way from 2.55 to the 1.65 price area. Not only did the price hit 1.65, GBPNZD also made a key reversal where it reached an all-time low before trading a thousand pips higher and closing on the high of the week.
A double bottom and a large key reversal taken together are very bullish. That’s when I knew this was going to be the turning point in GBPNZD and began the series of emails I’ve shown you already.
The initial move higher out of this double bottom penetrated the neckline – that’s simply the horizontal line drawn through the pattern. It started as resistance and now it’s transformed to support.
Which takes us to today and a new double bottom primed to send GBPNZD much higher again.
Now I’m looking at GBPNZD on a daily chart where each one of these bars represents one 24-hour session:
Here we can see a double bottom price pattern again, plus an inverted head and shoulders which has even more bullish implications.
In my mind GBPNZD has only one way to go, and that’s up. This is exactly the kind of trade I seek out – a standout trade where you get very well-defined patterns and the price action alerts you along the way.
The question today, after this enormous move from 1.82 to 1.95 (1,300 pips) …
Is it too late to get in? Well, I think GBPNZD is going a lot higher from here. The only question is in what timeframe? Understand that you have to withstand a lot of volatility in this pair so keep your positions smaller and your stops wider to maintain a long position over time.
That was a long explanation of how I trade and what I look for, but I hope I’ve convinced you of the validity of this type of trading.
Now onto the rest of this week’s analysis …
Here’s the U.S. Dollar Index (USDI) which measures the dollar’s movement against a half a dozen major currencies around the world.
As you can see, we had a major key reversal where we made a multiyear high and by the end of the week we closed on the low. Reversals are very important, especially when they coincide with previous support or resistance in the same area. That’s what we’re looking at here.
This could be the end of the rise in the U. S dollar. We don’t know for sure yet, of course. But at the very least, USDI is highly likely to drop to the long-term trend line I’ve drawn for you.
At that point we’ll see how USDI behaves. Could it continue in a range for quite some time longer, as it’s done for awhile? Or is it truly headed lower for the long term?
I will be monitoring this and keeping you updated as the price action progresses.
Now here’s how GBPUSD (the pound against the dollar) looks on a monthly basis, for a big picture perspective:
Last month this pair made a huge key reversal where GBPUSD went to an all time low around the 1.18 area and now trades at 1.25. This happened at a previous historical support level too. One which also made key reversals at the time.
So this could be an emerging double bottom price pattern in GBPUSD. We’ll just have to observe the subsequent price action going forward. I should point out that we’re only in the middle of the month and it remains to be seen where GBPUSD closes. However, we’ve definitely seen very robust price action at the lows. And I can’t rule out that we’re at an important inflection point in this pair.
Especially when the British pound against all major pairs is looking to get stronger.
Here’s EURGBP (the Euro against the pound):
Here we see the pound strengthening again with an emerging triple top. The most recent rally is looking like a bull trap where everyone who bought at the 91 level is now trapped after the prospective excitement of a breakout that didn’t materialize.
If those bulls don’t get out quickly, it could become quite painful and right now I really like the idea of shorting this pair with a target of 85 in the next few days or weeks.
The Brexit vote at the end of October is about six weeks from now, by the way. But you can see the market is already moving. So I’m always asked, do I trade the news? Do I trade events? And by the time the news or events happen, the pros already know the outcomes as the price patterns and price action determine where and when a market’s going. By the time the news comes out, the biggest moves have already happened.
Here’s light crude oil. I think there’s going to be some important ramifications this week based on the recent drone attack by Iran on Saudi Arabia oil production. It’s estimated that 5% of the world’s oil production has been lost. So based on that, prices should go higher.
However, this chart looks very bearish and so it’s going to be very interesting to see if the oil bulls and the media get the rally they’re talking up right now.
Remember, I feel news events play out in context with price action. And so I look at how the market responds to the news event, not the news event itself.
I have a feeling that while oil could go higher, those higher prices won’t last based on the significant downtrend from over $100 a barrel to the present level of $55. Plus a double top and a descending pattern featuring lower highs each week.
There was also a key reversal last week. So while oil may not go lower right now, I feel that overall this is a bearish chart. So any move a higher in oil could be an opportunity to consider going short at some point in the near future.
Let’s look at the precious metals now.
Spot silver (XAGUSD) is also looking quite bearish on a weekly timeframe. We can see last week’s key reversal where silver reached about $19.60 and then closed just above $18. In last week’s Report, I said this reversal was going to be a dagger in the heart of the silver bulls.
So far that’s looking like a good call with XAGUSD following through to close under $17.50. In my mind this confirms the recent rally is effectively over and that we’ll see sideways trading at best.
Here’s silver on a long-term monthly chart and we can see an emerging, very devastating looking key reversal forming here.
While this month isn’t finished yet, right now it looks like, silver’s been rejected at a key area – at the top of a long trading range within a downmarket established by the huge double top back in 2013.
So silver’s had a bounce here, but it does feel that silver will now drift within the $14 – $18 boundaries we’ve seen for the last couple of years.
Here’s gold (XAUUSD):
Gold has been rejected at $1,555 with two key reversals in the same area. That’s effectively a weekly double top.
As with silver, we’ve seen a continuation of the bearish price action. But unlike silver, I feel gold is still in a bull market. It’s just experiencing a pullback as markets never go straight up (or down, for that matter).
But the fact remains that the metals have hit a significant resistance area and will likely trade at lower prices over the next few weeks.
As confirmation, this daily chart of XAUUSD offers plenty of support to the short-term bearish view.
The double top at $1,555 is more prominent here. We also have what looks like an emerging head and shoulders price pattern where if we crack this lower level around $1,480, we’ll quickly see lower prices again.
It looks like we’re going to retest the $1,450 price level before continuing higher … or else breaking the uptrend entirely.
This has been a long Report, so let me finish with a quick look at the S&P500 stock index:
For the past several weeks, I’ve mentioned that the bullish key reversals along this uptrend line suggest the path of least resistance will be higher. Now we’re bumping up against all time highs despite all the turbulence.
It does feel that we’re on the verge of a ‘buy the dips’ opportunity as the market looks to be heading even higher.
In summary, right now I expect continued strength in GBP and U.S. stock indexs and weakness in NZD, the precious metals and EURGBP.
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I wish you a very healthy and prosperous trading week.
Mark “GBPShocker” Shawzin