Hold Tight In GBP, JPY and XAU: More Gains On The Way (But Not Yet)

Let’s start this week’s analysis with the usual: the U.S. Dollar Index, which is a useful proxy for the U.S. dollar against most major currencies.

As I’ve been discussing for the last several months, the reverse triangle (also known as a megaphone top) is the defining pattern here. Due to the bearish nature of this pattern, I believe we’re in for a protracted move lower in the U.S. dollar.

Having said that, last week we hit a major support level and the market made a key reversal with a close on the high of the week. This could translate into some minor support for the dollar. However, I don’t think it will last long — we’re in no man’s land right now with this index.

In tennis parlance, you want to be on the baseline or at the net, you don’t want to be stuck in the middle. But that’s where we seem to be right now in the U.S. dollar.

That’s why we could see some protracted consolidation for a couple of weeks before we retest the downside on the lower side of this megaphone top.

And for that reason, I’ve abstained from further trades on the daily chart and the weekly chart too. I’m not adding any new positions because most of these pairs look like they’re in flux and I don’t see any real opportunities that meet my risk/reward criteria.

EURUSD Holding Firm For Now

In EURUSD, we can see that the Euro is also in consolidation mode at or near current levels.

We may be looking at a descent to the breakout area at 117 but I feel the Euro’s ultimate trajectory is going to be higher. This is consistent with my thoughts of a lower dollar.

But we’re likely facing a couple more weeks of thrashing around at or near current levels. I don’t think there’s a great shorting opportunity, but on the other hand I don’t see EURUSD going much higher in the meantime.

We did have an inside week bar last week. But I wouldn’t be jumping on any breakout because right above there’s immediate resistance so we’re in for a bit more consolidation for at least another week or two.

GBPUSD Consolidating After The Breakout

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With GBPUSD, the main point is that the price action recently broke out of a long-term downtrend line. For the first time in many months closed above the resistance line that’s been keeping the GBPUSD downtrend intact.

We did see a mini reversal where the market made a new high last week, then closed on the low. So there could easily be a breakdown back to retest the trendline.

In fact, I wouldn’t be surprised to see several weeks of consolidation where the price action mimics July through October last year. However, it does look like GBPUSD has turned a corner. It just needs a bit more gestation time before a larger and more sustained move higher.

Further Gains To  Come in GBPNZD

Now onto one of my favorite pairs right now: GBPNZD.

There were some special elections over the weekend in New Zealand. The general election ended up in a stalemate with the ruling National Party falling short of a clear-cut majority to govern for the fourth time. Even though Prime Minister Bill English claimed victory on Sunday, they fell three votes short of a majority.

That means they’ll have to form a coalition government.

But I don’t think the New Zealand dollar will be affected by this result in particular, as New Zealand’s mixed member proportional political system is well understood overseas.

What may hold sway over the near term outlook for the New Zealand dollar is that the central bank appears to be on course to preserve the record low cash rate. This is in opposition to the Bank of England, European Central Bank and the Federal Reserve who have indicated they’re abstaining from further stimulus measures and raising interest rates.

With rates being raised in England and the US and kept at a low level in New Zealand I expect the New Zealand dollar should stay relatively weak. I’ve been following GBPNZD for quite some time ever since it put in a dramatic double bottom at the 167 area in October 2016. And early this year we crossed the neckline at 180 to confirm that double bottom. There’s been recent overhead resistance at the 188-190 are so at the moment we’re in the middle of the 180-189 zone.

Last week was an inside week where the range from high to low was within the range of the prior week. An inside week bar is a coiling bar and usually these types of bars precede major price actions.

I wouldn’t be surprised to see GBPNZD prices explode out of this area in the near future, which is why we’re still long on both the daily trades and the weekly trades from much lower levels.

In fact, if we go lower and take out the previous week’s close at 1.80 then that would be a good buying opportunity. My instinct tells me there’s going to be a buying opportunity on any selloff in GBPNZD right now.

We already have two long positions but there may be a terrific buying opportunity if we get a sell off before the next upward leg.

EURGBP Looking to Break Out Soon

Another British pound correlated trade that’s caught my attention is EURGBP.

We can see this pair has also formed a reverse triangle or megaphone top, just like the one we’ve seen in the US dollar index although this pattern is in the daily chart as I’m showing you here.

Another interesting thing is the set of five inside day bars. The last five trading sessions have been inside the range of the wide ranged session five days ago.

So this market is coiling at the base of the reverse triangle/megaphone top. I’m presently short from where 0.8981 as are my Elite Pattern Trader subscribers if they responded to my timely email.

Already we’re about 130 pips below that price level. But instead of exiting, I’m actually looking for an opportunity to add to that short position because it’s my expectation that we’ll get another retest of this 0.8725 low.

If we do, that projects even lower prices in EURGBP in the future and an even more profitable short position.

Yen Pairs On the Move: A Focus on EURJPY

Now I’m going to turn my attention to the yen correlated pairs.

Many of the yen correlated pairs are starting to exhibit very bullish price action. In this chart we’re looking at EURJPY as a good representative sample.

In this pair there’s an Eve and Adam double bottom. The Eve is a multi-pronged attack to the low and the Adam is a single spike to the low.

This is essentially a double bottom which means that this pair is going higher over time. We penetrated the neckline a few weeks ago and EURJPY has only continued rising higher since that time.

While USDJPY seems locked in a trading range between 109 and 113 (and therefore isn’t a great trading candidate at the moment) the long side of EURJPY, GBPJPY and CADJPY look very fruitful on the upside for some time to come.

Why I’m A Spot Gold Bear Again

My Elite members and Gold members had a very good week last week as we made several short trades in spot gold (XAUUSD). So let’s talk about my rationale for those trades starting with the monthly chart.

The guiding pattern in XAU U.S.D. has been the descending wedge bear pattern you see here:

A descending wedge is characterized by a sloping downtrend line that connects all the highs plus a horizontal line that connects all the lows. It’s a reversal pattern, so whereas the market was in a very bullish phase earlier, it subsequently became very bearish once it broke the downside of this pattern.

Admittedly I was at an inflection point last month.

It looked like we had broken out of the more recent symmetrical triangle. However, sometimes we get fake outs and it looks like that’s what’s happened. The earlier upside momentum has reversed and we’re approaching what could be a monthly key reversal.

Of course, the month isn’t quite over yet. We have another week before this monthly bar will close. If the market somehow rallies significantly, that will of course change the whole context of that bar.

But right now it looks like a very bearish key reversal with one week to go.

And it’s not only the nature of this key reversal price action but where this key reversal is occurring. Note that there’s been multiple attempts to break the 1,380 to 1,400 price level and if we’re turned back once again with this dramatic reversal (one week pending) we could have a major slide in the gold market going forward.

Now let’s look at the weekly chart where we broke above this reverse triangle a few weeks ago.

I was uncertain whether that represented a real move to the upside, but you can that once we hit that resistance level we hit an air pocket and gapped down pretty abruptly.

This gap was never filled as the market kept going lower and now the price action is back within the reverse triangle. That means we could have a bit of consolidation here, but again any move back into the 1,200 – 1,300 area will likely result in a further move to the downside by virtue of what we just examined on the monthly chart.

So how about the daily chart?

There’s yet another example of the megaphone top/reverse triangle pattern.

Yes, this is the same megaphone top pattern in EURGBP and the U.S. Dollar Index too.

Because these patterns occur among many different trading instruments (including stocks, commodities and FX pairs) that’s why price pattern trading methodology can be so effective across all trading instruments.

Now this daily XAUUSD megaphone top is in the very early stages, but notice the price action where the market made key reversals. There are lots of them on this chart and they’re high-probability indicators of where the market wants to go next.

That’s why I emailed my Elite list when I saw one of the most recent key reversals and told everyone to short gold at 1,319 on a stop right under the low of that key reversal. Our stop loss was nearly taken out, but we survived and so I sent another e-mail to sell short XAU USD at 1,318 again (and again, for a total of three positions). We added to our shorts before the prices fell out of bed — now we’re trading at about 1,297.

We’ve collectively made about 500-600 pips on the open trades from last week, and now we have an inside bar which represents a coiling action. We can anticipate some energy out of that in the near future but as a precaution (the weekend was approaching) I advised my members to close out two of the three short positions.

The very bearish price action on the monthly, weekly and daily XAUUSD charts means I anticipate staying short for the foreseeable future.

We’ll be looking for further opportunities to get short and if you’re on my Elite and Gold lists, you should have at least one remaining short position open with over 280 pips profit at current prices.

If you’d like to get in on this spot gold action yourself, my Gold program is exactly the way to do it. You can find out everything about my Gold trading program right here:

www.thepatterntrader.com/gold

I tend to be very successful with gold trading: in the two years since I started the Pattern Trader, I’m about 66% profitable in gold trades and I’ve accumulated a monster number of pips in XAUUSD. So if you’re interested just check out that link.

US Stock Markets Keep On Keeping On

I’m going to finish up this week’s report with the U.S. stock indexes. You can see that despite a lot of heated rhetoric flying back and forth between the President of the United States and the leader of North Korea, the world’s global stock indexes remain intact to the upside.

In this case we’re looking at the NASDAQ 100:

We’re consolidating in the tech industry at the high level, but there’s nothing I see that you can read into that consolidation right now.

That’s because if we look at the S&P, it went to a new high. A small one, but a high nevertheless.

A narrow trading range like this could turn out to be a turning point. When we get small inside bars then explosive price action often follows.

And because we’re hugging the ascending line of the price channel I’ve drawn for you, we could be looking at a move to the lower end of the channel. What could trigger this?

Well, there’s going to be another vote on the healthcare debate next week and if we get a third failure to repeal Obamacare then we could have a move lower.

Looking at the Dow Jones Industrials we see the same thing as the S&P500: an extremely narrow range from high to low of last week’s trading range.

Again, I don’t know how much to read into this because this is still a bull market until proven otherwise. Even if we get a setback, I don’t expect it to be too dramatic.

So that’s it for this week’s report, I wish you a healthy and prosperous trading week.

Remember that we’re in flux across a number of pairs: the GBP pairs, the NZD pairs and the JPY pairs too. There’s going to be tremendous opportunity but we may need a bit of time for further consolidation. That’s why I’m standing pat with my open positions: long GBPNZD, short EURGBP, and short XAUUSD.

I’m going to abstain from putting on any new positions for the immediate future.

 

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