Over the past couple of weeks, I have speculated on two key points:
1) Escalating trade tensions between the US and its major trading counter-parts could add fuel to the fire in the continuing USD rally.
2) The summer doldrums are likely to stifle any meaningful trends, rallies or breakouts with “legs” until September.
Both predictions have proven to be true as the dollar surged to a 14 month high last week.
Last week’s USDI “melt-up” was largely driven by turmoil in Turkey (tariffs) and Russia (sanctions) rather than the ongoing US/China trade war, but ultimately the reasons aren’t all that important.
That’s because the U.S. Dollar Index made a technical breakout above the neckline of its bullish inverted head and shoulders price pattern. This confirms the USD bull trend is intact and likely to persist for some time to come.
Due to seasonality, I wouldn’t rule out further consolidation and sideways trading action throughout August in the dollar. Despite the bull trend, we’re going to see ebbs and flows until this summer season is over.
However, market turmoil throughout the remainder of 2018 should demonstrate the dollar’s continued status as the default risk-aversion instrument.
You might recall that I’ve been quite bearish on NZDUSD (the New Zealand Dollar against the U.S. dollar) for the last year. That’s due to the double top that’s formed and the fact the price couldn’t bounce back up off the neckline formed by that double top.
I suggested a short at current levels and if you’d taken that advice, it would have worked out quite well already.
NZD has been the weakest of all the major currencies due to a variety of factors including very low interest rates, and last week the New Zealand central bank set a two year record rate low.
NZDUSD has broken the neckline decisively now. And it’s likely to trade much lower over the next few days, weeks and months.
While we didn’t actually take a short position in NZDUSD, we did go long GBPNZD (the British pound against the New Zealand dollar).
As you might recall, I’ve favored the long side of this pair since October 2017 based on a double bottom and the subsequent rounding bottom that formed since then.
The more recent ascending triangle has been marked with multiple key reversals at the support line of that triangle.
We went long at 1.9351 last week and so far GBPNZD has closed over 194. We’re up only 50-odd pips so far, but I expect there’s a lot more to come.
This pair looks like it’s ready to go to the upper resistance line very soon. In fact, it’s a question of when not if this pair goes higher.
While I’m not particularly bullish on GBP at this time as it’s looking weak, it’s still stronger in a race to the bottom between these two currencies because NZD is even weaker.
New Zealand will continue to keep interest rates at record lows and that bodes very well for our continued long position in GBPNZD.
So what else looks interesting?
I’m still keen on shorting USDJPY (the dollar against the Japanese yen).
I’m convinced this pair will eventually go lower on the basis of the historical head and shoulders and the current descending triangle.
We’ve seen another key reversal at the trendline of that triangle, giving further weight to my idea that the very recent rally was a fake breakout and bear trap.
Note that the USDJPY price has been contained within the triangle for the last couple of weeks. It will likely head to the neckline of the triangle before much longer and eventually break it.
Spot gold (XAUUSD) is still in a holding pattern after its recent plummet to the 1200 level.
Its breakdown from the ascending broadening formation support line was crucial. That line had been holding for the past year.
So why aren’t I short spot gold at the moment?
Because it’s sitting at a support area at the 1200 level for now. Right now the downtrend has been exhausted. What I want to see before going short again is some kind of retracement. Something of an elastic band pullback to put some “energy” back into gold so it has the power to break through that support and drop significantly lower.
I see gold returning to its 2016 lows, but first we need to see a bit of action returning to this market before it’s worth another short.
Now onto the stock market.
While I think it’s likely the stock market will also be somewhat range-bound throughout the remainder of the summer, the diversity offered by the vast amount of stocks plus “earnings plays” and other strategies, offers a relatively more fertile sandbox for now.
And last week, we saw the first real signs of resistance in the markets.
All the major US stock indices (NASDAQ 100, S&P500 and DJIA) suffered key reversal price action at or near major resistance levels. I’m showing only the S&P500 here because the price action in all three was essentially the same last week.
A key reversal in this situation is bearish.
But is it the pause that refreshes before the next bull leg? Or is it the beginning of a sizeable pullback?
While the DJIA is the most vulnerable at this time, all three indexes could retreat if there really is a major selloff coming.
At the very least, it’s likely we will see prices contained at recent highs for the next several weeks.
One more asset class I haven’t mentioned for awhile.
Last week we saw Bitcoin (BTC) prices retrace to the $6,000 support level. This is the fourth major retracement to this price level since the bubble burst near $20,000.
It now appears BTC is sitting on a precarious ledge at the $6k level and I believe it’s poised to crash lower. This is not a bullish chart at all:
The $6,000 level has been tested so many times that it seems inevitable that level will get pierced to the downside. This would trigger a potentially huge move to the downside in BTC.
Meanwhile, prices for Ethereum (ETH) and Litecoin (LTC) have fallen to new multi-year lows. Here’s the chart for Litecoin:
Price action in this asset class is exactly what you would expect to see in a burst post-bubble market. Therefore I feel all the cryptocurrencies are likely to fall much lower.
Are you interested in learning how to make profitable trades like my latest long in GBPNZD? Or how to exploit the stock market (and cryptocurrency) selloff if and when they happen?
Remember, the exact same profitable patterns show up in FX as well as in the stock market. Once you learn them, you can trade anything profitably.
The key point is that once you learn the ideas and concepts, they’re with you forever.
So if you’re interested, just check out that link.