Is Irma The Catalyst For Some Huge FX Moves?

By Mark Shawzin09/15/2017

Before I get into this week’s analysis, I thought you might like to know that I’m currently residing in southeast Florida. As you probably know, Florida was in the path of what was projected to be the worst storm in U.S. history: Hurricane Irma.

For personal reasons I wasn’t able to get out in time and I had to confront the reality of sticking around and watching everything unfold firsthand, including the very real possibility of being without power later in the week.

However, I think you’ll be as excited as I am about the trading opportunities which are starting to unfold now that Labor Day’s past us. Hurricane Irma might just be a taste of what’s to come in the markets.

My Target for the US Dollar Index

Let’s start with the U.S. Dollar Index. If you’re a regular reader, you’ll know I’ve been talking about the bearish reverse triangle and megaphone top for many weeks and months.

I projected the U.S. dollar was likely to go much lower as a result of this pattern formation, and that’s exactly what happened.

The dollar has dropped steadily, including a near-freefall phase last week where it did nothing but drop and closed near the low. Now we’re almost at the support line of the megaphone top. What happens next?

Well, I’m still bearish. And now we can measure the projected move from this megaphone top by measuring from the very top of the megaphone to the bottom. That would take us down to the 106-108 level and therefore I expect the U.S. dollar will fall to that area in the coming weeks and months.

Therefore, position your trades accordingly and stay short if you’re already short.

EURUSD: Get Ready For A Run

With the U.S. dollar projected to fall lower, it follows that the Euro should go higher against it.

And that’s exactly what we’re seeing in this EURUSD chart with the most recent week looking very strong.

We’ve been consolidating at the 118-120 price level for a few weeks now.

And the longer this consolidates the more follow through I anticipate to the upside.

Why am I so confident? You see, what governs this rise is the long term triple bottom that laid the foundation for it. It’s been a long time in the making, but once it penetrated above the 117  neckline it was off to the races. Now it looks like we have open spaces for EURUSD to explore even higher.

Once you have a breakout you typically revisit the breakout area so I wouldn’t rule that out. But any drop to the 115-117 price area is an opportunity to start getting long EURUSD for a much anticipated rise going forward. The run could be very dramatic going into the final quarter of this year.

GBPUSD About To Break Out

While the British Pound has lagged in performance behind the Euro for the last couple of weeks you can see that last week it began making up for lost ground with a very strong close.

As with EURUSD, in GBPUSD this upward move is underpinned by a double, even triple bottom reaching all the way back to October 2016 and January 2017.

That’s when the price bottomed out at the 118-120 level. And now that we’ve penetrated the neckline, we’ve held well at that level and started pushing higher.

This is especially significant when you consider that this price action is happening in the face of a very long term downtrend. We’re right on the trendline for that right now.

So with the US dollar looking poised for real weakness, the pound will be free to roam higher in the very near future. Even though there’s likely to be some resistance at the 135 level, we’re looking at a breakout situation so I don’t expect that resistance to last very long.

I’m expecting GBPUSD to move much higher than 135 over the course of the next few months. Consider going long at the earliest opportunity.

Choppy But Bearish Seas Ahead for USDJPY

As for USDJPY, in the 2015-2016 timeframe this pair formed a long term very bearish price pattern called a head and shoulders. With this pattern you have a what looks like a man or woman’s head with both a left shoulder and a right shoulder.

Then there’s a neckline which in this case has formed at the 116 level in USDJPY.

Once that neckline was broken, USDJPY dropped steadily before bouncing hard all the way back to the breakout area. It then formed a descending wedge triangle which is another bearish formation.

With a descending wedge triangle, we have a sloping down trend line and a horizontal line that connects the lows. Last week’s price action fell below the 108 support level for that horizontal line. Now we can fully anticipate we’re going to get lower prices in USDJPY.

Just be aware that we could see a retracement or two before the big drop in this pair.

We may still see further price activity at or near the support area in the near term.

However, I expect USDJPY to go potentially much lower by virtue of the two major bear patterns I’ve just highlighted: the head and shoulders and the descending wedge both indicate that the long term direction in USDJPY is bearish.

Watch AUDUSD For The Next Bullish Move

In this chart we’re looking at the Australian dollar against the US dollar . There’s a strong double bottom in AUDUSD which has governed the eventual price rise we’re seeing right now.

The double bottom took place in the October 2015/January 2016 timeframe, almost a year ago. But this “baked into the cake” a higher move in the Australian dollar and you can see we peaked above the 18 month resistance at 78 just a few short weeks ago.

Now we’re in full flight to the upside. Again, as projected by the Dollar Index, the US dollar looks to be moving lower against most all other currencies and that includes the Australian dollar.

We do have some resistance at the current level which could create a bumpy ride in the immediate future for AUDUSD, but by virtue of the double bottom price pattern it seems inevitable that AUDUSD will work its way higher over time.

USDCAD: Get Short

In my last several reports, I forecast that the Canadian dollar was likely to be one of the strongest currencies across the board. That’s definitely proving to be the case, especially against the US dollar.

In fact, the support line at 125 for the USDCAD double top has been violated and USDCAD is now in free fall. This pair could collapse outright.

However, just be aware of the possibility of a rally back to the breakout area. If we see that, use that as another opportunity to get short USDCAD.

There’s some potential support at 120, so if you’re already short you might want to take off some positions once we reach that level.

But again, look for all opportunities to get short USDCAD going forward. It’s likely to drop significantly even if we see a short-term rally back to 125.

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CHF Looking Strong But Wait on USDCHF For Now

Another currency I’ve nominated as one to watch going forward is the Swiss franc. The franc looks like it’s gaining strength across the board. Just like the Canadian dollar, in fact.

Here you can see USDCHF has formed a number of bearish price patterns, including a triple top. We’re also looking at a long term ascending triangle that recently got breached to the downside.

After the breakout from that triangle, USDCHF formed a rounding top and then with last week’s price action we saw an inside week bar. That’s a bar where the high and low was practically inside the range of the previous week.

So where to from here? Any violation below the support area is likely to open up another move lower in USDCHF. That’s why the Swiss franc is on this week’s ‘currency to watch’ list as it’s likely to pick up steam across the board and go stronger.

U.S. Light Crude Oil Can’t Fight Off the Bear

The U.S. light crude oil market presents a very interesting example of the dichotomy between how we think the market should behave and what the market actually does behave. Our expectations often don’t match up with reality.

Remember, just10 days ago we had one of the worst storms ever to hit the coast of Texas, a major oil refining and oil producing state.

Logically, this should have translated to much higher prices, right? You can see that in the week prior to the storm, prices did attempt to go higher only to close lower. That’s a damning vindication of the very bearish market in crude oil that’s been going on for years.

There’s also long term bearing rounding top apparent here too. It’s taking its sweet time but eventually we’ll see a violation of the $39-$40 neckline which will likely open up a deeper move below $30.

Again this is why I contend that price action is really the only thing you need in your arsenal as a trader. Looking at the news to interpret what we think is fundamental tends to be a distraction more than anything. The examination of price action and the associated price patterns is all you need.

That’s because the market is way ahead of events. The market is a discounting mechanism and discounts events as they’re happening. While certain events may seem momentous at the time, the market has already anticipated them.

That’s why the examination and analysis of price action and price patterns is really all you need to be successful in this game.

Spot Gold In A Turnaround Situation?

In this chart I’m looking at spot gold, otherwise known as XAUUSD when measured against the US dollar.

I’ve been a long term gold bear, but recently I’ve seen signs of an imminent turnaround.

That’s because buried in the structure of all this price action a very subtle double bottom. We had a test of the low, a retest of that low and since then we’ve been hovering above the 1,180 neckline for quite some time.

With this week’s price action XAUUSD burst past recent resistance at 1,300 and is now threatening another resistance area at 1,380. So while I expect a somewhat bumpy ride, XAUUSD does seem to be looking to go higher.

I feel we need to get above the next resistance at 1,400 and 1,420 before I’d declare a true paradigm shift in gold, however. That’s because gold has been going down for a great number of years now.

But the recent turn of events and price action has been enough to tempt me into holding a long position in XAUUSD. I’m prepared to be patient and see how things play out at the 1380, 1,400 and 1,420 levels.

Let’s see if is the start of a genuine turnaround. For now, it does appear that gold is on an upward trajectory and I’ll be closely monitoring XAUUSD and advising you accordingly.

US Stock Indexes Treading Water

Now let’s take a look at the U.S. stock indexes.

The NASDAQ100 is the technology index and has been unable to make a new high for the last four or five weeks. I don’t know if we can read too much into that, however. The bull market remains intact even without new highs.

With the S&P500 and the Dow Jones Industrial Average we see the same thing. They’re holding steady but unable to make new highs. The US stock market has been a very resilient market but for now it’s lost some momentum.

Because of the very robust bull market, I don’t expect any sell off for any extended period of time right now.

So let me close this week’s article here.

Hurricane Irma may compromise next week’s edition, but I will endeavour to communicate with you again as soon as possible. Until next time, I wish everyone a healthy and prosperous trading week.

If you have any questions please email me: [email protected] Please note that any response from me might be delayed due to Irma.

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Mark Shawzin

Pattern Trader

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