Before I begin, I hope everyone in the United States enjoyed a happy, healthy, and festive Memorial Day weekend in memory of those who sacrifice so we may enjoy the freedoms that we do.
Now I’m going to cover several FX pairs today, including a surprising change of stance on one pair I’ve been talking about for a long time. I’ll also discuss the precious metals, the NASDAQ, and an ETF I haven’t mentioned before.
So let’s get started with the US Dollar Index (USDI):
The USDI measures the US dollar against half a dozen of the major and most liquid currency pairs. As you can see, it’s been locked up in a trading range market for the last six weeks or so. Quite frankly, I wouldn’t be surprised to see the back and forth conditions persist for a while longer as USDI has a previous history of this behavior.
That doesn’t mean there will be no opportunities, but I typically approach the summer season by assuming there’s a much-reduced likelihood of clear breakouts from one level to another.
As regular readers know, I’m not in this game to take 20 or 30 pips out of the market. I’m always looking for a major breakout from one level to the other for consistent long-term profits. You can’t enjoy long-term success by being in and out of the market five or 10 times a day.
A good opportunity is one that offers a few hundred pips of potential, but unfortunately you have to be a bit more realistic in the summer due to reduced volatility. For the record, I’ve made extraordinary games earlier this year including 900 pips in a single move in USDJPY and 1,200 pips in GBPNZD. But right now in these summer months, you have to be realistic.
Realism starts with a long-term view at the weekly chart level (where each bar represents one week in time) so you can understand what’s going on, including the trend or pattern that’s driving the underlying market.
So let’s discuss a few pairs that meet those criteria, starting with GBPJPY (the British pound versus the Japanese yen):
Although GBPJPY has been range-bound recently (and this could continue for awhile), when you take a long-range view you see this chart is ultimately very bearish. There are numerous bearish patterns here, which strongly suggests this market will be going lower over time.
The first pattern was the very pronounced double top which formed the head of a head and shoulders. This is a reversal pattern. You can see that the market was ascending before this pattern and then descended after the price broke through the neckline at the 175 area.
Since then GBPJPY has established a bearish rounding top marked by a complex head and shoulders. A ‘complex’ head and shoulders has multiple shoulders on each side of the head.
GBPJPY had a little bounce recently off its long-term support line, but to me this is a dead cat bounce. I don’t think it will last and we’ll see another new low in this pair sooner or later.
That’s why I’m looking for opportunities to short GBPJPY on any rally. What’s more, I’m planning to hold my short positions for what could be a considerable period of time. Sometimes the market does go through these phases where you have to be patient until things resolve as anticipated.
Remember, nobody rings a bell when the trading conditions are good and it’s ready to go. That’s why I’m happy to short any rallies in GBPJPY, add to my short position as opportunities arise, and wait for this pair to test the 125 level (and perhaps even lower) later this year.
Now here’s GBPNZD (the British pound versus the New Zealand dollar):
It looks like the British pound is starting to significantly weaken across the board against the major currencies now. Including NZD!
That’s after me saying for the last couple of years that GBPNZD would continue to rally based on the bullish double bottom it established. GBPNZD did in fact traverse much higher from the low of 1.65 to a high of about 2.18.
However, it looks like that rally might be finished for GBPNZD for the foreseeable future.
That’s primarily due to the blowoff top (also called an exhaustion top) where the price rose very strongly to establish multi-year highs only to close out the week near a low. This was a very large range bar from the high to the low (about 1,800 pips in one week). By closing at or near the low, this bar became a key reversal that points to lower prices.
This is ominous because GBPNZD did something similar several years back as I’ve noted on the chart. You can see how the price behaved after that first exhaustion top formed. So I believe the current example could foretell a similar downward trajectory, especially with the mini rounding top that’s just appeared.
There’s also the fact that GBPNZD has broken out of an upward-trending channel and closed at the low for last week. I think this bearish price action could open up another move much lower.
Of course, this is summer trading so this pair could enter a trading range first.
But don’t rush in with a short just yet. Remember that the summer season is upon us and things move more slowly now.
Personally, I’m going to try and enter with a sell limit order a bit higher than the current price to catch any rally that might occur.
However, be warned that the problem with a limit order is that even if I’m right and the market rises, it may not catch my limit order before rolling over and dropping. So I’m alert for opportunistic GBPNZD price action, particularly on the daily chart.
To add to the continuing bear case for the British pound, here’s GBPAUD (the British pound versus the Australian dollar):
A few weeks ago I suggested you get short this pair based on the breakdown from the ascending broadening price formation on the chart.
It’s called an ascending broadening formation because it starts narrow and then broadens at the top, as you can see. When the price breaks down from such a pattern, it usually goes all the way to the base of the pattern which in this case is the 1.17 area.
So far, GBPAUD has done nothing but drop since that breakdown. But there are still several hundred pips to fall to the target price. When it gets there is somewhat of an unknown, but I would be alert for any rally to get on board as I think that GBPAUD is going to hit that target sooner or later.
The main risk is that even though we see a clear objective, GBPAUD could tread some water before dropping. Take a longer-term view during the summer and use lower risk and wider stops. These are challenging market conditions and you’ll preserve your emotional and financial well being if you keep that long-term perspective going forward.
The markets are becoming increasingly interesting as we enter the summer season.
As you know, I’m never looking to jump in and out of trades to make 30/40 pips, instead, I’m looking for significant long-term breakouts.
What I’m seeing right now is in line with the craziness happening across the world with powerhouse currencies significantly weakening, big potential opportunities on XAGUSD, and the best trade on the stock market.
- What the “Complex Head & Shoulders” means on the GBPJPY and why the latest rounding top suggests that this is going to go in one direction (I share how I’m planning on trading this pair) – watch from 2.49
- Is the British pound about to significantly weaken? Why I’m taking extra precaution to try and catch this on a rally and the impact this will have on associated currency pairs
- The “Ascending Broadening Price Pattern” on the GBPAUD and why it has just given us the green light that it’s about to drop by 100+ pips
- How to identify the high-level opportunities in these challenging market conditions by taking smaller positions and wider-term stops (watch from 12.10)
- Why trading “in and out” several times per day is deleterious to your emotional and financial wellbeing
- Is there a “Bear Trap” on the XAGUSD or will the trajectory pierce the boundaries of the “Ascending Triangle?” – the confirmation that I’m waiting for before jumping into this trade (watch from 12.45)
- The cautionary flag on GOLD that is keeping me on the sidelines even though these charts can be very alluring to untrained eyes (detailed walkthrough)
- Why we’re almost back to all-time highs in the NASDAQ even though we have record unemployment rates and why you would be crazy to try to short this freight train
- The biggest opportunity in the stock market right now and my suggestion for a long-term hold (some very big gains to be made)
- Plus much more
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