What a ride we’ve enjoyed with the U.S. dollar rally recently.
But for now, I think it’s time to step off the dollar train. That’s because last week’s key reversal price action in the US Dollar Index (USDI) likely represents a pause — or perhaps even an end — of the dollar’s surge these last few weeks.
Here’s the USDI chart for reference:
As a reminder, we went long several USD pairs a few weeks ago based on the H-bottom and some bullish key reversals. There was a historical precedent in the GBPJPY which played out almost exactly the way this pattern did: an H-bottom (so called because it looks like a capital H), a couple of bullish key reversals, and then a run to the upside.
USD pairs took off for three straight weeks of profitable gains. We made over 2,000 pips during the run and it was great while it lasted.
However, the party might be over for now.
That’s because USDI has suffered that bearish key reversal right at the neckline of the little double top it made back in October-December last year.
Accordingly, I’m recommending getting out of any long USD positions you might have right now. The only exception is a short NZDUSD position (New Zealand dollar against the U.S. dollar), as NZD is very, very weak right now on the back of some recent New Zealand central bank actions and statements. Plus one more pair I’m taking a possibly premature short on, as you’ll see in a moment.
So it’s time to get flat and wait to see if the USD rally is paused or else well and truly over. If you’ve read my articles before, you’ll know I hold long-term bearish views on the USD and fully expect the dollar will be lower and possibly much lower by the end of this year.
Let’s look at the one new USD-related trade I’m in now (other than staying short in NZDUSD).
Last week I shorted USDJPY (the dollar against the Japanese yen). While this trade could be premature, I believe this pair will ultimately turn lower.
I’m already short USDJPY at 109.29 but there’s still room to go short again below last week’s low (the green arrow points the way here). I feel it’s worth adding to my existing short position for the following reasons:
JPY has been strong against the board against most every other currency recently.
And historically this pair shows a bearish head and shoulders pattern with a steep retracement to the neckline of that pattern. After that, the price has largely remained locked inside a bearish descending triangle. (There was an exception which turned out to be a bear trap).
Now last week’s inside-week bar price action shows this pair is stalling out at the upper bounds of the descending triangle price pattern … again. (An inside bar is when the high and low of the current week is contained inside last week’s high and low.)
That’s why this pair looks ready turn lower in a hurry.
I see it hitting the neckline of that triangle and possibly even lower — to the lower bounds of the bear trap. Maybe even lower than that, if the USD rally is well and truly over.
So while this might be premature, I thought it was too tempting to overlook what seems to be the top of the USDJPY rally.
What else is on my list of trades?
While USD sorts itself out, the two trades I like going into next week, are long AUDNZD and long EURGBP.
Let’s look at the Euro against British pound (EURGBP) first.
I want to buy this pair because way back in 2015 it formed a bullish double bottom (or an inverted head and shoulders) price pattern. I’m showing it as a double bottom in this chart but you could easily make a case for a left shoulder just prior to the double bottom I’ve drawn.
After breaking the neckline of that double bottom/head and shoulders, the price retraced and then went on a long run which petered out only late last year.
For the last several months, EURGBP has churned its way through a bearish descending triangle. However, there was no follow through to the downside. The pair now looks ready to break out of that triangle on the upside.
That’s because we’re seeing a lot of pressure on the downtrend line right now — the price fought off an attempted drop very successfully last week — and we’re about to see a price surge.
I think there’s an extremely favorable risk-reward in EURGBP by buying here. The target I have in mind is 0.92 (the old high).
Now for a pair I haven’t traded for ages because it’s been a bit of a no-hoper for the type of large trading moves I look for in The Pattern Trader: AUDNZD (the Australian dollar against the New Zealand dollar).
However, things are looking interesting right now because of NZD weakness.
There’s been a long head and shoulders pattern with a long right-hand shoulder. Then last week brought a huge bullish key reversal.
In fact, it was so large that it effectively created a mini head and shoulders pattern and broke the neckline all in one go. When we see a powerful price movement like that, the market is telling us something very bullish about AUDNZD.
Get long here for a rise to last year’s highs at the 1.12 level.
So there we go: stay short NZDUSD due to NZD weakness and consider going long AUDNZD for the same reason. Going long EURGBP is another good bet.
And I’m putting my short money where my mouth is on USDJPY too. Stay out of other USD pairs for now even though we’ve made over 2,000 pips in the last three weeks. I think the party could be over, so let’s wait and see what happens next.
Staying nimble and optimistic about the next trade is how we pile up the profits over the long run. You pick the best of the patterns when they arrive, take the trade … and wait.
This is how we made more than 9,000 pips as Pattern Traders last year, after all.
And how we’ve taken around 2,000 pips since April 22.
We patiently waited for — and then caught — the big moves based on patterns we saw in the charts.
To put that into perspective, remember that last year’s 9,000 pips is about $90,000 for every $1,000 at risk when trading one full lot.
That’s the kind of money that can provide for a very nice lifestyle upgrade if you’re so inclined.
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