NZD, CHF & NASDAQ Opportunities Beckon Despite Congestion Ahead

Last week we saw a pretty tepid performance in the dollar. We saw a mini key reversal where the market reversed and closed on the low, but the price action was contained and this leads me to a bigger theme about the market action in general, which I’ll get to in just a moment.

As a reminder, when looking at the U.S. dollar we need to keep in mind the reverse triangle (also viewed as a megaphone top), plus a descending wedge bear pattern.

You can see we’ve broken out of that which indicates that the U.S. dollar is looking to be on a downward trajectory over time. Final confirmation would be piercing that support area not too far from where we are right now.

But volatility was down a lot last week. The weekly price bar is much smaller than the range of many weeks preceding it. That’s why I think we could be getting into a very difficult and challenging trading period. After all, most Europeans go on vacation in August and September and historically, markets tend to be fairly range bound and choppy during this time.

In fact, we’re starting to see increasingly erratic and frenetic market behavior. This makes me much less prone to chase breakouts. Even though I’ve made about 7,000 pips from November through to the current period, I’m just looking to sit on my gains right now. That’s caused me to miss a couple trades in the last couple weeks even though the perfectionist side of me wants to take advantage of all the trade set ups which are consistent with my methodology.

But I’ve also avoided several false setups that look promising but don’t actually go anywhere — which is just consistent with this environment (see the congested area from last year I’ve circled on the chart). So I advise discipline and patience right now even though it seems like we’re in a dollar freefall.

I know we have a lot of international tensions in the background. There’s a lot of rhetoric flying around from the U.S. president and the president of North Korea as well as Venezuela and other hot spots around the world. Any or all of these could be catalysts for some big moves in the markets.

But I’m trying to view this from a historical perspective, which means uncertain, range-bound trading. Unless I see something I really like, I’m going to continue to trade selectively and would advise you to do the same.

If you’re going to trade, trade with smaller risk and more selectively going forward until we see the environment change.

Be Careful of A Further EURUSD Breakout

The weekly EURUSD chart reflects my ambivalence about the current market environment.

Now of course this market has been on a tear. I predicted that back when we saw the triple bottom at the 103 – 105 area which suggested a major reversal of what was a bear market. And last week we saw a key reversal where the market closed on the high, indicating that it’s likely to keep going higher.

But on the other hand I’m confronted with the inevitable seasonal range bound pressures of August and September trading.

So although it wouldn’t be a bad trade to try and get long EURUSD here, I’m personally reluctant to chase it right now even though we’ve broken out above the 117 resistance area. If you decide to go long, the target is the gap at 120 which is 150 pips from the current level.

If you want to try this, be sure to take your profits fairly quickly because expect to see a constant re-testing of the current breakout area at 117 before we make another move higher.

The Likely Range for GBPUSD

Now here’s what GBPUSD looks like right now. The previous week’s key reversal, where the price closed on the low, is likely to contain the upward direction of the pound for the foreseeable future. So I feel we have a pretty good boundary on the upside.

Now it’s a question of how wide the range is likely to be.

Right now it’s too early to tell, but we might see a low in the weeks and months to come at the 125 support area. In the meantime, I’m anticipating increasing choppy, erratic price action in GBPUSD for the next several weeks.

Bearish Turbulence in USDJPY

Consistent with the freefall we’re seeing in the Dollar Index, we’re seeing a number of bear patterns in USDJPY which suggests the downward trajectory of the dollar versus the yen will continue.

The first bear pattern we can clearly articulate is the head and shoulders from several months ago. When we penetrated the neckline we then retested that breakout area with a double top before the present descending wedge emerged.

Now we’re at the lower end of this wedge. I believe we’ll see some near term support so I’d be very reluctant to chase a breakdown from the 108 support level. We’ll likely retest 108 early in next week’s trading before bouncing up again. That’s because I feel there’s more work to be done here before USDJPY resumes its eventual drop.

Why We’re Short NZDUSD

In our Trade of the Week last week, I suggested sell stop entry in NZDUSD below the low of last week’s bar. This was around 7387 and we’re trading a bit under that now at 7314.

The basis of the trade was that I believed the most recent run was a false breakout and should be shorted. And indeed there was no follow through. In fact, I speculated that we would go back into the range and maybe substantially lower in NZDUSD.

Meanwhile there was some key fundamental news to support this trade. Last Wednesday, the Reserve Bank of New Zealand kept interest rates the same while also suggesting they were going to intervene to force the New Zealand dollar lower. They felt that the New Zealand dollar was pegged too high.

So I anticipate that NZDUSD will continue to drop even with a weaker USD and we’ll see a retrenchment back into the choppy area and perhaps as low as the likely support line. That’s what I see on the charts and it’s backed by the dovish comments from the New Zealand monetary authorities.

Why There’s Now Less Risk In USDCHF

The USDCHF chart has been an interesting one.

For the past several months I’ve observed the ascending wedge triangle shown here. The market recently broke below the pattern and then last week we had a pretty determinative key reversal where the market made a new high and then closed on the low. So USDCHF has not only  broken out of this ascending triangle, we also have this key reversal which does suggest that we’re going lower.

But that’s not all. There’s another way to look at this pair too.

In addition to the ascending wedge price pattern we can also trace out a triple top at 103 where USDCHF was unable to make any progress.

Now we’re threatening the downside neckline at 94.

It appears that any breach in this area could open up a move as low as 91. I haven’t advocated trading USDCHF but it seems like the recent reversal bar as taken out quite a bit of the risk on the upside.

So I suggest probing the downside of USDCHF with a short entry below the key reversal and we’ll see how that works out.

 

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Light Crude Reflects the Seasonality All Too Well

Another market that’s interested me is the U.S. light crude oil market.

You can see my fears for decreased volatility, lower price ranges, and more challenging trading environment is very well reflected here. The trading range has become very constricted, the volatility is starting to drop substantially and the price is almost at a standstill.

Within the context of the current price movement, the long term rounding top looks promising but won’t be confirmed until we breach the neckline a hair under the 40 price level.

So while I think this market is headed lower and “heavy”, I probably would stand aside for now. It’s probably not a bad idea to wait until we see further price action at or near the neckline or breakout area.

XAUUSD At An Inflection Point And What To Do About It

Now I want to look at the spot gold market (XAUUSD) and as I believe we’re at a critical inflection point.

For this pair I’m going to start by looking at the monthly chart where you can see we’ve had a down trend until recently settling into a symmetrical triangle price pattern.

It’s too early to surmise how this is going to play out. We could get a fake breakout on either side of the triangle, or it could break and run hard either way too.

Now I’ve principally been a bear in the gold market for quite some time because of the descending wedge triangle I’ve shown you. It’s a lot like the one we’ve seen in the US Dollar Index.

But now there’s every possibility we could see a run up in the yellow metal due to recent international tensions. That’s why I’m also considering the following pattern for XAUUSD on a monthly basis:

With the likely trading range I’ve shown here, it’s easy to see we’re in a tug of war where false breakouts in either direction are very possible.

That’s why I’m waiting to see if this is a bear trap, meaning that we get a false breakout and then we get trapped into something that wants to go back in the direction from whence it came.

Here’s how that might play out on a weekly chart:

On a weekly basis, you can see that we’ve been in a fairly long term trading range between 1200 on the low side and 1300 on the high side. At the moment, it looks like we’re re-challenging the 1300 area again, perhaps up to 1320.

But consistent with my thinking in this summer market environment, I’d be very careful about chasing breakouts and getting caught in a bear trap.

But is there a way to play a small move to the upside?

On the weekly chart, I see an ascending triangle being formed where we could get a run up to the neckline before retracing all the way back down.

It’s tempting, which is why I’ve cautiously put in a couple of limit orders to buy this on the way up. But the problem with the limit order is that if it keeps going, your limit isn’t triggered. That’s basically what’s happened with mine. I’ve put a toe in the water and been too conservative.

Meanwhile the market just kept going and didn’t give me a chance to get in.

At the moment there’s some very robust price behavior where the market made a new low for the week and then closed on the very high, giving us great momentum to fill that space I’ve drawn on the chart for you. If the price does break through, the upper bounds are all the way up the 1,380 area.

But we’re at a resistance area the market has failed to penetrate for a few weeks now. I might have to forgo a bit of the upside because of my anxiety of being trapped up at the current resistance level.

So I’ll keep you apprised of my thoughts on XAUUSD. Depending on which way gold breaks on the monthly chart, we could be looking at a major opportunity in gold one way or another very soon.

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Is the Top In For US Stocks?

I’m going to finish off by looking at the U.S. stock indexes. We had a pivotal price action in last week’s trading action. In this case we’re looking at the NASDAQ 100 tech index.

You can see NASDAQ100 didn’t quite make a new high and then closed on the low on a big range bar. That’s pretty bearish and could be an early indication of a turnaround right there.

There’s a support area in the tech index at about the 5500 level, so if NASDAQ100 is going to keep dropping, there’s likely another 300 points to come until we reach that level.

After that, we’ll likely bounce around for a protracted period of time until the big bad bull market reasserts itself. Until we see otherwise, any sell off is probably going to be a buying opportunity for later.

So how about the S&P500? Again, the market made a new high, closed on the low and this will likely translate into some short term selling pressure.

However, I don’t think this looks like a tremendous selling opportunity.

That’s because there’s no established floor for the S&P500 (unlike NASDAQ100) and any drop might halt at recent lows at 2400, giving us very little room for a potential short trade.

So even though it looks like the high has been put in, I would caution against too much exuberance on the downside right now.

Similarly with the Dow Jones Industrial Average (DJIA / US30), we see the same kind of price behavior that suggests a top has been put in.

But again, I would caution you not to jump in willy-nilly.

If there’s any shorting opportunities they’re in the NASDAQ100 where there’s much more activity, much more frothiness at these high. Plus I can see a clear support area where the price could retrench.

So if you’re going to play the indexes on the short side I would certainly do it in the NASDAQ.

Pick your targets carefully because it’s my general expectation and anticipation that we’re in a challenging trading environment characterized by unpredictable, range-bound and choppy price action in most FX pairs and other trading instruments too.

I have been pretty transparent about my misgivings of trying to trade through these environments and my objective over the course of the next several weeks is to protect my previous gains and “to not lose too much”.

To that end, for the next several weeks (maybe through September),  I remain primarily in a capital preservation mode.

Remember that we make money in this game by not only being right on the direction, but also the timing. I’ve made over 7,000 pips over the last several months by getting the timing right and keeping my powder dry until the risk-reward ratio is heavily in our favor.

If making these kinds of prudent (and profitable) trades sounds good, you might find the Pattern Trader is exactly what you’re looking for.

That’s because my objective is for you to rack up regular steady wins based on the patterns I’ve shown you today. We just need to be patient and pick our chances when the best opportunities present themselves.As always, I wish you a happy and profitable trading week. If you have any questions please email me, [email protected]

As always, I wish you a happy and profitable trading week. If you have any questions please email me, [email protected]

Until next time …

Mark Shawzin

Pattern Trader

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