On Knife Edges: Which Inflection Points I’m Watching Now

Last Friday’s remarks by Federal Reserve Chair Janet Yellen, at the annual Jackson Hole Economic Symposium, offered little guidance on the future of monetary policy. The result saw the dollar come under pressure with gold getting a boost as well as certain currencies.

Then ECB President  Mario Draghi followed Yellen with a speech that specifically did NOT discuss current monetary policy. Market participants interpreted his silence on the exchange rate very bullishly for the Euro.

So where are we now?

There are certain pairs which have broken into clear trends (EURUSD and USDCAD) while others are on the edge of breaking out although with obstructions in their path. Those include the Dollar Index, USDJPY and AUDUSD.

Let’s tackle the Dollar Index first. Even though I don’t actually trade the US Dollar Index itself, it’s very important to get an idea of expected price action here since so many currency pairs trade in response to the overall strength (or lack thereof) in the US Dollar.

Here’s the weekly chart for the US Dollar Index, balanced as it is on an inflection point:

On one hand the dollar’s in free fall thanks to its descent from the heights of the reverse triangle (a.k.a. megaphone top) I’ve drawn for you. When the dollar kept hitting the heights of the megaphone while remaining anchored to its base (the lower horizontal line), it was fated to drop significantly. This has indeed happened over the last couple of months.

However, the dollar’s now reached the upper edge of an established support zone bounded by recent and more historical support lines. For now it’s holding on that upper edge.

Once the dollar can hit and break the zone’s lower boundary — the one that defined the original megaphone top — that would create an opportunity for significant new lows in the months to come.

Another factor to consider is potential volatility due to the Non Farm Payroll Report coming out this week. Could that cause the dollar to fall through it’s support?

Probably not, in my humble opinion. Remember we’re approaching Labor Day weekend in the USA. Not many traders are going to be active due to the holiday. And so I don’t expect the dollar to do anything more than drift sideways at (or within) the support zone for the immediate future.

Note that we just had an inside week bar too. That’s where the high and low of last week was completely contained within the high and low of the previous week. Inside bars indicate that the momentum is gone from a move and that a turnaround may be on the way.

That’s why the current price level could be a bit of a bear trap with some fairly unpredictable and possibly short term bullish price action. I’m still bearish on the dollar overall, but at the current level it’s best to wait and see how things play out at the edge of this support zone.

We can make a better judgment on the dollar’s future fall once we get this holiday behind us and a bit more price action at (and within) the support zone.

The Mighty EURUSD (But Don’t Buy Yet)

 

The Euro is currently the strongest currency against the US dollar, followed closely by the Canadian dollar which I’ll be covering in just a moment.

The Euro has shown some powerful momentum lately. That’s been underlined by a significant triple bottom hammered out over the last couple of years.

And things really took off  just a few weeks ago.

In fact, we cleared previous resistance at the 117 level and closed strongly above 119 on Friday. However, the near term upside is likely to be limited by the gap I’ve highlighted at 120. That’s probably going to be both a short-term magnet and a ceiling for EURUSD too.

EURUSD might temporarily exceed the 120 level, but I wouldn’t be surprised at all if it were to retrace and retest the previous support area at 117. It might even drop as low as 114, another previous support area.

History has shown this time and time again: when prices break out from long-term resistance or support, people get excited about the new breakout and chase the price, only to be disappointed when they get caught in the retracement action shortly afterward.

I’m still very bullish on EURUSD, but wait and watch for a retest at previous resistance before an eventual rise to significant new highs. This one will take at least a couple more weeks before we’re set for another major run to the upside.

Not in the Clear Yet: AUDUSD

Now let’s take a look at the weekly AUDUSD chart, specifically the double bottom I’ve highlighted here. In the second of the two bottoms, the price retested the low and set an all time low before rebounding strongly to fluctuate around and above the 74 level.

That double bottom tells us that prices will eventually ascend much higher.

But whereas EURUSD has broken out into the clear with no recent price history acting as resistance (other than the gap at 120), AUDUSD doesn’t enjoy the same luxury. It’s now at the 80 level where there was significant resistance in April of last year and more recent obstruction in the last month.

AUDUSD will have to clear all that resistance before it’s truly on the way to significant new highs.

Again, bear in mind that with the Labor Day weekend approaching, AUDUSD is not likely to move much until that holiday is behind us. I want to see AUDUSD at the 82 level before it’s “in the clear” as with EURUSD and ready to ascend to new highs.

So while I’m bullish on it right now, we need to be patient and see how long it takes to clear out the resistance that’s weighing it down right now.

Watch Out for the Sentry at the USDJPY Door

On the USDJPY weekly chart, the main pattern to observe is the head and shoulders from last year. That’s a reversal pattern and it worked in textbook fashion this time.

USDJPY went from bullish as it entered the head & shoulders to bearish as it exited.

And once the neckline was broken at 116, USDJPY dropped steadily with only a brief recovery toward the end of last year.

USDJPY is once again on a downward march as shown by the other bearish pattern I’ve drawn for you: a descending wedge triangle. That’s one of my favorite bear patterns since it indicates much lower prices once the market breaks the horizontal line of the triangle.

With that being said, we have to be patient and wait for that breakdown to happen. There’s still significant support at the horizontal line and there’s a good chance the market could rise once more. There’s special reason to be cautious when you consider that we’ve just had an inside week bar on USDJPY — the price has lost its downward momentum and could be ready to turn around in the near term.

So there’s a sentry guarding the door at the 108 price level right now in USDJPY.

We have to wait until he’s out of the way before I’m confident about taking the short side of a USDJPY trade. That’s why I feel we have to wait a bit longer.

Yes, I know that “waiting a bit longer” is a familiar refrain in this report, but we make money in this game by not only being right with the direction but also the timing of our trades.

Patience Required for the USDCAD Bear

This weekly chart of USDCAD demonstrates why the Canadian dollar has been one of the strongest currencies against its southern neighbor. The USD just can’t hold up against the relentless pressure applied by CAD since 2016 rolled around.

The drop in the last month or two has been particularly severe:

So what pattern are we reviewing here?

There’s been a long term double top in USDCAD. I realize it’s an unconventional double top because one peak is significantly lower than the other. However, the price action is confirming the pattern and right now we’re at the long term neckline for it.

As with EURUSD, I’m expecting an extended run in this pair, this time to the downside.

However, I would expect any breakdown below the USDCAD neckline to be short lived as the price will likely retrace before the downtrend resumes. There are also multiple support levels below the initial neckline. Those have to be cleared as well.

However, I’m still expecting USDCAD to drop significantly once the initial neckline is breached and we get past the likely retracements.

Getting Bearish on USDCHF

In this weekly USDCHF chart, we can see the bear patterns forming in the pair. There’s a double, even triple top. Plus the price has broken out from its ascending wedge triangle.

That breakout has already retraced and now looks ready to descend once again.

However, as with AUDUSD, there’s some recent price history that has to be cleared before USDCHF can truly establish a strong downtrend. In fact, USDCHF has a LOT more support to chew through before it’s truly on its way.

So while I believe USDCHF is on the verge of a major price move to the downside, we need to be just a little more patient before I’m happy to jump in for some very profitable trades in this pair.

No Volatility = Bad News For US Light Crude Oil

Generally speaking, I don’t follow the news or events surrounding a particular instrument or pair. Instead I look at how the market has reacted to news or events and how its plays out on the chart.

That’s why this weekly US Light Crude Oil chart is so interesting right now. Right now the oil-oriented area of the USA is enduring one of the worst hurricanes since 1951 as Harvey pounds the shores of Texas.

There’s a lot of oil refineries there and a lot of oil is shipped into and out of the USA from that area. It’s probably the most important oil area in all of America.

All that, and yet the oil market has not reacted at all to this calamity.

In fact, oil has stayed firmly within the constraints of a bearish long term bowl pattern. It’s remained within a very tight range despite all the disruption in Texas.

And that’s why I expect to see much lower oil prices once the $39 neckline for crude oil is breached.

I’ve been bearish on oil for a long time, and it’s been a long wait for that neckline to get hit. But it’s going to happen and when it does the fall should be spectacular.

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Why I’m Mostly Bearish On Spot Gold

Spot gold (XAUUSD) is another commodity I’m reviewing closely.

This is a market that’s trying to break out of a relatively tight trading range and right now it’s hovering at the 1300 level again.

But the most recent week is an inside bar. In general, an inside bar indicates the current momentum has been spent and the market is going into neutral or even reverse.

There’s also a lot of price resistance at current and slightly higher prices too. Even if there’s a surge above 1300 to the 1350-1400 level, it’s likely to be exhausted by the time it gets there.

Especially when there are older key reversals (red circles) we’ve seen that would also need to be overcome.

And quite frankly, I don’t see all that happening right now. At best, gold will break one or two levels higher as I’ve drawn them on this chart. Until then it’s stuck in the 1200-1300 price area with occasional outside excursions.

Another way of looking at XAUUSD is the reversed symmetrical triangle I’ve drawn here.

If gold continues to slightly expand its range as defined by the triangle, that would translate to a 1320-1340 upside objective. So if you’re an aggressive trader, you might want to put on a long trade at current prices.

However, be very cautious and be ready to exit once we hit the 1320-1340 level as a reversal could be quite sudden.

So what about the bullish case? Gold bugs typically only want to hear bullish things about gold, so here’s my take.

There’s potentially been a double bottom made at the 1050 level as I’ve shown here. It could be a governing pattern that ultimately “governs” gold to a return to its old highs.

However, I can’t say I’m totally on board with that as the bearish presence seems too strong for me. There’s just too much resistance on hand. While gold’s moved up a little in recent weeks, it’s hardly challenged that resistance with any vigor.

I just don’t see that gold has the power to break through into a new bull market right now. I’m keeping an open mind about all this, but I think we’re on the precipice of a major development that will prove the bearish case rather emphatically with a major move in the final quarter of this year.

So our patience has been tested lately in XAUUSD, but I do believe things are going to open up nicely for a tradable move in the foreseeable future — ideally in the next couple of weeks.

 

NASDAQ100 In Neutral … But For How Long?

Let’s finish with a look at the US stock market, the NASDAQ in particular.

As you can see with the NASDAQ100, the main technology index, the price has been unable to return to its previous highs from four weeks ago.

It simply can’t maintain its earlier momentum right now, and so the market could easily descend to retest the recent lows at the neckline I’ve drawn for you.

However, don’t try shorting NASDAQ100 yet. This is a very robust bull market and I’m going to continue sitting on the sidelines until we can see where this market is truly headed next.

But mark my words: despite all the caution I’ve been showing in recent weeks, I believe things are going to get very lively soon. We really are on the knife edge in a lot of different pairs.

Once things get rolling, I anticipate we’ll be able to put on some very profitable trades very soon.

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If you have any questions please email me: [email protected]

As always, I wish you a happy and profitable trading week. Until next time …

Mark Shawzin

Pattern Trader

 

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