On the Edge: Why I’m in Capital Preservation Mode

First, a quick recap of what I’ve been talking about for the last few months in the US Dollar Index.Let’s take a look at the weekly chart where you can see the dollar fell to further lows to set a new 10 month low.

I’ve been projecting a lower dollar primarily based on two very bearish price patterns.

The first of those patterns is a reverse triangle or megaphone top. As I described it last week, a megaphone top looks like one of those megaphones a coach would yell through from the sidelines. This is a bearish pattern so we had a potential major top in the U.S. dollar.

And nothing we’ve seen recently has dissuaded me from that notion. If we’re going to project where the dollar might go, we measure the move from the peak to the support line first of all. Then we can extrapolate how far it could go from there in a measured move down to around 106. Therefore I believe we have plenty of room on the downside in the U.S. dollar.

The other price pattern that’s supported my bearish posture in the U.S. dollar is the descending wedge triangle. You can see the market has breached below this descending wedge triangle and projects down to the support area if not much lower.

So what might be the catalyst for this?

Next Wednesday we have an interest rate meeting by the FOMC (Federal Open Market Committee). There are dimming expectations for another interest rate hike. In fact, there’s only a 52% consensus that we’ll see a 25 basis point hike. I think this is contributing to the current weakness in the U.S. dollar.

Hold Your Horses on a Euro Breakout

Let’s move onto the EURUSD weekly chart. For the last several months we’ve been discussing this triple bottom in the Euro at the 103 – 105 price area.

That triple bottom is about to be confirmed with the breach above the neckline. There was a recent high at about 117 and EURUSD is right at a major resistance area.

So even though I see the dollar going much lower — which should project the Euro much higher — that current resistance area plus key reversals where the market makes a new high and then closes on the low sets the stage for what might be a prolonged resistance.

That’s why I wouldn’t chase it here. The seasonality in July and August is where we typically see a range bound environment.

So my EURUSD target is around 120 for now. If we do see a run despite the seasonality that’s likely to be the top before a pullback to the resistance area once again.

Why It’s Important to NOT Take Trades

Some of you know my caution is balanced by the fact that I’ve made a tremendous amount of money in the last several months, including 2,400 pips on the weekly trades and 5,000 pips on the daily trades.

WEEKLY Trades: Profit/(Loss)

It’s been a great run, and that’s why I’m in a capital preservation mode right now. I’m offsetting my expectations and prepared to watch some trades go by in this period.

Remember that professional traders are measured by the trades they don’t take as well as the trades they do take. I realize it’s not the most glamorous thing you want to hear when it comes to trading. After all, not many traders want to sit on their hands and stay on the sidelines.

But experience has told me this is the best posture when I feel we’re looking at markets at major support and resistance areas as with the Euro. So while it’s extremely captivating to try and take advantage — and yes, I hate to see them go by, especially when I know what’s going on here — this one is worth sitting out for now.

I’ll keep you advised if I see some good risk/reward EURUSD opportunities going forward.

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EURGBP Near a Top?

One of the more interesting charts that I want to point out is the ERUGBP weekly chart. It’s punching higher but it’s at or near resistance. I also see some linearity forming for a price pattern, much like we saw in the U.S. dollar. There’s a reverse triangle apparent here.

See how all the lows line up? See the symmetry of this ascending line?

I’m going to be watching the EURGBP price action closely to confirm if we’re indeed at a major top we can play to the downside soon.

Why GBPCAD is Worth A Look

While I very much expect the GBPUSD to continue trading between the 126 and 130 level throughout the summer I’m looking at some other GBP correlated pairs for more volatile trading possibilities.

Here we see the weekly GBPCAD chart with a very interesting double bottom which looks likely to hold. With the recent decline, I think we could be near a major support level.

Not only am I looking at the price pattern but I’m looking at the price action too.

When GBPCAD made an all time new low a few months ago, it reversed to close on the high part of the week on a very large range bar. Typically that kind of price action should contain the market and I would expect to see some kind of support in this price area.

But right now it’s a bit like catching a falling knife in GBPCAD and there’s no reason to jump too quickly.

I just wanted to alert you that I’m watching this area for any indications of support. A key point to understand is that even if support shows up, it will take a while to turn GBPCAD around due to the steepness of the recent decline.

So we’re likely to see some backing and filling in this area before the turnaround provides a real opportunity. Just be patient and wait for a better chance.

Don’t Chase AUD Yet

In this weekly chart of AUDUSD, I believe the governing price pattern is the double bottom and W formation which effectively has underpinned the price action for the last couple years.

Last week we saw a breakout above the recent highs. Having said that, because of seasonality I’m not inclined to chase breakouts. AUDUSD could find some difficulty between 80 and 82 even with the impending USD weakness. That’s why I’m happy to sit in capital conservation mode for the next couple weeks.

Again, just be patient as we plod our way through these slow summer markets.

USDJPY Vulnerable to a Drop

Now the USDJPY is another one for which we have to wait awhile longer.

I could make the case for major support with the recent double bottom. But also there’s a major head and shoulders price pattern which could be the governing price pattern. By that I mean it will ultimately determine the direction of USDJPY.

That’s why I think we may have a fairly range bound market that goes between the two support and resistance lines I’ve drawn. I’ll be watching closely to see how this breaks out. Again, I’m on the sidelines while I watch how the price patterns resolve itself in the various JPY pairs.

USDCAD Still A Falling Knife?

This is a weekly chart of the U.S. dollar versus Canadian dollar. For many weeks now I’ve been very bearish on USDCAD ever since we broke the ascending trend line of the ascending triangle shown here.

That happened after a false breakout at the top which was followed by a collection of inside week bars. I said at the time this would likely open up a huge move lower and that’s what we saw.

I projected we would come down to the support area and we’re not too far from that right now. USDCAD has put in a substantial top and should work its way lower but there’s some support at this level, as shown.

I would wait for a better risk/reward opportunity to initiate further shorts at this time even though this pair still looks like a falling knife.

Adam and Eve in NZDCAD

Another CAD related pair that’s been on my radar for quite some time is the NZDCAD. Here we see a Adam and Eve double top on the weekly chart.

An Adam is comprised of a single spike and an Eve is a multiple spiked top. That means we’re looking at a potential double top formation in NZDCAD. However, we can’t confirm this double top until we see a breach of this neckline just under the 92 price level.

Another key point is that this past week was an inside week bar where the high and low was within the high and low of the previous week.

That means it’s coiling up for a major move. If we drop under the low of this inside week and break the neckline it could open up a path to new lows in NZDCAD as projected by the double top. Until then, the price remains at a major support area so I’m going to sit and watch the price action for now.

However, those of you who are aggressive you could put a sell stop at the 92 level on NZDCAD and see if we get a nice move lower sooner than I expect.

Oil Still Hanging In There … For Now

Here’s the weekly chart for the US light crude oil market.

I’ve been pointing out the potential of the bearish rounding top and that any breach below this $39 neckline in light crude oil should open up a major move lower to the 35 area and potentially much lower than that.

Any catalyst or any trigger below that neckline would be something to watch going forward.

Watch and Wait For Gold

So how about spot gold? While I saw major support at the 1,200 area for XAUUSD, I’ve been pretty cautious about trying to follow this market higher even though I projected 1260 as a target.

That’s because I see what could be a head and shoulders top forming. That’s a very bearish price pattern but for now the price isn’t ready to fall … yet. If the price does in fact turn at the 1,260 level then we’ve got a head and shoulders and the next price to watch would be the 1,200 level where the neckline waits.

The FOMC meeting on Wednesday could be a big catalyst for gold. If we see the Fed backing off and being more dovish, that could open another move higher in XAUUSD.

So I want to see how the price reacts to the FOMC meeting and then I’ll be making my decisions going forward on spot gold.

I will of course keep you posted on that, especially if you’re a keen gold trader like me. In the last year and a half I’ve taken out 4,555 pips trading XAUUSD.

And that’s why I created a specific and highly disciplined Gold program. There’s only one or two high probability trades a month and you have to be patient for them, but they’re very profitable once we get into a good one.

To find out more about that specialized gold program, visit this link for more information:

www.thepatterntrader.com/gold

S&P Still Unstoppable

I’m going to finish off this week’s report with a look at the S&P 500 stock index.

The S&P500 made a new high last week. So this is still a big bad bull market and the market is ascending within the channel I’ve drawn for you.

Any break above or below that channel could open up a new move. Meanwhile the VIX (the volatility index) is making new lows which indicates this market will be vulnerable to a down move at some point. However, it appears to be too early for any such thing to happen yet as the S&P bull is just too strong for now.

In summary, the markets are at substantial support or resistance areas in many pairs right now. As they could break either way, I’m content to sit on the sidelines for now and watch the price action unfold.

I will advise you a better risk reward opportunities going forward so until next week I wish you a healthy and prosperous trading week.

If you have any questions, please email me at [email protected]

You can also check out:

www.thepatterntrader.com/apply

Remember, my objective is for you to rack up regular steady wins. And part of the game is knowing when to keep your powder dry for the truly good opportunities.

Until next time …

Mark Shawzin

Pattern Trader

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