Last week I began my analysis with EURCHF (the Euro versus the Swiss franc) because I felt it was an ‘off the grid’ trade with an excellent risk/reward ratio.
Let’s look at that chart right now:
EURCHF has been in a profound downtrend for some time. What’s more, it's typically a very moribund pair and normally trades in a very tight trading range. That makes it unsuitable for the type of trade I normally seek out.
However, there’s a stealthy setup here which I first discussed last week.
People always say you can't pick tops or bottoms but quite frankly I consider that my strategic edge. I have an effective strategy for spotting trades as trends turn from one direction to the other.
So while EURCHF has been in a downtrend, right now there’s a favorable possibility we could get a nice spike to the upside. I really like the risk/reward here.
The evidence starts back in the April-May timeframe. EURCHF put in a subtle double bottom from which it bounced nicely before coming back down to test that pattern’s neckline.
Since then, it’s put in some very bullish price action with a pair of key reversals (that’s when the price made a new low and then closed on the high of the week). EURCHF did that twice in its most recent consolidation.
This combination of pattern and price action indicates where the most likely momentum is going to be. A double bottom price pattern in the rear view mirror and bullish price action ever since now strongly suggests future prices should be higher.
How much higher remains a bigger mystery. This potential move could just be a countertrend trade where it comes right back down into the trend later. Even so, that gives us a nice profit opportunity without having to risk too much to find out if we’re right or wrong.
That scenario is to me is the Holy Grail of trading.
Last week I suggested putting a buy stop in EURCHF at 1.0802. That order remained unfilled for most of the week.
But here’s the nice part: I didn’t have to watch the chart every day. I wasn’t stressing out over a
15-minute chart. I wasn't looking for some indicator to turn. I put in a low-risk buy stop order and went off to do other things with my time.
If EURCHF had kept going down, then my buy stop wouldn't have been triggered. No harm, no foul.
But on Thursday that order was finally triggered. By requiring the market to confirm my hypothesis, I got into the trade at the time and price that it's ready to “go”.
The risk remains small for potentially a nice upside. I'll do that trade all day long.
And it’s not too late to get aboard if you’re not long already. That’s because the characteristics and benefits of this trade remain the same as last week.
Let’s compare EURCHF with GBPCHF (the British pound versus the Swiss franc).
It's pretty much the same discussion as with EURCHF. GBPCHF has been an ugly downtrend.
People always say the trend is your friend, don't fight the trend and so on. Often, that’s the way to bet.
But I’m seeing a good risk/reward trade in GBPCHF on the long side here. During the pandemic, GBPCHF spiked below its long-term support line of multi-year lows. It spiked back up just as quickly, suggesting that price movement created a bear trap where anybody chasing those lows has since been trapped.
As with EURCHF, I think there’s a sneaky play to the upside because of recent price action. Specifically, I’m looking at the coil that’s currently forming. A coil is formed of inside bars which are entirely contained with the high and low of a longer, earlier bar.
Coils suggest a compression of energy that sooner or later releases in explosive fashion. I’m taking a bet that we're going to uncoil to the upside.
Again, what I like about this trade is that it's not going to take long to find out if I'm right. I also don't have to risk a whole lot. The potential reward looks very attractive. And so I'll do trades like that all day long.
Now of course the disadvantage of picking a bottom is that it could take a lot longer than you think to see your play happen — or you could just be wrong.
However, when you can keep your risk low while having a great shot at an upside bounce – a bounce perhaps as far as the trendline I’ve drawn on the chart — it’s worth betting on.
Now I want to look at a few more GBP pairs.
After all, the UK has been beset with another outbreak of COVID as well as enormous Brexit concerns. The pound has plummeted. Are there trading opportunities here?
Here’s GBPNZD (the British pound versus the New Zealand dollar):
This could be another great buying opportunity. That’s because when you look back at history, often the best plays are the ones that pop up when there's a crisis. Crises represent opportunities and right now I believe that being long GBPNZD presents just that opportunity.
Although this pair was crashing last week, I suggested the 1.90 price level was likely to hold in past emails to my Elite members. I felt the crash was likely a phenomenal buying opportunity. We started to get a sense of that last week when GBPNZD made a low right under 1.90 and then closed substantially higher.
That reversal (not coincidentally) took place right at the level of a previous reversal, suggesting we may be seeing an emerging double bottom.
This translates into an enormous opportunity because I believe GBPNZD is in a stealth uptrend. Look all the way back to late 2016 and early 2017 where it put in a double bottom price pattern that’s been dictating price action ever since. I call it a stealth bull market because there’s been heavy downturns along the way.
But in the main, GBPNZD has been traversing along a well-defined uptrend line. Every time it hit this line, it’s held. That’s why I think it will hold again.
In fact, this looks like the beginning of a beautiful story to the upside.
It’s why I put a buy stop slightly above last week's high. Wait for the momentum to put you in the trade. And if the trade fails, no harm no foul.
And that’s the beauty of my layered approach:
I look for a pattern.
I look for price action.
And then I compliment it with a resting or pending order to let the market confirm what we think we’re seeing.
This double bottom right at the 1.90 area will be confirmed upon a thrust above a neckline around 2.05.
But I'm not waiting for that confirmation. I've got long positions on already and I advised Elite traders to get in at 1.9235 earlier this week. Already we're sitting on a nice 200 pip buffer waiting for prices to rise what could be a lot higher in GBPNZD.
I think there’s still more to come in this pair.
Now I’ll take a shorter look at GBPAUD (the British pound versus the Australian dollar) for comparison purposes:
This shares many of the same characteristics as GBPNZD where all the way back in late 2016, early 2017 the pair established a triple bottom price pattern which has governed prices ever since.
You can see that every time GBPAUD tested the 1.75 line it held, including recent weeks. It now looks like GBPAUD is forming a what could be a meaningful double bottom. Final confirmation of this double bottom would be a breach above 1.84 – 1.85.
That would then open a threshold for much higher future prices in GBPAUD.
Now for some USD analysis ….
In this chart I'm looking at USDI (the US Dollar Index) which tracks the US dollar against half a dozen of the major currencies.
For the last several weeks I've been saying the dollar has likely peaked, but consistent with analysis in last week's report, you'll see I was projecting an upturn in the dollar this week.
That was primarily due to the key reversal pointing the way higher, plus some inside bars.
I suggested that USDI could retest the neckline of the bearish head and shoulders and that’s what we’ve seen. How far of a bullish incursion USDI will make is yet to be determined, but next week should see continued strength in USDI based on last week’s action.
My long-term view on the dollar is bearish. In the meantime this looks like a short-term counter-trend rally.
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