Special Situations Outside The U.S. Dollar

Last week we had a spate of economic reports and events, so let’s examine what was released and our expectations going forward for the major currencies.

Earlier last week we had an interest rate announcement from the Bank of England. They announced they were going to raise rates but it was a dovish statement in that they gave the impression it would be a ‘one and done’ proposition. On that news the British pound tanked.

On Friday we had the Non-Farm Payrolls report. While it came in a little less than the expected number of 315,000, the Fed reported a very robust 261,000 for September jobs. That increases the pressure on the Fed to raise rates.

There’s also pending tax legislation in the United States so about the only thing that could impede the dollar right now is if that somehow did not go through. Until that happens, the dollar remains firm.

A couple of weeks ago I pointed out that the key reversal at the support level was likely to put a kibosh on the downside and strengthen the dollar. We can see exactly that in the ensuing couple of weeks.

And last week we had an inside week bar where the high and low was within the high and low of the previous week. An inside week represents a coiling of energy and we’re likely to see the release of that energy to the upside this time. That’s why I anticipate a future shoulder forming in the U.S. Dollar Index.

Now I’m going to look at each one of the major pairs against the dollar. With the exception of the Canadian dollar it appears that the U.S. dollar is likely to keep strengthening.

How Everything Stacks Up

Against the USD

In this pair I’m looking at the Euro versus the U.S. dollar (EURUSD).

As with the US Dollar Index, we have this coiled inside week bar which will unleash energy but probably  to the downside in this case. We previously broke out above the 117 area with a breakout, but now it looks like we’re breaking back down.

I don’t know if this puts us on a path to a huge move lower or something less significant. Time will tell but it does appear that the Euro feels heavy against the U.S. dollar and will go down perhaps to the 112/114 area or lower.

As I indicated earlier, the Bank of England announced pretty dovish interest rate hike and on that the pound fell like a stone. We’ve had four inside bars in a row now — all the ranges have been inside the range made five weeks ago.

Typically when you see this coiling effect, these inside range bars, you can expect an explosion as energy gets unleashing out of this area.

That being said, GBPUSD is at a key inflection point where some critical resistance and support lines come in. Going back many years we’re sitting at the top of a major resistance line. We’re also at the intersection of a support line so we have a symmetrical triangle forming on a long term basis in GBPUSD.

So even though last week’s events precipitated a selloff and we’ll likely see some follow through, it’s probably just be a knee jerk reaction.

There may be a buying opportunity here, especially if GBPUSD tests the 128/129 area. I don’t expect it to drop out of the sky here but I’ll keep an eye on price action into next week.

In this chart I’m looking at the U.S. dollar versus the Japanese yen (USDJPY) and frankly analysing the yen charts in the last couple weeks has just exhausted me.

That’s because I can make the case for both the bullish and bearish sides.

For the bulls, we have a double bottom and a key reversal which ordinarily would suggest that we’re going higher.

But I’m a bit circumspect that there could be a trap here. One that ultimately suggests the yen-pairs may be headed lower in the immediate future.

Here’s the bearish case: the head and shoulders is the governing pattern in USDJPY, plus we’ve seen a descending wedge here which the market recently jumped out from.

That might seem bullish but there’s still recent high to worry about and the USDJPY price is poised there right now. My feeling is that it will fail again, but I’ll be watching it closely to see what happens.

One important thing to keep in mind: all yen pairs cannot be judged the same.

CADJPY looks very different than CHFJPY and EURJPY looks very different than GBPJPY. Each of these yen pairs has to be observed on their own merits.

But if you had to put a gun to my head I would say they feel heavy and that GBPJPY and CHFJPY in particular look like they will head lower from here.

In this chart I’m looking at the Australian dollar versus U.S. dollar (AUDUSD). The Australian dollar for the most part has been in a bear trend for a long time.

I was a bit unsure as to whether the double bottom would turn this around but following a brief breakout we now have AUDUSD dropping back below the breakout area.

It’s too early to tell if the Australian dollar will go to all time new lows but I think it does look like we’re going lower. Especially when you can see within this recent pattern a head and shoulders with a sloping down trend line.

In this chart I’m looking at the New Zealand dollar versus U.S. dollar (NZDUSD) with the Kiwi dollar being the cousin of the Australian albeit a bit weaker.

We see the same double bottom patterns but it appears we’re rolling back into the primary down trend. That’s why I’ve been very negative on NZDUSD.

More recently we’ve had a double top right at the 74/75 area and we cracked through the neckline of that some time ago at 71. Now we’re just hugging the lower end of support and I imagine we’ll bash through that sometime in the near future. Any penetration below the low of last week should open up another move to the downside for NZDUSD.

In this chart of the US dollar Canadian dollar (USDCAD) we can see that CAD was the only currency the dollar weakened against last week.

The dollar finished slightly lower against the Canadian dollar but it may signify that we’re going to go into a trading range here. I don’t think I would short USDCAD because it might be an aberration in a market that’s turning around and continuing higher.

So we’ll have to wait and see what the price action of USDCAD looks like/

In the meantime the Canadian dollar was stronger against a host of major currencies last week and we’ll have to see if that strength continues going forward.

Now this is a chart of the U.S. dollar versus the Swiss franc (USDCHF). I have liked the upside of USDCHF for the last several weeks.

We traced out a long term ascending wedge triangle, and then saw a false breakout below it.

Within this false breakout, we saw a very nice double bottom and then when it cracked through the neckline a few weeks ago I said that this was likely to project higher. Indeed we’ve seen the follow through. As with almost every other USD pair we are also seeing another inside week bar with a coiling effect.

I think we’ll see progress through 104 and perhaps much higher in USDCHF. If it breaks the upside barrier of this long term ascending wedge then look out. We could have continued weakness in the Swiss franc against a litany of currency pairs but it’s most notable against the US. Going long USDCHF feels like a no brainer and I would certainly get on the long side of this trade.

Where The Biggest

Gains Should Come

Now I’m going to focus on some special situations in the forex market.

First of all, my big favorite GBPNZD. I’ve extolled the virtues of this pair for quite some time based on the underlying double bottom. We also cracked through the neckline recently and I do believe this pair will go higher. Much higher!

Now I recognize that our faith was rocked last week on the interest rate announcement of the Bank of England as we saw a huge pullback in the pound correlated pairs.

But my feeling is this may be an opportunity to add more to our long positions.

The pair is a bit unique at the moment in that we have two opposing key reversals. Key reversals point in the direction the market wants to go to but in this case there’s a conflict between a recent bullish key reversal and last week’s bearish key reversal.

To resolve this, I’m going back to I know which is the double bottom that seems to be underpinning GBPNZD. I have some blind faith that even if we get under the support line this remains a great opportunity.

I’ll certainly be watching this pair very closely. Any support could translate into a nice buying opportunity and I’ll keep you advised as I monitor the events going forward.

Another special situation that I’ve been looking at for the last couple weeks is the Euro versus British pound (EURGBP). Up until now we’ve been looking at weekly charts but now this is a daily chart.

EURGBP has been forming a reverse triangle and then more recently we had a bearish double top price pattern. If we dig within the double top we also see two key reversals where the market made a new high and closed on the low.

Although there’s been a recent rally from a bullish key reversal, we’ve seen too much pressure on that support line which suggests that we’re on the way down to 0.8700 and below.

Especially when on Friday we saw an inside bar. For those of you who are a little more aggressive I would certainly explore the downside of this market by putting a sell stop under the low of Friday’s range. I think that ultimately we’ll go to 0.8700 and if we do crack that then it does project much lower in EURGBP.

What’s Up (Or Down)

With Gold?

I’m going to finish up this video presentation by looking at XAUUSD (spot gold). I’ll begin by looking at the weekly chart. We see that at this 1,400 or 1,380 level XAUUSD has hit a ceiling it can’t bust through. Each thrust at the 1,380 to 1,400 level has failed.

Now it looks like the most recent failure will prove to be ultimately fatal and I believe it will break significantly to the downside. At the most recent failure we had a breakaway price gap. Then in the last week of trading there was another coiling bar (a recurring thing in this week’s report)  right at the major support level.

I believe that if we get through that support level there will be a significant move to the downside. In fact, I’m looking at all the time frames — monthly, weekly, daily — and everything is flashing a trade to the downside in spot gold.

Now I’m looking at XAUUSD on a daily timeframe and we can see for the past several months that XAUUSD has been in this ascending broadening formation. Since February I’ve been having a very profitable time playing both sides of XAUUSD and generating 3,000-4,000 pips in profit.

You can see that this formation starts out narrow and then goes wide, hence the name ascending broadening formation. You can see recent price behavior has brought it to the support line, the lower end of this formation. I believe that ultimately this will kick through.

As additional evidence, we’ve recently seen a descending wedge triangle which is inherently a reversal and bearish pattern.  Any penetration under the support area at 1,260 will take prices lower.

And yes, I know we got stopped out on our recent trade. I hate putting a stop in this thing because we stopped out and then prices went right back into this 1,260 to 1,280 price range immediately afterward. It’s very frustrating for sure.

However, I still strongly believe that the risk is to the upside in spot gold, and that the opportunities are to the downside. Any price movement to the upside is going to be momentary and short lived and I believe that we’re on the precipice of perhaps a major break lower in XAUUSD.

Now for a quick recap …

Last week, a dovish Bank of England interest rate statement and a robust NFP Report on Friday contributed to a firming US Dollar while sending the British Pound (GBP) reeling against most major currencies.

The robust NFP Report will likely keep pressure on the Fed to raise rates in December, but the dollar is likely to find its fortunes linked to the prospects of passing tax cut legislation that markets think might lead to a steeper Fed rate hike cycle in 2018.

The sell-off in GBP has pushed the pound back towards support levels and may offer bullish traders a second bite of the cherry. See my technical analysis of GBPNZD for more details.

I expect continued weakness in NZD correlated pairs and a firming tone in GBP pairs. I especially like:

Long GBPNZD
Short NZDCAD
Short EURGBP

Plus here are my thoughts on the other markets:

EURUSD should be under further downside pressure from current levels.

GBPUSD is sitting at major “inflection points” of a symmetrical triangle on the weekly charts and is likely to consolidate between 1.2800 and 1.3200 for next several weeks.

USDJPY is sitting at a major resistance area (114) and the jury is still out as to where USDJPY heads from here.

XAUUSD (spot gold) has suffered from some lackluster price action following the huge negative Key reversal on the September monthly chart. This suggests much lower prices from here and penetration below the 1240 price level will open the potential for a major leg lower.

Light Crude Oil still trades at the upper level of a major support (42.00) and resistance (55.00) price zone. We could see a breakout to the upside, but I’m very cautious about the continuation of a rally in this market for now.

The three major US Stock Indices (S&P500, NASDAQ100 and DJIA) exploded to all-time new weekly highs — again. The big, bad bull market remains intact.

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Mark Shawzin
The Pattern Trader

 

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