There are three key developments which should set the stage for the markets in the coming week:
- the March 1 deadline and pending resolution of the US-China tariff/trade war is looming
- UK lawmakers are about to make another decisive Brexit vote, and
- The semi-annual Congressional testimony from Fed Chair Jerome Powell is approaching fast
For that reason, the markets are currently in a low-volatility environment. Which means the kind of big trade setups I normally look for are unlikely to materialize this week.
However, there’s still at least one good FX trade that you can get into this week, plus a trade in Tesla (TSLA) that’s worth considering while we wait for the rest of the markets to move out of tight trading ranges.
I’ll cover those trades in just a moment, but first a look at why this isn’t a good environment to be making lots of trades or taking many risks at the moment.
As we’ve been discussing for the last 3 months, the USDI (U.S. Dollar Index) continues to play chicken within a narrow trading-band that goes back to 2014. When USDI is likely to break out from the current gridlock (either higher or lower) remains an uncertainty.
As we can see here: USDI is trapped in the lowest volatility and narrowest corridor since 2014. (USDI measures the U.S. dollar against a basket of major currencies, notably the Euro).
This means that everything that worked trading-wise in September through to January is not showing any kind of follow-through now. This is NOT a great environment for big trades across most asset classes.
This is important to understand, otherwise you’ll be exposing yourself to unnecessary risk and losses. After all, as traders we need to recognize not just the right trades but also the right environment.
The solution is to be very selective with your trading and trade with low risk too.
The way I handle trades – especially in environments like this one – is to take trades with at least a 2:1 or 3:1 ratio between reward and risk. Remember that risk is always present in the market and the reward might be there. So trade accordingly, especially when the rewards are much harder to get (like now).
Remember that there’s never any need to rush into trades. Just keep your powder dry and wait. When volatility increases there will be plenty of time to make adjustments.
The EURUSD (Euro against the dollar) forex pair is a prime example of the current low volatility market.
A breach below the 1.12 price level in EURUSD would likely result in a broad move lower for the Euro accompanied by a higher dollar across the board. Similarly, a puncture above the 1.18 price level would lead to the opposite.
In the meantime, we’re gridlocked within a narrow 100 pip trading range as we wait to see how the EURUSD’s bearish head and shoulders pattern will play out.
For now there’s just too many headfakes and not enough follow through on what EURUSD wants to do next. Accordingly, I’m inclined stay on the sidelines.
However, EURGBP (Euro against the British pound) is potentially much more interesting in the near term. While this has been a relatively unexciting pair for the last 12 months, I think we could be close to a breakdown here:
For the bearish case, we’ve seen four tops with a common neckline. The market has failed to rally even after bouncing off the 0.87 level many times. Therefore – in the absence of upward momentum — it’s likely we’ll see a breakdown below the long term support at 0.86.
It’s worth risking 80 pips here to take a 240-pip profit if and when EURGBP drops hard – that’s in line with my 3:1 ratio between risk and reward.
Remember, you can lose with 72% of your trades and still come out with a break-even if you use that 3:1 rule for your risk and reward targets.
Consider shorting EURGBP at 0.8650 or higher, or else wait until it hits 0.86 if you’re very conservative. I’m inclined to take a crack at this should we take out last week’s low as it’s just about the only high quality risk:reward FX trade for patient investors right now.
Shorting EURGBP on weakness gives us a trade to focus on while we wait for the rest of the market to come to life once again.
While I don’t have a specific price recommendation here, USDJPY (the dollar against the Japanese yen) might break down from here too.
I’m been a long-term bear on this pair thanks to the historic head and shoulders with a double top from back in 2015. More recently a descending triangle (also bearish) has defined most of the price behavior:
Now USDJPY is challenging the upper trendline again, and here’s the key thing: last week’s price action was an inside bar.
Remember, an inside bar (sometimes called a narrow range bar) represents a compression or coiling of energy which will be released explosively in the future. When you see a price compression like this, think of a beach ball being held underwater. When you release the pressure, it shoots up dramatically with a very sudden move. This release could happen in either direction, but I’m inclined to think the major move will be lower once again.
Because as we can see, USDJPY has risen higher and then stalled out at the trendline.
Could we get another headfake as we saw late last year? Yes. But ultimately that’s unlikely to last and the downside represents the better risk:reward.
I expect we’ll see a move here in the next couple of weeks but for now just wait and see which way it wants to go.
I have one more possible forex trade to watch closely: AUDCAD (the Australian dollar against its Canadian counterpart). It’s looking extremely weak right now:
Here we see an Adam and Eve double top which you can consider a triple top if you want with the added Adam top. (An Adam top is a spiky top whereas an Eve top is much more rounded.)
Right now AUDCAD is drifting toward multi-year lows and is likely to re-test the 0.91 lows soon. It’s worth keeping an eye on as a short candidate.
So how about my long-time bullish favorite GBPNZD (the British pound against the New Zealand dollar)?
The bullish case is based on the double bottom and rounding bottom, plus the neckline for those patterns at 1.80 which used to be resistance but is now support.
Unfortunately, GBPNZD is currently landlocked in a 500-pip trading range like most of the market these days.
However, but I did get long last week and am sitting on a small profit. It may take awhile to emerge from the trading range, but I maintain confident that we’ll break out to the upside and very profitably too. We just need to be patient.
Having said that, if you’re sitting on a small profit in GBPNZD then consider taking some profits now. If you’re not interested in waiting, take the money and then sit on the sidelines for awhile.
Personally I’m going to hang on, but it’s totally understandable if you’d like to cash in and take the money for now.
XAUUSD (spot gold) has continued to fail to capitalize on its long-term breakout from the monthly symmetrical triangle price pattern.
Recent price action once again saw the yellow metal turned back at the 5-year resistance level between 1340 and 1360. I’m not inclined to buy and wait here.
That’s because a positive outcome from the US-China tariff dispute could translate into short-term head-winds for this pair thanks to USD strength. Accordingly, I’m sitting on the sidelines and monitoring the price action.
We’ll most likely see a lot of backing and filling (a.k.a. consolidation) and perhaps even a headfake that gets everyone excited before gold falls back once again.
For confirmation, we can see in this weekly chart that gold doesn’t look about to break out.
It’s been trading between 1360 and 1200 for the last several years.
Although the double bottom acts as a foundation under the current range, we got within shouting distance of the resistance at 1360 and then backed off.
Remember, gold still has to pierce that glass ceiling at 1360 before we can establish a new gold bull. Since that hasn’t happened yet — and given the inherent low volatility market environment across most asset classes — I don’t think much is being lost by “sitting on our hands” for now.
In fact, the longer XAUUSD consolidates at its current levels, the stronger the platform for a serious move higher later in the future. That’s why it’s best to sit this one out until we see a stronger indication that a major move is about to unfold.
We can say the same about the S&P 500 too.
It looks like the market wants to go higher once again, although the ceiling at 2800 is putting a cap on it for now.
That’s why I feel this index is likely to go sideways for awhile until it gathers the energy to break through and resume its long-term bull trend.
But never mind the index …
Here’s one trade that looks very promising even in this low-volatility environment … shorting Tesla (TSLA):
Tesla’s chart has been establishing a major top with multiple bearish indicators. I can see a double top, a head and shoulders, and then a rounding top with a neckline at 280.
Overall, TLSA looks very heavy with only one key level of support way down there at 250. It looks like it will tip over and drop down to that support, and probably soon.
In fact, the latest bar is an inside bar. This tiny, coiled up bar should release its energy to the downside.
So there does appear to be a good risk/reward opportunity here. Consider shorting TSLA at 292 with a tight stop loss at 297. Take your profit near 260 in case it doesn’t quite hit 250 again.
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And that’s it for this week.
Be patient … consider shorting EURGBP, TSLA and perhaps AUDCAD … and wait for a more volatile and opportunity-laden market to make an appearance.
I wish you a very healthy and prosperous trading week.
Mark “LowVolatility” Shawzin