Before I take a deep dive into this week’s market analysis, I want to give many thanks to all those who turned out for the “Pattern Trader Elite Retreat” in Fort Lauderdale.
A great many of you showed up in Fort Lauderdale last Monday and Tuesday. Some of you came from so far away and I was really blown away: Singapore, Australia, Belgium, Brussels, the UK, South Africa and so on. I had a gas and really enjoyed getting to know each one of you. I hope you shared my sentiments.
So I really want to thank you for your devotion and commitment to yourselves for making the trip. It was extraordinary for me to meet all of you. In fact, I’m already looking forward to the next one. I’ll share the details when we’re ready and we may even do it twice a year because everyone really enjoyed it — the proof is in the video testimonials we’ll be releasing soon.
Thanks so much for all of you who came out.
Now let’s shift over to the markets, starting with the US Dollar Index as a proxy of the US dollar against many major pairs.
In the last couple weeks, the recent USD rally has stalled out. Because of the bearish megaphone top, it was always my suspicion that this recent rally has been a merely bear market rally and nothing more serious than that.
Clearly the price action has stagnated over the last couple of weeks. One reason why may be the fact that at the end of last week, it seems the much touted GOP tax plan may be stalling out in the Senate.
There are also indications that corporate tax rate cuts could be postponed to as late as 2019. That too could put a serious kibosh on the dollar rally and we’ll have to see how events unfold.
Certainly the dollar is at an inflection point against the British pound and the Euro. They’ve got strong support against the dollar with weaker support for the Australian dollar and New Zealand dollar. While I don’t expect USD to crater from here, we could be at a turning point.
I’ll keep you posted on my USD thoughts, but instead of looking at all the markets in general, I thought I would home in on a couple pairs that represent some specific opportunities this week.
An Interesting Bearish
Take on EURGBP
Let’s start with the EURGBP. The pound appears to be strengthening across the board and that includes against the Euro. So I expect that EURGBP will weaken very soon.
Now, as part of the Pattern Trader Retreat, we had all the participants do a market observation exercise and share what they thought the patterns were doing. One of our members (I’ll give a shout out to Ben) identified a cup and handle pattern in this pair. It’s actually an inverted cup and handle.
(I’ve drawn a conventional cup and handle pattern on the chart too so you can see what it normally looks like.)
And in EURGBP we see the inverted version of a cup and tea handle thanks to Ben.
This does look like an emerging bear pattern, especially when you combine it with the double top where we saw the market fail at the 90 level. Each time it tried it got turned back. We had enormous key reversal bars right at the 90 area.
And so we’ve got an interim double top within the inverted cup and handle. That’s why I think it’s just a question of time until we make our way lower to the 87 support line and then perhaps a lot lower down to the 83 level.
I don’t actually have a price entry as a suggested trade entry in EURGBP right now. But it’s a low-risk proposition to short EURGBP based on this upside down inverted cup and handle and the recent double top plus multiple attempts at the 90 area.
It’s not a question of “if” but “when” we slide through the 87 price level in EURGBP.
Turning Around An
Oil Tanker With GBPNZD
Another pair that I have not been short on enthusiasm for is GBPNZD.
I’ve been yelling from the rooftops since last October about the massive turnaround potential in this pair.
There’s quite a collection of bottoms starting with a double bottom with very strong key reversals within that double bottom. That’s when I started sending out videos and emails alerting members of a potential massive turnaround in GBPNZD.
As you can see, the turnaround hasn’t happened overnight.
Picture the captain of a supertanker out in the Gulf who gets a call from home and now has to turn around his super tanker and head home. You would literally need 18 miles of ocean to turn that super tanker around.
This is directly comparable to GBPNZD. Given the extent of this pair’s protracted decline that preceded the double bottom, understand that markets don’t turn right around. They need that 18 miles of ocean to do it.
So even though we saw the bottoming price action last October, it’s still a reversal in progress. GBPNZD has slowly been surely making its way up from the 167 price level to the current level of 190. That’s a $23,000 move for every $1,000 you bet since that time.
There was a second level to this double bottom pattern back in early 2017, and then we confirmed it by going through the neckline. Remember that the neckline is simply a line that crosses through the entirety of the pattern.
Very often you’ll see charts bust through the neckline as everyone gets enthusiastic, but then right after that initial euphoria we get a retrenchment or retesting of the neckline.
We then formed another rounding bottom in the summer and came through the neckline again. And now I think we’re well on our way higher.
The last couple of weeks have been a bit unusual because I’m normally very nervous of key reversals.
Typically, key reversals of this magnitude indicate the market’s momentum is over and done. They may even mark a key turning point.
But I said even in my last week article, I thought this key reversal would just be a fake-out. That’s proven to be correct so far. Because instead of going down, the market went lower into earlier part of the week and then finished on the high, forming a mini key reversal in opposition to the big one the previous week.
If that bearish key reversal was valid, we should have seen follow-through to the downside. Instead the market is sticking around and continuing to consolidate.
Some people have asked me if there’s been a double top in GBPNZD.
But if you have a recent double bottom you can’t have a double top so close to it. That’s because a double bottom implies a huge rally and we haven’t seen that yet. I think this is just a consolidation zone right now.
We could continue to hang out here for a couple more weeks, but I’m recommending adding to your GBPNZD positions above the weekly high of last week’s key reversal because I believe this market is inherently unstoppable. It can only go higher over the next several weeks and months.
USDJPY Turning Over
and Ready To Drop
Another pair that’s aroused my curiosity is USDJPY.
In the last couple of months we’ve had a rally coming off a double bottom. I was skeptical of that rally because of the governing (and very bearish) head and shoulders pattern all the way back in the 2015/2016 timeframe.
The governing pattern is the pattern that’s ultimately going to guide the primary direction of USDJPY.
To be clear, a head and shoulders pattern is a reversal pattern. This market came from all the way down in the low 70s (not visible on this chart) to about 125. So it was a four or five year rampant bull market in USDJPY which ended early in 2016.
More recently, the price action has been going sideways. But we did have a double top just above the neckline of the head and shoulders. And even more recently, a descending wedge triangle began to form.
The price broke out above that triangle. I thought it might be a false breakout and this was confirmed by last week’s key reversal where the market made a new high and closed on the low. That reversal suggests to me that we’re going to see USDJPY retreat back into the descending wedge
I don’t want to play Carnac the Magnificent here and get too far ahead of myself. But I do believe last week’s key reversal is something we can sink our teeth into as a low risk, high probability reason to go short.
So I’m looking to test the downside by sneaking in an order under this reversal. Then we can wait and see how the USDJPY market behaves into next week.
We could be at a pivotal inflection point in the yen pairs but I’m most confident of USDJPY turning bearish as this time.
XAUUSD: The Calm
Before the Storm
Now I’m going to shift my focus to XAUUSD (spot gold) while starting with the monthly timeframe. Just like USDJPY, I look for a governing pattern.
Remember that the governing pattern is the one that governs price activity for weeks, months and possibly years going forward. In this case, the descending wedge triangle has been in force and governing the price behavior in XAUUSD for quite some time.
More recently, we’ve had some trouble at these 1380-1400 area with a double, even trip top. The market has been repeatedly turned back at this level.
And then in September we saw a key reversal where the market made a new high and closed on the low. It was almost a $100 swing in the month of September.
Typically when we see these reversals, they point the way.
The exception has been GBPNZD which I know could be a bit confusing, so let me explain.
When you examine a key reversal, you need to look at the context in terms of what’s going on before it occurs. What was the phase or condition of the market? GBPNZD had an underlying bullish price pattern with its double bottom which contrasted sharply with the bearish key reversal.
However XAUUSD comes from a descending wedge bear price pattern and the key reversal is just further conformation of the bearishness.
I also like to highlight the concept of spacing. You see, just because we had a key reversal doesn’t mean the market is going to collapse right then and there.
It’s very difficult for markets to cut through areas (or “walls”) where they’ve been previously. Typically, we have to build “away” from a particularly strong wall to create enough space to break it down later.
That’s why the last couple of days, weeks and months have been all about creating this space. While it’s been unexciting, I believe that ultimately we really are creating the necessary room to fall hard and fast. In fact, I think the narrow range of this month’s bar is likely to widen considerably by the time we reach the end of November.
Now XAUUSD on a weekly timeframe looks far more cluttered. It’s difficult to see what’s going on here.
But clearly the 1380 price level has been the ceiling that XAUUSD has been unable to shatter. Meanwhile, we’re seeing that prices are getting constrained and we’re building away in order to fall later.
Incidentally, a pattern that I’ve seen at this weekly level is a reverse triangle and there was a recent false breakout to the upside. That didn’t last and now we’re trading under the 1300 breakout area again.
I believe it’s just a matter of time before this thing opens up a path lower. We’ve had three weeks trading in a very narrow range and the more this stays constricted, the more it’s going to move when it breaks down.
To me, a good strategy would be to place a sell stop right under the weekly low around 1260. if that’s triggered, it’s likely to open up a new move lower in XAUUSD.
Now let’s look at spot gold on a daily chart. I’ve done very well trading the ascending broadening formation back and forth since February. I’ve generated close to 4,000 pips on the upside and downside.
We’re once again going to challenge the support line of this ascending broadening formation.
But unlike in the past, I don’t believe we’ll see another retest — we should bust through here with a vengeance.
Because we’re very close to the support line I’ve got a preliminary order to try and catch this on a rally. However, the safe play is to stick a sell stop below all the lows at around 1260 -1261. Once the market tests that region it’s very likely to break through there.
So even if XAUUSD may continue to thrash around and test our patience, it’s just a matter of not “if” but “when” this thing will implode to the downside.
Now here’s a quick recap:
Pattern Trader Retreat: I can’t thank all of you who showed up in Fort Lauderdale again. It was a fantastic experience for me.
Market Overview: The recent Dollar (USD) rally was stopped in its tracks last week, as Senate Republicans underwhelmed with their version of tax cut legislation. The plan they offered differed on several key points with the House of Representatives proposal and thus opened the door to a thorny reconciliation process. Perhaps most critically, the Senate’s scheme would delay corporate tax cuts until 2019.
A rate hike in December is all but priced in, suggesting the 2018 policy path is the central object of speculation. Still, a change in the baseline assumption for where the Fed expects to go in 2018, might substantially alter the way forward.
I have suspected the price rise in USDI, starting in late September, to be a rally within a bear price pattern (Megaphone-Top). So we could be at a critical turning point in some USD correlated pairs, most notably GBPUSD.
I will keep you apprised of my thoughts on the future direction in USD.
Currencies to watch include GBP, NZD and JPY. I expect continued strengthening across the board in GBP pairs, a strengthening turn in the yen pairs, and continued weakness in NZD pairs.
I especially like:
EURUSD had a key reversal (higher) last week which should provide some support at current levels.
GBPUSD is sitting on major inflection points of a symmetrical triangle and is likely to consolidate between 1.2800 and 1.3200 for next several weeks. I think there is massive support and upside potential in GBPNZD, GBPCAD, GBPAUD and GBPCHF.
USDJPY also had a key reversal (lower) and it feels like an ominous warning to USDJPY bulls. I expect further downside pressure from here.
XAUUSD is resting on the support line of an ascending broadening formation. When (not if) we penetrate below this line, I think we will see a broad move lower.
Light Crude Oil has recently broken above its resistance (55.00) price zone. We could see a further rally to the upside, but I believe it could be a “bull trap” and would advise caution to traders on the long side.
As for US Stock Indices, the S&P500 and DowJones30 have stalled on the weekly charts. I foresee volatility, and potential vulnerability to long stock market traders in the short-term.
Pattern Trader Retreat : We had our first Elite members Pattern Trader Retreat in Ft. Lauderdale, Florida last Monday and Tuesday.
I was overwhelmed and very humbled as participants came from very far-away lands, including: Singapore, Brussels, Australia, Belgium, and South Africa.
Gauging from everybody’s reaction (we filmed everything and will release the video testimonials soon), it was a smashing success.
Once again, I would like to express my sincerest thanks and appreciation for those who came to Florida.
I am already looking forward to the next one.
Meanwhile, if you’d like to prepare yourself for any of the trades I’ve highlighted today, seriously consider looking into my LIVE 2-Day Bootcamp.
I’ll demonstrate exactly how to make currency trades just like the one I’ve outlined here, including my “Lazy Trader’s” 5-step execution plan that’s pulled in more than 6,108 pips in the last 12 months. Plus over 1,000 pips in September alone.
If you’re interested just check out that link.
Seats are limited so don’t delay!
If you have any questions please email me: [email protected]
The Pattern Trader