There’s one currency I strongly believe will strengthen in the coming weeks and months, and another that I strongly believe should weaken.
But before I get into those, let’s begin this week’s analysis by looking at some of the major asset categories from a global view. Then I'll zoom in and examine specific opportunities
The US Dollar Index (USDI) measures the US dollar against half a dozen of the major currency pairs:
USDI is establishing a slight bottom in the dollar. I don't expect this to prompt a major rally, but I do expect more strength than weakness in the near future.
Countering that is a major resistance pocket to act as a bearish force. That suggests USDI is now caught between support on the lower side and the resistance on the higher side. I feel the index could be trapped in a sideways trajectory all through the summer, perhaps with a slight upward bias.
Therefore dollar correlated pairs like EURUSD (the Euro against the dollar), AUDUSD (the Australian dollar against its US counterpart), and GBPUSD (the British pound against the dollar) should weaken to some degree over the next few weeks.
Let’s start with EURUSD where the major trend has been down for a long time:
Within this downward trajectory, a prominent head and shoulders pattern has acted as a continuation pattern. You can see that once EURUSD dropped to the neckline of that pattern, it kept on falling in line with the primary bear trend.
EURUSD does not look like it's going to stop falling anytime soon.
In the meantime, there’s been a coiling effect over the last six to eight weeks where a group of inside bars have all been contained within the larger trading range established back in late March.
This coiling effect builds up pressure which I expect to be released to the downside soon. That being said, EURUSD has a lot of price support all through the 1.04 – 1.06 area, so EURUSD’s continued drop will occur in fits and starts.
Eventually, I expect the Euro to reach parity with the US dollar (1:1) at some point in the future.
In this chart, I'm looking at AUDUSD (the Australian dollar versus the US dollar).
During the February – March – April time frame AUDUSD spiked down as it triggered all the sell stops under the 0.67 price level that was sitting there for some time. It spiked as low as 0.55 and then retraced substantially.
However, that rally appears to be over and the long-term downtrend is now likely to resume. I think it’s very likely that AUDUSD has hit significant resistance at the 0.65 level and that a re-test of the lows is on the way.
Because this is the summer season, we could see some sideways trading behavior in a kind of “three steps forward, two steps back” opportunity. But for those who are willing to be patient, shorting AUDUSD should be rewarding in the foreseeable future.
Now here’s my long-time favorite short pair: USDJPY (the US dollar versus the Japanese yen).
As regular readers know, this is a pair I've talked about at enormous length for many weeks, months, and years. This pair has established overwhelmingly bearish price patterns on just about every time frame I've examined, even when you go 45 years into the past with a very long-term chart.
On this weekly chart, there are multiple bear patterns including the head and shoulders with a double top. That pattern halted the existing rally and then the descending triangle (marked by a series of lower highs off a common low) piled on the bearish pressure.
USDJPY has bounced off the 104 area multiple times with a recent spike below that level. That spike subsequently became part of a bearish H top (or steer top, if you think it looks like the horns of a steer instead).
This combination of multiple bear patterns makes it very difficult to see USDJPY turning around with a bullish rally. Therefore the price action will be anywhere from sideways to downward over the next few weeks.
The only risk I see with shorting this pair is that it could continue to ramble back and forth for a while before it finally breaks down as expected.
Because this is the summer, I don't expect a lot of fireworks but if we see a sharp breakdown I'll happily take it. That’s why I intend to stay short and I view any rallies in USDJPY as an opportunity to establish further shorts.
Overall I see the yen strengthening across the board and, despite the fact that I also see some near-term dollar strength, the yen should be even stronger which means USDJPY will go lower over time.
If you ever needed proof that you should NEVER trade based on the news/media, then just look at today’s markets.
In this weeks ‘Video Report’ – I shared where the big opportunities are, where the big traps are and my advice to patient traders that want to be part of huge trades over the coming months.
- What the bottoming of the USD index means and why I’m predicting that associated pairs will go weaker over the summer months (my full explanation from 0.34)
- The “Head & Shoulders” on the EURUSD that has now coiled and the patterns that suggest that this is going to drop even lower over the coming weeks.
- The currency pair that has showed overwhelming bearish price patterns on every timeframe I’ve reviewed (and how the most recent “Ascending Triangle” signifies what is going to happen next)
- The “Key Reversals” on the AUDJPY that signify what is going to happen next (and how you can profit from this)
- The “Bull Trap” that you need to be wary of that is tripping up many traders (my advise on how to distinguish a “trap” from an “opportunity” (watch from 10.29)
- Why you should be focusing on “The Path to Least Resistance” on the NASDAQ and how to be part of the renewal of this MONSTER
- Why you cannot trade based on the news (the clearest real-life example that I could ever show you (watch from 13.24)
- Why you should keep your position size smaller, your stop losses wider and look for more selective trading opportunities over the coming weeks
- The “winning play” right now for those of you that are patient (revealed at 18.20)
- Plus much more
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