What a difference a week makes!
In my report last week, I identified an obscure “H” – price pattern (so-called because it mimics a capital H) plus some key reversals on the U.S. Dollar Index (USDI) weekly chart.
It was the sort of pattern that’s only obvious in hindsight, and I drew a strong parallel between the current state of USDI and a past performance GBPJPY which had shown a similar pattern some time ago.
Because of GBPJPY’s very bullish run, I speculated we were on the cusp of a sizable rally in the U.S. dollar too.
Here’s that GBPJPY chart again to refresh your memory:
It seems history really does like to repeat itself.
Because right on cue, the US Dollar Index (USDI) and USD-correlated pairs broke out higher from a very narrow trading range last week. This was a range so dull and restrictive it was like watching paint dry as it dominated the FX market for 13 straight weeks.
Not any more. Now we’re seeing some real action and this means profitable times are here for us as disciplined FX traders.
That’s because I expect the U.S. dollar to continue running higher for the next couple weeks at least and perhaps even longer. This week’s calendar is event laden with an FOMC policy announcement on Wednesday and Non-Farm payrolls (NFP) on Friday.
There will be tremendous implications in the policy statement. Traders will be focusing on the Fed’s recent hawkish intentions and there’s a 50% probability of four rate hikes this year.
That (and the chart patterns) give me good reason to feel that USD has more room to run on the upside.
Last week I made some additional predictions that EURUSD (Euro against the U.S. dollar) would turn lower in response. So far that hasn’t happened yet, but that time isn’t far off. In fact, I think its not a question of if — but when — EURUSD turns lower.
However, my other predictions are already bearing fruit.
For example, GBPUSD (British pound against the U.S. dollar) appears to have cratered to the neckline of a bearish double top price pattern already. That double top and a large key reversal spelled doom for the pound against the dollar.
Right now GBPUSD is sitting right on the neckline of that double top. A crack below the neckline would imply a move down to the 1.3000 price level. There’s no other way to play this pair but to go short until we see 1.3000.
As for NZDUSD (New Zealand dollar against the U.S. dollar), the price has made multiple attempts to crack the 0.74 level and failed every time.
So the only other way was to go down … hard. NZDUSD finally cracked below the neckline of the recent congestion and this suggests much lower prices, probably 0.6800 or even lower. As with GBPUSD, the only way to play this pair is to go short.
Meanwhile, USDCHF (the U.S. dollar against the Swiss franc) appears firmly on course to take prices to the upper end (1.0300) of a long-term ascending triangle price pattern I’ve drawn for you here.
There was a false breakdown earlier which turned out to be a bear trap.
But USDCHF is now firmly back into the ascending triangle and ready to go for the neckline of the pattern — the old highs at 1.03. You want to be long this one until we see those old highs challenged once again. At that point we can see just how weak CHF will be over the long run (right now it’s the weakest of the major currencies).
So how about some non-USD pairs?
If you’ve followed me for awhile, you know I’m very bullish on GBPNZD (the British pound against the New Zealand dollar).
So last Friday’s 300 pip drop in GBPNZD was a disappointment. However, I still believe in the long-term up-trend in this pair. There’s good support at 1.9200 where we see the past double bottom plus a rounding bottom too.
The recent sell-off could represent a good opportunity to accumulate positions at lower levels. After all, there’s still an uptrend in place that includes bullish key reversals.
I’ll keep you posted on my thoughts.
In the meantime, beware as GBPNZD did in fact reverse at a key resistance level. The price might drop a little lower before the bull trend reasserts itself.
Another interesting pair right now is CHFJPY (the Swiss franc against the Japanese yen).
Weakness in CHF has created a breakdown beneath the most recent neckline.
So far CHFJPY has failed to rally after that breakdown. And the fact that this breakdown was preceded by a double top (and a more historic descending triangle) makes for a strong bearish case. The best way to play this pair is to try a short below the recent lows to capitalize momentum carrying the pair lower. Possibly much lower!
And that about wraps things up for now.
I’ve given you a lot of trade ideas this week. You should consider shorting GBPUSD and NZDUSD, going long USDCHF, and shorting CHFJPY while waiting to see how we test the lows in GBPNZD.
It’s opportunities like this that pile up the profits over the long run.
This is how we made more than 9,000 pips as Pattern Traders last year, after all. We patiently waited for — and then caught — the big moves based on patterns we saw in the charts.
To put that into perspective, 9,000 pips is about $90,000 for every $1,000 at risk when trading one full lot.
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