There are two (or more) compelling FX short opportunities available right now. I discuss those trades and the reasoning behind them later in this article.
But first, I’ll cover events in the USDI (U.S. Dollar Index) so we know where the foundation of the FX market stands right now. We’ll also talk about gold and U.S. stocks, but starting with the dollar gives us the necessary background.
So here’s the situation …
As of Friday’s close, (USDI) climbed seven consecutive trading days to deliver the strongest weekly gain it’s seen in some time. In fact, it matches similar stretches through October 2018 and December 2017. And we haven’t seen a climb longer than this since all the way back in November 2016.
However, USDI remains grid-locked within a defined trading band despite all that recent strength. There’s no clear indication which way it will go beyond the current support-resistance zone.
So even though USDI remains in a long-term uptrend, and it caught a bit of support to propel it higher last week, we can’t say for sure that USDI is poised for new highs.
I do think USDI may another crack at the top edge of the channel before bouncing off or else rolling over and heading for the lower edge of the channel.
Right now there’s no tradable USDI action we can use to our advantage.
Let’s look at the EURUSD pair (Euro against the dollar) as the Euro is more than 50% of the USDI basket of currencies against the USD. Is there any hint about the dollar’s direction here?
At the moment this pair is looking more bearish than bullish. It’s mimicking the range-bound activity we’re seeing in the USDI, but there is a significant bearish head and shoulders pattern here.
The price has been hanging around the neckline. However, EURUSD needs to break down to 1.12 to confirm the bearish head and shoulders.
And for the bullish case, 1.18 would indicate the head and shoulders is busted and there’s a bull trend.
As of now, I’m leaning toward a break below the 1.1200 price level. I think it’s more likely we’ll break to the downside than the upside right now.
It’s a similar situation in GBPUSD (the British pound against the dollar).
This pair is likely to remain rangebound between 1.33 and 1.24 for the foreseeable future.
It’s looking more bearish than bullish due to a bearish head and shoulders with a double top.
But it needs to breach 1.24 to confirm the downtrend is still intact. So I don’t see a good trade here right now.
I do like the pound against other currencies, though: primarily the two Southern Hemisphere currencies which are looking very weak across the board right now.
In fact, there are extremely bearish long-term chart patterns and price action emerging in AUDUSD and NZDUSD (the Australian and New Zealand dollars against the U.S. dollar, respectively). Both AUD and NZD appear weak and I especially favor Long GBPNZD.
First a quick look at AUDUSD, which has been in a well-defined downtrend since 2015:
The double bottom finishing in early 2016 looked to have marked the bottom temporarily. Then we recently saw a long and very bullish key reversal bar forming over the holiday season.
But the expected upward move failed to gain any traction in January and February. Therefore I’m bearish once again on AUDUSD. I now think the double bottom was just a distraction and the more recent double top is more influential.
You can see that once we passed the neckline for that double top, the price has been unable to recover despite that holiday key reversal bar.
Any price movement below 0.70 is a bearish confirmation we should trade. However, the strength of the recent key reversal suggests there may well be a retest of 0.70 after the first breach.
If you’re an aggressive trader, you can short the first break below 0.70. If you’re more patient, then wait for the retest.
But overall, I expect AUDUSD should go much lower over the course of this year.
It’s a very similar story with NZDUSD.
There’s a long-term downtrend, a double bottom, and then a pair of double tops.
This pair looks like it’s poised to take out the multi-year lows in the next several weeks and any price action under 0.66 would confirm the resumption of the bear trend.
If you’re an aggressive trader, shorting at 0.67 and waiting for 0.64 is a decent risk/reward situation. Otherwise wait for 0.66 and play the pullback after the initial breakdown.
There are plenty of other ways to profit from AUD and NZD weakness though.
I’m especially interested in GBPAUD and GBPNZD (the British pound against each one).
GBPAUD shows a huge move lower through most of 2017 and then a triple bottom.
We’ve seen sideways action bouncing off the neckline ever since, but we’re once again approaching multi-year highs. In fact, last week featured a powerful bullish key reversal bar where GBPAUD made a new low early in the week and then finished near the high.
Since key reversal bars tend to “point the way” for future momentum, this strongly suggests that we’ll be seeing higher GBPAUD prices soon.
GBPNZD is very similar.
We have a historic double bottom followed by a rounding bottom, and then the price bounced sharply off the neckline at 1.80 several weeks back.
For exactly the same reasons as GBPAUD, I expect higher prices over the course of this year. I and my Pattern Trader members have done very well trading GBPNZD in the past, and I’m personally building multiple long positions in this pair to return large profits over the course of the year.
If you’d like to start doing the same, buying the momentum at 1.9275 with a buy stop offers a good risk/reward. That’s because penetration above last week's key reversal bar is likely to be a catalyst for further momentum to the upside.
Now for a few words about spot gold (XAUUSD).
Last week, XAUUSD broke out of a long-term symmetrical triangle price pattern as shown on this monthly chart. Each bar here represents one month:
Gold isn’t ready to run yet. However, I remain bullish.
Because while it’s entirely possible that gold could trade lower or consolidate at current levels, any meaningful penetration above $1325 would suggest a move much higher.
Here’s the weekly chart so you can see why 1325 is important: it’s the high of the most recent run.
That’s step one.
Once that’s broken then XAUUSD has another hurdle to jump at 1360.
For now we must stand aside and see how this resolves.
As I pointed out in last week, it does appear we’re setting up for an important bull run in gold once again. Just be a little more patient for confirmation that it’s happening now and now another few months from now.
Meanwhile the stock market remains at an inflection point.
QQQ is the tradable ETF proxy for the NASDAQ100 tech stocks and that’s what we’re looking at here:
Remember that U.S. stock indices have rallied approximately 16% from their December lows, and are currently trading at critical resistance levels. Penetration beyond the resistance levels would imply the long-term bull market in this asset class is intact.
However, the 172 area has been quite problematic for QQQ. It just can’t hold above that price since the beginning of the October decline.
Although this suggests the bear market has already started, I wouldn’t be surprised to see QQQ trade sideways between 162 and 172 for the next several weeks. That’s because the explosive moves and volatility we’ve seen over the past few months can’t go on forever. The market needs to calm down at some point and I think that’s what’s most likely to happen in the immediate future.
While we wait to see how the QQQ fares, I’ve been looking for specific stocks offering more explosive opportunities in the near term.
That includes COST (Costco Wholesale):
There’s a strong bearish case for COST: a triple top and a descending triangle.
You can see how the price came back to test the neckline with a double top, and now COST is sitting at the neckline of that double top.
If you were one of my Elite members, you would have been short COST from a higher level. I don’t recommend going short at this level though. By this point, you want to protect your profits with a stop loss at 211. That gives us a modest profit while we wait to see if COST will drop further below that neckline.
In the meantime, the most likely profit opportunities in the immediate future come from shorting the weakness in AUD and NZD. I particularly like going long GBPAUD and GBPNZD here.
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Mark "GBPNZDPositionAggregator" Shawzin