It’s impossible not to notice the current declining volatility and tight trading range FX market environment.
While you might think this makes this report, there are still some promising trades on offer. I’m currently profitable on several of them and will tell you what I like right now.
But first, a few words on managing the current trading environment:
To succeed in a slow-moving, range-bound market like we’re seeing now, you must trade more selectively, be prepared to hold positions for a longer period of time, and widen your stop-loss levels too. (Remember, you must reduce your trading size when widening stops to keep the same level of risk. Doubling the width of your stops means cutting the trade size in half, for example.)
With that said, the US Dollar Index (USDI) is not particularly interesting … yet.
At the moment, USDI is gradually approaching a break-out above a tightly coiled symmetrical triangle.
Due to the previous uptrend, I believe USDI will break out on the upside of this triangle, but with the reducing volatility, this may take a few weeks yet to happen. Therefore I’m not making any trades based on U.S. dollar movements at this time.
Just be patient for this one. It will come when it comes.
A trade I will likely take at that time includes shorting EURUSD as this pair appears particularly vulnerable to a move higher in the dollar.
From the chart below, we can see a classic head and shoulders pattern. Since that bearish pattern formed, the price has drifted lower at a snail’s pace.
Right now EURUSD is resting at multi-month lows and its range is getting increasingly small. In fact, last week it moved only 70 pips from top to bottom … over the entire week!
A breach of the 1.12 price level will likely open a path to a big move lower over the course of the next several months. I feel the likely target is 1.05 or even lower, but there’s no rush to get in yet.
Beware of a bearish price trap: even if EURUSD does break lower, it’s likely to retrace back into current range in the near term. Again, patience is needed here.
Less patience is needed to go short NZDUSD (the New Zealand dollar against its U.S. counterpart). I think shorting this pair offers a fantastic opportunity over the next several weeks.
That’s because this pair has been in a prolonged downtrend for the last 4-5 years and doesn’t look to be finished yet.
In fact, NZDUSD was the biggest loser last week with a 1.09% drop. I believe the weakening trend in NZD will not only continue, but actually pick up steam over the course of the next several weeks and months.
Multiple tops are evident and most recently NZDUSD has formed an ascending triangle.
Triangles can be continuation or reversal patterns, but this one looks to be a continuation pattern of the long-term downtrend as the price dropped below the trendline and closed on the low. I got short NZDUSD last week with a sell stop below last week’s low. This was a trade I recommended to subscribers and I would look to do the same thing again this week.
That is to say, short NZDUSD with a sell stop below the previous week’s low. I’ve been building a short position in this pair and currently have 3 short positions here. I am looking to add more.
The other pair where I’m seeking to exploit NZD weakness is GBPNZD (the British pound against the New Zealand dollar).
Here I want to be long. That’s because GBPNZD will move up on NZD weakness.
Note that the currency to the left of a currency pair (e.g. XXXYYY) is the base currency and the price will go down if XXX is weak. So with NZDUSD we’re going short.
Meanwhile the currency on the right of XXXYYY is called the quote or counter currency. A pair will rise when YYY is weak. That’s why we want to go long GBPNZD. I hope that makes sense!
Anyways, there are strong bullish patterns for GBPNZD including a double bottom and rounding bottom. Together they should provide a foundation for this pair to ultimately head higher.
Most recently we’re seeing an uptrending channel and I believe this should continue rising for the next couple of weeks. Be aware that there is a LOT of volatility in this pair – be prepared with wide stops if you go long here in expectation of a long-term rise.
In the meantime, I’m also short spot gold (XAUUSD).
On the monthly chart – remember, that means each bar represents an entire month here – we see a long term symmetrical triangle:
A couple of months ago we saw a breakout. This is likely to be a false breakout in the short term as a subsequent key reversal signalled a move lower.
If XAUUSD re-enters the triangle, it would signal a meaningful crash back down to the lower trendline at the 1200 area. That could begin to happen as early as this month.
The price must hold at the 1280-1310 level to keep the latest bullish trend intact.
I don’t think it will, especially if you look at XAUUSD at the weekly level.
Here we see how spot gold hit the wall at the 1350-1360 resistance area:
Now there’s a short-term double top too.
While there’s support at the 1280 level, the double top suggests XAUUSD is more likely to go down than up right now. That’s why I’m currently short XAUUSD from 1311 on March 27 and again at 1285 on April 4.
There could be another run to 1320 but I’m staying in these shorts for the immediate future. I think we’re more likely to see 1200 than anything over 1350 for now.
So what about the stock market?
Boosted by the prospects of a US-China trade deal agreement as well as a slow growth slow inflation environment, U.S. stock indices are marching toward their all-time high peak trading levels. In fact, the S&P500 appears poised to reach the 3000 level in the near-term.
Late last year a bearish head and shoulders pattern formed. Then the S&P crashed through the neckline (confirming that pattern) before a massive key reversal took it back above that neckline.
Now the price has run above the right hand shoulder of that head and shoulders. That means the pattern is now busted and we’re back in bullish mode. All time highs are on the way … soon.
Two stocks I favor to go higher in this bullish stock market environment are Facebook (FB) and Alibaba (BABA).
Let’s look at FB first:
The bullish case for Facebook features a prominent double bottom to act as a long term basing pattern. Most recently we’re seeing a reverse triangle. I believe any price action above 180 will take FB above 200 relatively quickly.
As for BABA, it’s an excellent example of how chart patterns emerge and play out:
Last year it formed a prolonged head and shoulders (bearish), then plunged through the neckline.
Then a double bottom formed and as soon as the neckline for that pattern formed, the price zoomed higher. BABA is now poised to go higher once again once it escapes the confines of its own reverse triangle.
I believe any break above 180 should take the stock to over 200.
So both these stocks have formed formidable double bottom basing price patterns. And because FB and BABA are poised to break out above reverse triangles, I favor holding long positions in these stocks for the next several weeks.
I also favor staying short spot gold (XAUUSD) and NZD (the New Zealand dollar) as well.
I wish you a very healthy and prosperous trading week.
P.S. I believe there are 2 currencies that are about to crash. Check out the link below to find out which currencies.
Mark "NZDTrendTrader" Shawzin