This week marked another week of balancing on a knife edge for many instruments in the markets — especially the ones we’re most interested in here at The Pattern Trader.
So even though we’re still at some major inflection points for both FX pairs and stocks and their indices, the coming trade action is pivotal.
Continuing upheaval in the global stock markets continues, primarily due to China trade wars, interest rate trajectory and the Fed’s balance sheet unwinding contributed to vast uncertainty and triggered sell-offs in the British pound and global stock markets. The dollar and gold served as the “safe haven” asset classes … for now.
So the key things to watch are whether or not GBP and the stock indices will grab a foothold and hang on, or whether the current sell-off in these respective markets will open up the floodgates to much lower levels.
Let’s take a look at the U.S. Dollar Index (USDI) for some insights into how everything else is likely to behave in response.
USDI is showing some strength as its “safe haven’ status came into play, but it’s failed to breach the upper resistance of its current range with no breakout apparent or imminent.
In fact, we’re seeing what looks to be a double top here. That makes USDI vulnerable to trading lower, especially against the Euro.
The Euro against the U.S. dollar (EURUSD) is very interesting.
Normally a head and shoulders pattern is bearish, but the price should have dropped after forming the pattern. The fact this hasn’t happened could transform the bearish pattern into a bullish reversal to the upside.
Now, it’s still possible that EURUSD could roll over and drop hard as a delayed reaction to the head and shoulders. However, I’m more inclined to ride EURUSD up than down at this point. I think we’ll see a rally here, one that could move as high as the left hand shoulder on the pattern to perhaps 1.20 or thereabouts.
Here’s some additional evidence for why I’m feeling bullish on the Euro.
For the EURCAD pair (Euro against the Canadian dollar), we can see it’s been descending in stairstep fashion with support at the 1.48 area as a potential triple bottom formed.
To confirm the triple bottom, we’d need a rally from here. I think we’ll get it as last week we had an inside bar. The coiled energy represented in that inside bar looks most likely to burst upward with a strong reversal to the upside.
So what about the pound?
Well … a lot of uncertainty about the Brexit negotiations remains. And that’s why GBPUSD (the British pound against the dollar) has been in a relatively tight range lately. Currently, this pair sits at a resistance area right now (the right shoulder of what appears to be another head and shoulders).
And recent action feels heavy. I think we’re going to see a challenge of the longer-term support line down near 1.27 and perhaps even lower than that. But the first downside target is definitely that support line, and we’re more likely to hit that than challenge recent resistance in the near time.
The pound is also looking bearish against the Australian dollar (GBPAUD).
The historic triple bottom should have sent this pair higher.
While GBPAUD did make it past the neckline of the triple bottom, things are now looking quite bearish. The rally is sputtering and looks likely to reverse thanks to a double top.
If GBPAUD descends all the back to (and below) the neckline then the recent uptrend will almost certainly be finished. As with GBPUSD, prices look heavy and under pressure here. If you’re feeling aggressive, take a shot at the short side in this pair. Otherwise sit and wait for the neckline to be breached.
With GBPNZD (the pound against the New Zealand dollar), we’re also seeing very negative price action again.
This pair recently broke out past historical resistance, then retreated to the support line and subsequently inside the ascending triangle following a key reversal. This is very bearish. In fact, if we break down below that triangle that’s a major reversal.
Now I’ve been bullish and long GBPNZD for the last 18 months, but that’s where I will officially turn bearish.
Personally I’m willing to see how support holds at the trendline of the triangle.
But if you’re less comfortable about staying long here, then take the loss right now. It’s not fun to lose, but if you followed prudent risk management with your trade size your loss should be less than 1% of your account here. So even though this is potentially a large loss in pips, it should NOT be a large loss in terms of your account balance.
Always practise good risk management so when things go wrong, they aren’t too painful. I’m confident we’ll make this one back in the near future as other trades move strongly off their inflection points.
Now onto spot gold (XAUUSD)
Let’s take a look at the monthly chart first.
Last month was notable for the inside bar that formed. This signaled a bullish reversal (so far) this month. If it follows through to the end of this month, we could be looking at a significant turnaround in gold. Especially if the USD is poised to turn lower! We’ll know more when November rolls around and the current bar is complete.
As for the daily view, price action suggests we will in fact see a bullish monthly bar.
At the daily level, we’re seeing a double bottom which crossed the neckline at 1215, then formed a handle after that. To me, that’s a bullish cup and handle formation. Any breakout above recent prices 1230 is very bullish and should lead to significantly higher prices.
Let’s take a look at the stock market, starting with the S&P 500.
Not so long ago, a small, benign inside bar represented what turned out to be a hair-raising reversal to the downside.
The key reversal heralded a significant drop from which the market hasn’t yet recovered. In fact, there’s a new inside week bar forming after a double top.
Right now the market will likely seek a foothold of support along the long-term trendline. From there it could break in either direction.
However, the double top and the fact that the overall price action feels “heavy” suggests there’s a lot of pressure on stocks right now and the major direction could still be down before we see a bounce.
This same scenario is apparent in the tech stock proxy NASDAQ 100.
Here we can see the price has moved within a channel for the last several months. Thanks to the two key reversals that preceded this drop, we’re likely to hit the lower channel line again soon.
After that, the price could bounce right back up again as per previous drops, or else we could see a major drop that’s much more severe than most observers expect. For now, just wait and see what happens when we hit that channel line. If you’re aggressive you could consider shorting it below last week’s low.
I’m more bearish than bullish on tech stocks thanks to the patterns I see in these two examples: Amazon (AMZN) and Alphabet a.k.a. Google (GOOG).
AMZN first …
There’s a clear double top here (an M-top actually due to the shape of it). We crashed through the neckline and then re-tested it. This is bearish. I think this needs to go down before it can go up again.
When it reaches its recent low at 1680 then we can see if there’s a successful re-test before it can power higher. Until then, this price action looks very bearish.
As for GOOG, we have a descending wedge with multiple tops here …
We broke the neckline and are now sitting at near term support.
This is also quite bearish and I would expect consolidation at the very least, if not another drop, before the price can challenge the neckline here — never mind break it.
And that wraps up things for this week. I’m bullish on the Euro and gold and bearish on the dollar, the pound, and stocks. Especially tech stocks.
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