I want to start this week’s report by delving into a detailed discussion on busted chart patterns.
When I first started trading, I absorbed material from all kinds of sources to learn about technical chart patterns. Whenever I spotted one, I typically got really excited and thought that once I saw something, it affirmed where the market was going to go.
Things aren’t always that simple, however. It took me a while to evolve my thinking about how I look at the market and specific patterns. That includes the times when they work and when they don’t.
I’ll illustrate this with a current weekly chart of AUDCAD (the Australian dollar versus the Canadian dollar):
Typically the way I view this chart is to note the governing price pattern: the double top all the way back at the 1.06 price area. That market top suggested AUDCAD would likely to go lower and that’s exactly what happened. There was a series of descending movements. For a while, these were checked by a new neckline.
Then that support failed during the coronavirus panic and AUDCAD broke lower. It seems that the final breakdown fulfilled the expectation of the double top.
Because now you can see AUDCAD’s price action is starting to go the other way. Is this just a bounce within a bear market? Or is this now what I call a busted pattern?
A busted pattern is when price breaks out against the trend suggested by the governing pattern. AUDCAD has broken the long neckline that acted as support for several years. It now looks ready to start busting ALL the bearish price patterns that built up in earlier years, including the multiple tops that came after the original double top.
For now AUDCAD is around 0.94 after busting that long-term neckline at 0.92.
How does a pattern bust like this? The market likes to confound most people by changing when they least expect it. Once everyone “knows” the price will drop, it eventually reverses and the market takes on a life of its own against expectations.
That phenomenon traps a lot of traders who expected the earlier trend to continue forever. And the reversal can have explosive effects when those traders finally throw in the towel and exit their positions.
So will AUDCAD keep moving up?
To support the busted pattern idea in the pair (and a new uptrend), there looks to be an intermediate inverted head and shoulders with a sloping neckline forming now. The neckline is sloping because the right shoulder is higher than the left. Because of the pronounced upward tilt, my expectation is that not only will AUDCAD continue rising but it will rise swiftly.
There was also a bullish key reversal in the last week. AUDCAD made a new low and then closed on the high. Since key reversals often point in the direction the market wants to go, I’d say AUDCAD has busted that earlier double top governing pattern, established a (tentative) new one with the inverted head and shoulders, and is set to keep moving up.
Perhaps even a better example of a busted chart pattern is NZDCAD (the New Zealand dollar versus the Canadian dollar):
Again we see a classic double top at the 0.98 level, plus a series of peaks on either side which makes this a complex head and shoulders pattern.
A double top combined with a head and shoulders should set the price action on a perfect trajectory lower. This did happen, but once NZDCAD traded below the long-term neckline of that pattern, the response was not in line with expectations.
When price action doesn’t agree with my price analysis (and therefore expectations), it’s time to examine what the market is telling me. You can see that rather than a decisive breakdown below the neckline, NZDCAD instead bounced quickly. That created a bear trap for every trader who bet on a breakdown and went short below that neckline.
And now NZDCAD is trading considerably higher.
However, the new upward trajectory is facing a few obstacles. There’s a downtrend line NZDCAD still has to break, plus a resistance level (defined by a key reversal at that price) that must be cleared.
If NZDCAD can take out those levels (right now they’re just above its current price), that will be the catalyst for a new bull market in NZDCAD as the old bear pattern that was controlling it will be successfully busted.
Now let’s look at the opposite of a busted pattern …
In this chart, I’m looking at GBPJPY (the British pound versus the Japanese yen):
Here the market is confirming the governing structure that’s in place, which is a bearish double top and head and shoulders pattern.
You can see once GBPJPY went through the neckline for that pattern, it’s dropped significantly and hasn’t managed more than a lower double top within a complex head and shoulders. All of this bearish price action has been contained with a larger rounding top formation for the last few years.
And then GBPJPY recently tested the resistance line at 140 but failed to rally.
Therefore all price action remains bearish and my expectations are that GBPJPY will keep falling and eventually take out its last line of support. This is why I remain short GBPJPY.
Now of course we could see continued volatility and a narrow range of trading before the descent continues. But over time I expect that GBPJPY will NOT bust the existing patterns and will instead set new lows.
Here’s GBPCHF (the British pound versus the Swiss franc) at the monthly level for another example of similar behavior:
Again, there’s no ambiguity in this chart. There are no busted patterns here and GBPCHF has behaved according to the existing patterns and trend for 14-15 years and counting.
GBPCHF remains in a huge downtrend and the best the bulls could do is an intermediate double top at the 1.50 area. After that, the next leg lower began and GBPCHF is currently poised to take out the next support level.
I believe GBPCHF will soon be challenging multi-year lows at around the 1.10 level based on the trajectory of this chart. I see nothing to stop it.
In fact, the British pound is the weakest currency on the board and the Swiss franc is one of the strongest. The Japanese yen is another of the strongest, and so my expectation is that the pound will continue going lower against both.
Therefore GBPJPY and GBPCHF should keep dropping.
Now it’s time for a look at the USDI (the US Dollar Index) which measures the dollar against half a dozen of the most liquid currency pairs:
At the height of the pandemic panic, USDI made what I feel is an exhaustion top that will establish a long-term trend for a lower dollar over time.
But having said that, USDI hit a level of support a couple of weeks ago and carved out a key reversal. This support will likely keep the dollar in a tight support range for the next little while, perhaps even as long as the entire summer season.
This week, I’ve spotted “Busted Chart Patterns” everywhere.
What are they, I hear you ask?
Well, in this week’s video report, I identify them in the live markets, explain how to trade around them and how they pose huge opportunities.
I also share what is the weakest currency on the board (to many people’s surprise) and the strongest currencies on the board (to an even bigger surprise).
I also cover:
- The “Busted Chart Pattern” on the AUDCAD and why this has trapped so many traders, leaving the big question, “what is going to happen now?”
- The classic “Double Top” on the NZDCAD that has resulted in this trade acting very peculiar and doing the opposite to what everybody expected (and why it now looks like it’s going to soar!)
- Why this unpredictable whirlwind currency pair is going to continue dropping after recently re-testing the neckline (watch from 10.40) and why you should be getting short
- The (surprising) weakest currency on the board right now and the two strongest (yet obscure) currencies that you need to know about … watch from 13.01
- What’s going to happen next with the US Dollar? With new cases of COVID spiking and continued to divide amongst the people, what is going to happen next for this powerhouse currency?
- The long-term symmetrical triangle on the USDJPY and why this has identified what is going to happen next … and why this could be VERY tasty (watch from 15.40)
- Is there another “Busted Chart Pattern” on Silver? I share a real-life example of how to identify a busted pattern and not get caught by the common traps
- Is GOLD going to go much higher? The one thing I’m waiting on before jumping into this potentially huge trade
- Plus much more
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