For the first time in a while, I’m taking a position in Facebook. I have some excellent reasons for that of course, and you’ll find them later in this report.
But before I make the case for my long FB position, it’s important to see what else is going on in the markets first.
Let’s begin with a look at the U.S. Dollar Index (USDI). (Remember, the reason we look at this chart is because the U.S. dollar is the most important currency and affects other asset classes too. The USDI compares the dollar against a half a dozen of the world’s major currencies.)
For the past year or thereabouts, USDI has been trading at a major inflection point and effectively playing a game of chicken. Will it continue higher along the trendline (and bust the double top pattern) or will it roll over and drop?
You can see that we’re trading at an important support line right now.
In fact, USDI dropped below an important support line, then retraced above it once again. And last week USDI had a very narrow range bar — this often precedes a large burst of energy released in one direction or another. Which direction is more likely is often determined by the preceding pattern and we can place buy or sell stops above or below the low or high as appropriate.
But in this case, I’m still somewhat undecided about USDI. I could make a major case that we’re at a double top inflection point and USDI will ultimately rollover. On the other hand, this could be just a pause in a longer-term USDI bull market.
However, that’s the beauty of being a trader. We don’t have to guess. We can let the market tell us how it’s going to unfold.
That’s why I’ll be watching this market very carefully over the next couple of weeks.
In the meantime, we can take some hints about the dollar’s future direction by examining individual currency charts where some currencies are clearly stronger against the dollar and some currencies are weaker.
The AUDUSD (the Australian dollar versus the U.S. dollar) pair is a good case study as AUD is one of the weaker currency pairs of all the majors.
In this chart, I can’t see any potential for a meaningful dollar sell-off. That means it’s unlikely we’ll see any significant AUDUSD rally.
Because when we look at this pair, it’s clearly in a long-term downtrend from the 98-cent level six years ago all the way to 68 cents today. There was a continuation pattern in the form of a double top which arrested AUDUSD’s attempted rally.
Then once that pattern’s neckline was penetrated, AUDUSD has slid within a steep channel ever since.
I see this continuing for the foreseeable future. In fact, AUDUSD looks like it should break below the 65-cent level in the next few weeks and months
Now for a contrast: while AUDUSD suggests the dollar rally will continue, GBPUSD (the British pound versus the dollar) indicates the opposite as the pound is much stronger.
Very negative expectations from Brexit have been replaced with what looks to be much rosier expectations as GBPUSD has bounced significantly off its long-term lows.
So is this the beginning of a giant rally in GBPUSD? Not necessarily. A genuine long-term trend change won’t be a serious possibility in my mind until we clear a couple of hurdles, notably at the 1.30 – 1.34 area.
Having said that, GBPUSD is still looking strong.
That’s why even though it’s currently forming a pennant pattern that could break either way, the most likely breakout direction is up. After all, recent momentum is clearly to the upside.
Just don’t jump in too soon. Wait for the market to tell us the next move. We might end up waiting longer than we think for another significant move up.
USDJPY (the dollar versus the Japanese yen) has been a more neutral trading pair in recent weeks.
This pair has been highly constrained within a very small range.
As regular readers know, I’ve been on the record for quite some time as a long-term USDJPY bear because of the head and shoulders price pattern in 2015 that included a decisive double top. USDJPY has also featured a descending triangle pattern as it traced out a series of lower highs anchored by a common neckline at 104.
Both the head and shoulders and the descending triangle are bearish.
So while there may be still some upside left in USDJPY, I think we’ll ultimately see another break to the downside soon. The way to play this is with a sell stop order under USDJPY’s recent tight trading range.
A sell stop would get you into the short side of the trade if USDJPY does, in fact, drop without further warning. If this pair continues on its merry way higher, no harm no foul — your trade won’t be executed. But on the other hand, you might wake up one day with a nice surprise if and when USDJPY returns to its primary direction: down.
Now for a non-USD pair: GBPNZD (the British pound versus New Zealand dollar).
Just as I’m a long-term bear in USDJPY, I’m a long-term bull in GBPNZD.
I’m a bull thanks to the underlying long-term patterns going all the way back to late 2016 early 2017 with a double bottom and rounding bottom. These put a solid foundation under a GBPNZD move from the mid-1.60’s through the 2.01 level some 3,600 pips higher.
Last week we saw a surprise move out of the New Zealand central bank (RBNZ) when they decided to keep interest rates flat.
Because the market expected a cut, this strengthened NZD and GBPNZD dropped 400 pips. Such a move might look scary if you’re not looking at the longer-term picture as I am. That’s the picture where I see GBPNZD making a tight consolidation above a neckline after establishing a new multi-year high.
That’s very bullish. Even the 400 pip drop hasn’t done any damage to this pattern.
In fact, the longer GBPNZD consolidates the more energy it builds. And ultimately when it uncoils it will release a lot of energy, most likely to the upside.
That’s why I’m still bullish even as I warn you about the volatility in this pair and why you, therefore, need to keep your stops very wide so you don’t get shaken out.
Focusing on the big picture will keep you unemotional even when we see major 400-500 pips gyrations. You’ll be able to see the forest for the trees and be able to stay in GBPNZD as it breaks out of its current log jam and continues higher over time.
Now let’s look at XAGUSD (spot silver) at the monthly level.
Several months ago, I went on record and said I believe silver’s huge key reversal would prove decisive in quashing its emerging rally. After the market went over $19 before closing around $17, I felt this represented a dagger in the heart to anybody who was bullish at the time.
That’s because if we look back at silver’s price history, we see it’s been in a long-term bear trend that began with an enormous double top several years back. When that double top’s neckline was penetrated at $26, silver has ground its way lower ever since.
And so while it appeared something interesting was getting underway for a couple of months, silver’s key reversal put an end to it. Now the metal is merely putting some space between that rally and what I believe will be a sell-off from present levels.
We could see a trading range in silver with $16.50 being the bottom and perhaps $17.25 at the upper end, of course. But ultimately I think silver’s run out of energy. I think we’ll see a further move to the downside overtime here.
Gold looks a bit brighter. In this chart, I’m looking at XAUUSD (spot gold) and gold does appear to be stronger than silver.
Gold is seeing some interim support with two bullish key reversal bars, including the one that formed just last week. That suggests a trading range with $1,450 at the lower end and $1,500 or $1,510 at the upper end.
However, if you want to play that potential trading range, don’t hold out for too much on your trades. Don’t get too greedy, particularly on the long side as gold is still looking more bearish than bullish even with those reversals.
Now for the U.S. stock markets as we look at the NASDAQ stock index.
The NASDAQ has made consecutive highs for three weeks in a row as it broke into the new high territory.
The knee-jerk reaction of many traders looking at this extended long-term bull market is to step in and take the other side of this.
However, I wouldn’t do that if I were you.
That’s because it appears there’s more room to the upside. The orderly manner of the latest advance doesn’t say “market top” to me. You can see the volatility hasn’t been excessive.
And remember that bull markets begin when there’s a lot of negativity and a bear markets begin when there’s a lot of exuberance and speculation. There’s a lot more negativity right now than exuberance.
Until we get massive volatility with huge trading ranges in the future, I’m not ready to call the end of this bull market. In fact, there may be some good miles left on this old girl in the days and weeks to come.
To that end, I’ve taken action via Facebook (FB) as it represents an exciting opportunity at current levels.
Facebook has been in a long-term price uptrend. There’s also a lot of negativity surrounding this company, including a lot of controversial things with regards to the way it shares or doesn’t share data, how it may or may not affect the outcomes of elections, and so forth.
That’s created a lot of negativity around the stock, but to my mind price is the only thing that counts. And right now FB is congesting in a very interesting area. It looks like we’re seeing an interim inverted head and shoulders and we’re trading right at the neckline.
Overlaid upon that is a symmetrical triangle. This looks like a continuation pattern in an up-trending market. And as you can see by virtue of Friday’s close, FB closed right at the trendline of that triangle.
I feel any break above that will release the stored energy in this stock and allow it to reach its old all-time highs above the $200 level.
To capitalize upon that situation, I’m personally long Facebook options: the 195 and 197.5 strikes expiring on November 22nd.
I’m not recommending you take this trade, by the way. That’s because if you decide to invest in options you can lose 100% of what you put up. I can’t be sure if you’re prepared to risk that.
I just want to put it on the record that I’m long these calls and why. If you decide to venture into something more speculative, please be aware of the risk.
To recap: I took this trade because there appears to be pent up energy in this stock that’s ready to be released explosively. I also feel FB is undervalued relative to its competitors. Overall, there seems to be a lot of immediate potential to the upside in Facebook and so I’m long those options.
And that’s it for the week.
I remain bearish on USDJPY, bullish on GBPNZD, and bearish on AUDUSD and the precious metals, especially silver. I’m also willing to speculate long on FB and we’ll see if it pans out or not.
I wish you a very healthy and prosperous trading week.
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