Before I dig into the markets, I want to say a couple of words. This will be my last weekly video report until 2020. So I want to wish everyone a great, healthy and festive holiday season and a very healthy and prosperous new year too.
I also want to say this has been one of the best years financially in a long time. I hope I’ve been able to help some of you along the way.
Very often I’m asked, “If you’re such a hot shot trader, why do you bother doing this? Why do you spend so much time doing webinars and emails for The Pattern Trader?”
This is a perfectly valid question. If I was on the other side of the table, I’d be asking exactly the same thing.
The answer is twofold:
- I get so much back from The Pattern Trader by putting my own thoughts down on paper and in video. It really does clarify my views and ensures my analysis is as good as it can get.
- I also receive a lot of gratification from helping thousands of members around the world.
You see, the trading methodology I evolved over 30 years got me to a point where I finally understood how to make money in the market. That’s why I started The Pattern Trader: to show you how to do something that actually works.
Let me share a few general rules that have helped me be consistently profitable for quite some time.
Rule 1: Only use daily, weekly and monthly timeframes.
No 5-minute or 15-minute charts or anything like that.
There’s a whole bunch of scientific evidence to back this up. For example, a 2008 study by Gutierrez and Kelly discovered that price tends to keep moving up for up to one year after a small reversal pattern. Therefore using the daily, weekly and monthly timeframe gives you a much better chance in your trading.
Rule 2: Hold on to trades for 1 – 100+ days.
In my webinars, I’ve cited additional statistical and industry statistics to back up my notion that day trading doesn’t work. It’s estimated that 90% or more people lose all their money within three months of opening an account.
A 2019 study by Chague said it’s “virtually impossible” for day traders to make money in the long run.
My own experience backs that up. I tried day trading. I tried doing everything that I do on one-hour and four-hour charts. The result? I ended up just trading a lot more and eventually running into the knife far faster and with bigger losses. Getting in and out of trades with small losses is a recipe for disaster.
That’s why you need to be more selective with your trades. Look to build positions and let those trades work for you.
Rule 3: Only use price to determine decisions. Ignore the news.
Price rules. By way of example, we saw a bunch of news come out in the UK after the elections and after the Brexit vote that shot the pound higher.
That’s great for those of us on the long side. But back in August, I was already saying the market was telling us the outcome of Brexit and the UK elections. The pound was going to go up thanks to very bullish price action.
I was talking about being long GBPNZD (the pound versus the New Zealand dollar) when it was around 1.85. Today we’re trading a 2.03, a big 1,800 pips higher. GBPUSD (the pound versus the U.S. dollar) is 2,000 pips higher. GBPAUD (the pound versus the Australian dollar) is trading at new multi-year highs.
For regular readers this should be no surprise. My prevailing philosophy is that the market is a discounting mechanism. The market is ahead of the news and you should only pay attention to price.
I hope those rules make sense for you. They’re your foundation for this short series of steps to give you the best chance of getting on the right side of the market:
Step 1: Assess the phase or the trend of the market
Step 2: Determine if there’s a governing price pattern
Step 3: Asses the potential for momentum with a daily or weekly insurance bar
Step 4: Let the market confirm that momentum with a resting order
We’ll cover the pattern-related stuff later in this report.
But one thing you might not know is a “resting order”. For me, a resting order is when I confirm my analysis by putting in a stop order in the direction of the main trend.
While I sometimes use a limit order, I usually get into the market with a buy stop for long positions or a sell stop for short positions. A buy stop is filled when the price move up and a sell stop is filled when the price drops.
This means I get into each trade when it moves in the direction indicated by the trend or pattern I’ve previously identified.
There’s no better example of how this all works than the live account that I started in March with a $300,000 balance.
After putting in an initial sum of $300,000, I’m up about $1.2 million as the equity is $1.5 million right now. So I’ve made roughly about $1.2 million in this account since March.
Even though I traded several pairs throughout the year, my success came from two trades: short USDJPY (U.S. dollar versus the yen) and long GBPNZD (the British pound versus New Zealand dollar).
I began shorting USDJPY in late March and early April. Then I spotted the turnaround in GBPNZD in early August. I made $600,000 on USDJPY and about that much again in GBPNZD.
So yes, most of my profitability came from only two trades.
This is a completely different mindset than anything you’ve typically seen in forex trading, right? That’s why most people have trouble executing with this approach. They want to over-trade and keeping hopping in and out of positions.
That’s why I keep reinforcing the idea of long-term position trading to liberate you from the chains of day trading. You need to see the opportunities and ALSO have the discipline to stay with those trades that work.
I made six trades shorting USDJPY. Here’s the email I sent out to thousands of members around the world on April 21st (I’ve added callouts to make the text easier to read):
I referenced several bear price patterns on this weekly USDJPY chart. These include the historical double top, the descending triangle that formed later, and finally an emerging double top.
The trade call was catalyzed by a very narrow range bar. This is a bar where the range of the high and low is much, much smaller than previous bars. Price is “compressed” and it’s like compressing a spring. The energy will be released explosively, usually in the direction of the governing patterns.
I recommended members sell short USDJPY 111.61 with a take profit at 108.57. Then I kept moving the take profit as USDJPY kept dropping and eventually got out at 105.17 with 650 pips of profit in this trade.
Between April 21 and August 12 I made $300,000 on that one trade. I made other short USDJPY trades that collectively netted me over $600,000 over four months.
Again, this approach is in complete contrast to making many trades a day. I made one trade on April 25th and got out three and a half months later and made $300,000.
I seek out the major setups that translate to major moves, then hop onboard those trades, build positions and finally ring the bell when it goes in my favor.
Obviously, this doesn’t happen every day or every week or every month. I saw two or three major opportunities this year which translated into seven figure gains for me.
I simply identified those trades and then had the discipline to sit in them until the big payoff a few months down the road.
That’s my prevailing philosophy and trading methodology.
So with that said, let’s take a look at what’s going on in the markets right now.
I believe we’re at a historic inflection point for the U.S. dollar right now. It’s important we start with the big picture and how it can translate into an enormous opportunity going forward (or an enormous pitfall for those who don’t understand what’s going on).
This is the 43-year price history of the U.S. Dollar Index (USDI).
Since 2010 we’ve had a 10 year up move. But if we put it in perspective to historic movements, USDI has made only a lower high against the neckline. (The neckline is the common low for each bounce.)
Every time USDI has bounced, the bounce is shorter than the one before.
That’s created a descending triangle price pattern and right now USDI is trading at an historic level. An emerging double top at a key resistance area is forming. It’s right at the prevailing resistance line too.
So USDI is trading right at the apex of its 10-year rally and right at the cusp of its long-term downtrend line. While we could still see a thrust above the downtrend line, I think we’re very close to what could be a major top here.
History suggests USDI should turn back in the direction of the descending triangle and retest its lows.
In fact, this chart looks a lot like USDJPY where we’ve seen several retests of a common low. This is consistent with how a descending wedge pattern works.
Now to play devil’s advocate, some traders would say that maybe this a potentially a triple bottom? I don’t think so by virtue of the lower highs. It can’t be a triple bottom unless there’s a decisive breakout above that sloping trendline.
Another reason to be bearish is that each of the previous USDI moves is about 5-8 years long. Then we’ve had a 10-year run lately. So a cyclic turn seems overdue. Once the “starting gun” for a turn is fired, USDI typically moves in one direction or another for 5-8 years.
I’m seeing lots of confirmation that USDI is indeed turning when we examine it on a weekly basis. The double top from the 43-year chart shows up prominently here.
I’ll admit that until a week or two ago, I was on the fence as to whether USDI still had another shot to the upside. But with USDI breaking its uptrend, it looks like it’s starting to roll over.
This was the first time USDI closed under a multi year support line. So now the gun has been fired.
I recognize this is could be a premature call, of course. Perhaps this could take a while to develop. But this breakdown is important enough that I want you to be prepared for what’s coming.
Here’s one of the best ways to play it …
The first pair out of the gates against dollar appears to be GBPUSD (the British pound versus U S dollar).
Just a few short months ago, the U.K. was in depths of despair over Brexit and all its possible permutations There was tremendous uncertainty about the U.K. and the pound everywhere you looked in the news media.
But this is why you have to focus on price
only. Price told us about the turn way before the news.
If you were looking at the news alone, there was no way to profit from the turnaround from 1.18 to the present level around 1.35.
That 1.18 proved to be historically very important. It looks like an emerging Eve and Adam double bottom has formed. The “Eve” bottom is wider and broader with multiple bounces off a single low. An “Adam” is often just a single attempt.
This double bottom won’t be confirmed until a breach above the neckline at around 1.42. But to my mind it looks like GBPUSD has already come out of the barn and is ready to trend higher.
Although GBPUSD will be volatile while in the middle of a resistance zone, I’m looking to buy the dips.
Meanwhile I’m already long GBPAUD (pound versus Australian dollar) for over a month.
Despite the fact GBPAUD has shown serious volatility, what hasn’t changed is the driving pattern in this pair: the triple bottom.
Remember that isolating the driving pattern (or governing pattern) is how you separate the noise from the reality. The triple bottom has a common neckline which first acted as resistance around 1.75 and then acted as long-term support. Every time GBPAUD touched the neckline from above, it served as a launching pad for another surge.
The logic works like this: once you’ve determined a bottom has formed, then the market can only go higher. It doesn’t make sense that a bottom that took years to form is just going to crap out and go the other way already. That means there’s lots of room to run in GBPAUD.
Now I’m often asked how I determine to where to get out of the market.
The answer is simple: I get out when an opposing pattern tells me to get out. I would need to see GBPAUD carve out some kind of bearish pattern that suggests the bull run is over and the pair is ready to go the other way.
I don’t see anything of that nature yet. GBPAUD has broken out to a substantial multi-year highs. So while it might look scary to buy it now (it’s already had a 2,000 pip move in a short period of time), I believe there’s serious mileage left to the upside here. The same applies to all British pound correlated trading pairs, by the way.
The main FX mantra right now is: “dollar lower, pound higher.” It’s that simple.
Now I’m going to shift gears and talk about the spot gold market (XAUUSD).
Again, it’s looking like the dollar is starting to roll over and weaken. So if the dollar is going down then gold is going higher.
In the last couple of weeks, I’ve been ambivalent about gold mostly because I saw very ominous price patterns in silver. But gold and silver have parted ways. In the middle of this year, the typical gold-silver ratio was around 40 to 50 but then in October we saw gold trade at 91 times the price of silver.
So seeing something in silver can be misleading. The two are not the same. Gold is a lot stronger. And if I see the dollar’s going to weaken, it makes sense that gold’s going higher.
There’s a solid double bottom here. Just like GBPAUD, once it retested the neckline successfully it was a launching pad for higher prices.
I did see XAUUSD top out in July and August. It just couldn’t rally back to the highs.
But now I think gold’s ready to go back up. Right now the yellow metal is forming a pennant or flag. That looks to be a continuation pattern once it breaks out to the upside.
There are multiple (but small) bullish key reversals within this pennant/flag which suggest the breakout will be a bullish one.
That means I’ll soon be sticking a toe in the water here. In fact, I’ll be looking to build long positions for the long haul in gold for 2020.
But before I sum up, one last chart: the S&P500.
As you can see, the index made another new high.
This doesn’t surprise me. I’ve been saying for quite some time that the path of least resistance for U.S. stocks is higher. I can’t see any justification for getting short.
Any room to the downside was going to be held in check by the substantial key reversals in place along the uptrend line anyway.
Being bullish on stocks might seem counterintuitive because I see the dollar rolling over and ready to collapse. But price is the ultimate decider, as always. With low interest rates people are looking for places to park assets.
Why not stocks?
After all, there are negative interest rates in Germany, France and Japan. Insurance companies and pension funds need to park money where they’re not getting negative returns. And right now the U.S. stock market looks like the best home for that.
It’s why we could see yet another run to the upside before all is said and done.
Furthermore, I don’t see the U.S. stock market’s bullishness ending until we see considerable volatility. Bull markets end when there’s excessive speculation.
If and when we see giant thrusts up and down and all over the place in the S&P 500, then it’s time to consider that the market has topped out. But we’re not there yet. I don’t sense we’re getting overheated. So there’s still more room to run on the upside.
That concludes my last report for 2019. I’m bearish on the dollar and bullish on the British pound, gold and U.S. stocks.
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Again, I want to thank you guys for your continuing support at The Pattern Trader. The entire team thanks you and wishes you a very healthy and prosperous trading week … and an even better 2020!
Mark “USDHistoricOpportunity” Shawzin