Let’s start this week’s analysis with a weekly chart of the US Dollar Index. If you’re a regular reader, you’ll know I’ve been predicting the demise of the U.S. dollar for quite some time. That’s entirely due to the combination of a reverse triangle or megaphone top price pattern and the descending wedge price pattern I’m showing you here.
So while I’m still bearish, in last week’s price action we had a key reversal where the market made a new low for the week and then ended the week higher. I call these bars key reversals because they indicate potential trend reversal or at the very least a pause in an existing trend.
We had a key jobs report on Friday (the Non-Farms Payroll Report) indicating 209,000 jobs have created, which is a pretty favorable environment. I think this indicates the U.S. dollar drop is likely to be over for the next couple of weeks at least.
Now this doesn’t automatically mean that the dollar’s going to soar higher. In fact, it probably confirms what I’ve been shouting for quite some time. Which is that going into July, August and September the markets typically enter a choppy, sideways range bound phase that’s likely to be very challenging and difficult.
So here’s what I think is most likely to happen: we could see a rebound back to the breakout area of the dollar index at best. Even that doesn’t offer tremendous opportunities and we could instead see very unpredictable and range bound sideways price behavior before there’s a resumption of downtrend.
August is a period where a lot of FX traders go on vacation and the markets get less volatile. They slide sideways and the daily ranges become more constricted. These environments are much less favorable to us traders and they’re environments that invite disaster if you try and trade your way through them.
Later this week, I’ll make a separate video on how to trade range bound and choppy environments if you’re to trade them at all. But here’s the general idea…
There are certain periods where the market will chop back and forth between defined support and resistance areas and also times where you get fake breakouts. My typical Pattern Trader approach is to trade with the market and trade with the momentum but there are certain environments where just the opposite applies. When the markets trade outside their support and resistance boundaries, you can consider a reverse strategy during those times.
Again this is in an environment where there is a considerable bound trading behavior that you can start observing certain areas. Then there are less favorable trading ranges where it’s much tighter, it’s much more constricted and if you try and trade within this you’re likely to get very chopped up.
So we need to understand the environment we’re going into and we don’t have enough information yet on whether this a rangebound market or a very constricted one.
That’s why I prefer to wait to see how far this extends. Typically I look to take 300, 500 even 800 pips out of a trade but in the current environment the best we could hope for is taking 100 or maybe 200 quick pips out of a trade. Even that isn’t looking favorable at the moment. So for the foreseeable future I would advise the best trading is not much trading at all until we see what kind of environment August and September is likely to yield.
Why We Were Right
Not To Chase EURUSD
Now let’s look at the weekly chart for EURUSD. As I’ve indicated for the past several weeks, I expect the Euro to go higher due to the triple bottom at the 103 -105 trading area.
Recently we cleared the resistance of this triple bottom right at 117 but as I’ve been warning, I would not have chased any price action above this resistance.
In fact, last week we made a new high and then settled back and closed considerably lower. Now we have to prepare for the probability that we’re going to chop around for awhile before ultimately resuming an upward path in the Euro.
As with the US Dollar Index, I think it’s increasingly likely we’re going to enter a challenging range bound and more difficult trading environment going forward. This means we have to be either more selective or be willing to sit on the sidelines for a protracted period of time.
Possible Trade in GBPUSD
But Keep It Low Risk
If we look at the weekly GBPUSD chart, it’s telling us pretty much the same story as EURUSD.
During last week’s price action we made a new high and closed on the very low of the week, indicating we’re likely to go back into a range perhaps as low as the 125 area .
We’re likely to see a considerable period of retracement and consolidation. Now we may find some potential trades, but we’ll have to see how the range is defined in the weeks to come.
I would expect the upper level of resistance to be right at last week’s closing and the lower boundary around 125.
Aggressive traders may try and trade the short side now and keep your stop loss and your profit targets tight. Perhaps you could risk 50 pips and start taking profits at 100 pips. It’s up to you as to how you approach this, but I would trade very selectively and with more disciplined (lower) lot sizes and else not trade at all.
Where the Range is
Forming in USDJPY
Shifting over to USDJPY, the governing pattern is the head and shoulders price pattern which means that USDJPY is inherently a bearish pair.
Although the head and shoulders should guide this pair lower, in the meantime the 108/109 level shows a lot of firming action and a lot of reversals. That indicates some support in this price area and then we’re bounded on the upper level at about 114.
Again, this may set the tone for the next six weeks or so. I would look to buy any kind of breakouts below this support area and maybe short a breakout above the range we see here.
The charts of AUDUSD and NZDUSD are pretty much the same these days, so for this example I’m going to use the NZDUSD weekly chart.
The double bottom has underpinned the price action for quite some time, indicating that this pair should go higher. However, we’re at a catalytic point indicated by the resistance area going all the way back to April, 2015.
Last week’s inside bar demonstrated a failure to make any progress on the upside and could indicate a return back the choppy range. In fact, NZDUSD has been pretty much bounded on the high side at 75 and on the low side at about 69, so counter intuitively I think this is going to be a false breakout.
That’s why I’m looking for NZDUSD to fold back into the earlier range.
Just be aware there’s an important monetary statement coming out of New Zealand next Wednesday at 5 PM EST. This will indicate whether they’re going to take an aggressive or more passive interest rate stance and this could be the environment for a pretty catalytic move.
Now I’m looking at USDCAD and as with the other pairs, we’re starting to get a picture of the boundaries these markets are likely to trade in for a considerable period of time.
This is one trading range I’d be much less inclined to play here. That’s because USDCAD could open up a new path lower. I just don’t feel the risk/reward is there right now.
You may get an incremental move higher but I think it will be choppy, so step away for the foreseeable future until we get a clearer vision of what’s likely to go on here.
How To Play the
USDCHF False Breakout
So how about USDCHF? For many months we’ve been observing the Swiss franc tracing out this ascending wedge triangle against the dollar. There was a breakout below the ascending line which now looks a fake out false breakout.
We’re likely headed back into the triangle, which may offer an interesting trading opportunity if prices rebound all the way back to the upper level.
So for those more aggressively inclined, I would look to get long above the high of this week’s range. I don’t think there’s a whole lot of risk it seems the Swiss franc has weakened across the board and could rise back up to the 103 price level.
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US Light Crude Oil
Moving on to the commodities related markets, let’s review U.S. light crude oil.
For the past couple of weeks and months it’s been like watching paint dry, but if we look carefully, there’s a rounding top formation which is bearish.
However, I’m not going to take any action until we pierce below the neckline at or near the $39 price level. I do feel that the next move is likely to be much lower but I wouldn’t rule out anything to the upside including a fake breakout to meet some resistance right around the $60 level.
But since it’s summer, we’re likely to see a continuation of choppy, sideways behavior. That’s why I recommend standing aside and simply observing U.S. light crude oil for now.
Wait for the Triangle in XAUUSD…
Or Go Short Now If You Dare
In this weekly chart I’m looking at spot gold, XAU USD. There are a number of things going on here in XAU USD that suggests we could be at an interesting inflection point.
I’m not looking for any breakouts or breakthrough just now as we could still see a considerable period of range bound behavior, but this inflection point is very interesting due to the symmetrical triangle that’s forming.
Right now we’re at the upper boundaries of that triangle with multiple reversals including the double top at the 1300 level and then last week’s price action where we were turned back again. That’s why we’re likely to drop back in the near term.
For aggressive traders, it’s worth taking a short now and you may want to put a limit order a little in the 1,262 – 1,265 zone with a stop a little over 1,280. We could still retest the 1,300 level, but spot gold looks more likely to drop than rise from here.
Now let’s take a look at the monthly spot gold action because it always helps to look at the bigger timeframes.
In this case we can see that the governing pattern, the pattern that’s guided price action for the last several years, is the descending wedge triangle characterized by a sloping down trend line that connects the highs and a horizontal line that connects all the lows. Once we broke out of this descending wage we dropped considerably lower.
Now we’re at the upper levels of a monthly symmetrical triangle. If prices stay true to form, we could see another drop back to 1,200. Otherwise we could get another snap back.
Either way, we’ll break out of the symmetrical triangle sooner or later. Which way it goes will be our guide to a bigger move into the latter part of this year.
XAUUSD could be a difficult trading for the next month or two but I think we’re at the precipice of a major breakout that should indicate the next primary move in spot gold. We just need to be disciplined and patients until that time presents itself.
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Is This The Pause Before
The Next US Stock Run?
Let’s finish up by looking at the three major U.S. stock indexes.
To start, this is the NASDAQ 100, the proxy for the tech companies. We had an inside week bar where prices stopped going up even after we’ve been making new highs almost every week and month for a considerable period of time.
There’s a support area below the current price and perhaps this may yield a significant trading range in NASDAQ100. We’ll have to see how prices behave but if we get a retreat, then we have upper and lower boundaries within which we can make some trades.
Having said that, every time I’ve thought NASDAQ100 is going to stop or slow down it’s shown itself to be considerably bullish. I’m on the sidelines until we see how this one plays out.
Now this is a chart of the S&P500 which continues to be a runaway bull market. Again the momentum favors the bulls. I wouldn’t consider shorting the S&P500 at this time.
And finally, this is the Dow Jones Industrial Average which continues to make new highs every week.
So the equity markets continue to be a runaway bull market until shown otherwise and you have to be on the long side or not in this market at all.
Remember that we make money in this game by not only being right on the direction, but also the timing. You might find the Pattern Trader is exactly what you’re looking for.
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My objective is for you to rack up regular steady wins based on the patterns I’ve shown you today. We just need to be patient and pick our chances when the best risk and reward presents itself.
By Mark Shawzin