A Week of Huge Key Reversals (And Their Implications)

By Mark Shawzin09/09/2020

Over the last several months (since the depth of the pandemic), we've seen some huge rallies in gold. We've seen some huge rallies in the stock market. And we've seen a tremendous selloff in the US dollar too.

But based on what we saw last week, I think we’re about to take a breather from these very robust trends. Today I’ll unpack each asset class, explain my thoughts and show you what I see going forward.

Let’s start with the dollar, as measured by the US Dollar Index (USDI).

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The dollar peaked at the height of the pandemic at a major resistance area and then established a bearish head and shoulders price pattern. USDI broke through the neckline of this pattern just a few short weeks ago, suggesting that bearish pattern will shape the direction of the market over time.

But that was then, and this is now. No market moves in a straight line forever.

USDI made a bullish key reversal last week. (That’s a bar where the market sinks to new lows, then closes at or near the high (meaning the buyers were in control).

Because of that key reversal, I feel USDI is likely to find support for the immediate future. It will likely rise to the neckline of the head and shoulders pattern and re-test it.

At that point we’ll see how long it takes before support for USDI evaporates and the descent resumes. That will likely take a couple of weeks … or potentially longer, considering we’re not that far away from a US Presidential election and all the uncertainty that can bring to the table.

Now here’s EURUSD (the Euro versus the US dollar):

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Basically this is the upside-down version of USDI because the Euro comprises over 60% of that Index. And since the dollar is getting some support, we can also expect some resistance in EURUSD.

And that's what we're seeing with a collection of bearish key reversals at the 1.20 price level.

Each time EURUSD attempted to go north of 1.20, the sellers were in control again by the end of the week. I don't feel that EURUSD will undergo a dramatic selloff here, but I can well imagine it could trade sideways and even drop somewhat before picking another (likely upward) direction later this year.

For another example of how a strengthening dollar is affecting the market, one of the stronger currency pairs in the last three to four months has been AUDUSD (the Australian dollar versus the US dollar).

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Last week, AUDUSD hit a pocket of resistance at the 0.74 price level which is consistent with past resistance. It traced out a weekly bearish key reversal too, which shows us that by the end of the week, the sellers were in control.

Looking at AUDUSD’s long-term downtrend, the price peeked above it temporarily. Then the key reversal was completed. So I foresee that AUDUSD prices will settle back somewhat over the next couple of weeks. Whether it's a dramatic setback or just a consolidation is yet to be seen.

Now I'm going to look at the JPY (Japanese yen) correlated trading pairs, starting with USDJPY (the US dollar versus the Japanese yen).

As long-time readers know, I've been firmly in the bear camp for quite some time in USDJPY:

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I remain a USDJPY bear because of the dominant, governing price patterns going all the way back to 2015. Those patterns include the double top at 126 which formed the head of a head and shoulders pattern.

The market has since traced out a descending triangle and a second head and shoulders with a double top within that triangle.

But so far USDJPY has been stubborn about continuing to confirm that bearishness. Most recently, it has formed a coil from which it could break in either direction. I’m not ruling out that USDJPY could break out of the recent coil and re-test the upside of the descending triangle before dropping again.

Or perhaps it will simply drop first.

It’s impossible to tell yet. For now, just understand that coils usually precede a burst in price action one way or another.

So we’re at an inflection here and in the other yen-correlated pairs too. The good news is that we're getting closer and closer to a resolution and some excellent risk/reward trade opportunities in the not-too-distant future.

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