Since its break-out earlier this year in mid-April, I’ve been a loud advocate of being on the long side of U.S. dollar trades.
However, last week's key reversal price action in the U.S. Dollar Index (USDI) suggests we could be at a major inflection point.
That might seem strange considering that just last week I was projecting just how high the dollar could go, so here’s my reasoning in light of what happened last week …
Remember that a key reversal is where the market made a new high (or low) and then closed at the extreme opposite end of the price action. Basically the market rejects the extreme price and heads back emphatically in the opposite direction.
That’s why I say a key reversal points in the direction the market wants to go — in this case, DOWN.
In fact, this week’s USDI key reversal price action coincided with a similar major key reversal two weeks earlier. It’s now giving the appearance of an H -Top (that’s a specialized double top bear price pattern you don’t see very often).
Bear in mind I correctly predicted the recent uptrend in USDI by spotting an H-bottom back in April of this year (see below). That H-bottom was accompanied by bullish key reversals and prompted a dollar run from 116 to nearly 124 over the course of this year. Now it looks like we could be seeing the same situation … except heading in the opposite direction.
Penetration below the recent uptrend line would confirm a huge turn lower in the dollar. So I’m not making a bear call yet, but we can’t ignore the ominous possibility of an H-Top seeing as how an H-Bottom proved to be so potent at foreshadowing a turnaround.
I believe the best way to play this potential dollar turn is to go short USDJPY (the dollar against the Japanese yen).
That’s because there’s a long and detailed case for the bearish cause in this pair.
Back in 2015 - 2016, we saw a head and shoulders complete with a double top as the head. That served to send the USDJPY market lower ever since. Even a sharp rally near the end of 2016 couldn’t hold over the neckline. It’s been downhill again ever since.
Most recently this pair has traced out a descending triangle from which it broke out in late September of this year. I believe this was a bull trap because there have been two key reversals — forming a double top — within the so-called breakout pattern.
That’s why I expect USDJPY to descend back within the triangle to the 111 level and then much lower to the neckline of the triangle. That would confirm the double top and point the way toward much lower prices after that.
Considering all the bearish signs here, I think USDJPY a great risk-reward as a short.
So what else looks promising?
With the possibility of short-term pressure on the dollar, it would be logical to conclude XAUUSD (spot gold) should head higher.
We’ve recently seen some bullish key reversals including a double bottom formed at mid-year. And last week’s key reversal indicates that gold really does want to head higher.
On the weekly chart, it still looks too early though. At the weekly level, gold still has to get through recent resistance at 1240. However, any movement above 1245 would definitely get my attention for a major spot gold rally.
Now here’s a daily chart for gold.
Consider this trade if you’re prepared to jump the gun a bit and go long sooner than the weekly chart would suggest.
You can enter a buy stop at 1226 (just above recent highs) and try riding up the momentum as high as it goes. (I give more specific instructions to Pattern Trader subscribers but that should give you a good start on planning a trade on your own if you’re so inclined.)
Just be careful not to risk too much. It may be premature to jump on the long side of gold just yet.
Now let’s take another big picture look at what else is going on …
Given the recent volatility and unpredictability in the dollar, stock market and gold, I’m focusing intently on interest rate movements. What happens here will ultimately yield the answer to the next important moves in all the other markets.
That’s because I believe the "source" of any upcoming economic crash will be the record amount of debt we’re accumulating (at last count the U.S. national debt is now over $21 trillion, for example).
To that end, I’m closely monitoring the price patterns and price action of the following credit-themed ETFs:
- iShares Hi-Yield Corporate Bond Index (Ticker; HYG) which is a proxy for an $8.6 trillion “junk bond” market (yes, trillion with a T)
- Emerging Market Debt(Ticker; EMB) which is a proxy for an $8 trillion market, and the
- Leveraged Loan (Ticker; BKLN) which is a proxy for an even more trashy $1.4 trillion market than HYG
Remember that prices move inversely to interest rates when viewing HYG, BKLN and EMB.
Let’s look at HYG first.
Here we see a very long term 10 year rounding top and then a more recent one with a neckline at 83.
HYG has dropped to that neckline right now and looks very likely to break lower sooner or later. There are lots of factors that could trigger a credit crisis at some point, but from the look of HYG we could see that crisis sooner rather than later. Remember that junk bonds are at risk of default to begin with, and a real crash in these bonds could force a chain reaction of pain amongst many borrowers and lenders here.
Meanwhile EMB isn’t looking much healthier.
We have a double top and neckline here. And the current price isn’t far off the neckline. A breach below that neckline and the institutions holding this debt could be in serious trouble, as with HYG.
Now here’s something that looks even more scary. There’s another even lower class of debt out there called Leveraged Loans and the BKLN ETF is a proxy for it. There’s over $1.2 trillion of this crap floating out there. This is the same garbage level sub-prime debt that which led to a huge crisis back in 2008. Remember that?
The chart below is a 10 year chart for BKLN. We’re seeing two rounding tops here, and right now the price is sitting on the neckline of the lowest and most recent rounding top.
Now here’s a daily chart. BKLN just gapped lower and closed below multi-year lows. This is VERY bearish and this price action likely indicates an impending implosion in this asset class. This is very likely to ripple across the spectrum of all financial markets … and probably sooner than later.
So be very careful. As you can see, credit/bond prices are starting to roll over. A sustained break below the levels seen in these charts will inevitably lead to a credit crisis, and will likely translate to a crash in stock prices. That’s why this is definitely worth keeping an eye on.
Now here’s the stock market I’m following most closely with a crash in mind: the NASDAQ100 which is the proxy for tech stocks.
Here we see an inclined head and shoulders pattern which is very bearish. The drooping neckline means it’s likely to go lower very quickly. Short any major rallies if they appear and look out below!
Remember, last week I stated, "With respect to the US tech sector (NASDAQ), many important individual stocks (GOOG, AMZN, NFLX, NVDA & FB) have traced out very bearish technical price patterns suggesting these stocks have topped - and will continue a descent lower.
"NFLX, FB and NVDA bear price patterns and price action are indicative of the damage that has been done in the tech sector, and it feels like there is more to come".
So what happened? This week FB and NVDA crashed to 52-week lows, with NFLX not far behind.
Let’s start with FB (Facebook). That’s the first of the popular FANG tech stocks.
This stock shows a rather unusual double top that most closely resembles a completed M-Top, even if it’s a bit asymmetrical. FB has broken the neckline already and long term prices are likely going much lower.
Not unlike the NASDAQ100 itself, AMZN (Amazon) is also showing a sloping head and shoulders with a double top. The right shoulder is sitting well below the left one which is especially bearish.
And NFLX (Netflix) too has carved out a double top and broken the subsequent neckline. While it could potentially rally back to the neckline, any such rallies are a good opportunity to get short if you’re so inclined.
Now for GOOG (Alphabet, formerly known as Google) and the last of the four FANG stocks. GOOG has formed a triple top and it’s been nothing but downhill since the neckline was violated. The stock has since been moving in a tighter and tighter range so it’s at a big inflection point at the moment. It could could rally back to the neckline or else crash harder than it has already.
NVDA (Nvidia) crashed on a weak earnings report last week.
That should be no surprise thanks to the chart patterns here: a double top and a reverse triangle — both of which are bearish. I don’t think the worst is over, either. NVDA looks likely to keep going a lot lower from the current price.
In short, I believe any rallies in the stock market will be short-lived. Especially the high-profile tech stocks I’ve just shown you here.
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