Let’s get right to it and review the U.S. Dollar Index weekly chart today.
For the past several months, I’ve been predicting the demise of the U.S. dollar ever since it peaked with a megaphone top.
So what’s a megaphone top?
As you can see, the descending wage is denoted by a sloping downtrend line that connects all the highs plus a horizontal line that connects recent lows. And last week the USD Index challenged the neckline of the descending wedge triangle but ended the week at fresh 10 month lows. This is also very bearish.
What’s next? In the coming week we have a couple of important notices out of the FOMC on Wednesday, plus an inflation report from the U.K. These are going to be pivotal and possibly catalytic announcements for the markets.
I don’t make my decisions based on the news, though. That’s because the news basically reinforces what prices are already suggesting and again both those reports could be a catalyst for a further move to the downside.
At a minimum the downside projects to the 118 or 117 level in the U.S. dollar index. Then from there, I think we’ll see a period of consolidation before a yet another move lower.
My only concern has been the timing. Typically in the late July/August timeframe we don’t see much volatility or much follow through in prices, although this summer seems like the exception. The markets are remain robust, trends are following through and we’re still seeing good upside in our trades.
So despite the summer season, I do expect to see the dollar move lower over the short term.
Stagnation Ahead in the Euro
In this next weekly chart I’m looking at the Euro against U.S. dollar and the near term resistance in the EURUSD.
There are a number of highs right around the 115 – 117 area, so we’re edging closer and closer to a zone where we’ve seen many price setbacks. As we head into the latter part of July and August I expect to see this market revert to a tight trading range. That’s why I’m not inclined to follow the recent EURUSD uptrend much higher.
In fact, I think we could be in for a nasty setback in the Euro before climbing higher later. I’m wary at these levels as I feel they’re nosebleed levels in the Euro, particularly when measured against the Australian dollar and the British pound. Although I’m not including those charts here today, we did in fact have some weekly reversals in the EURGBP and EURAUD last week and those trends could continue lower.
So what about the other major European currency I’ve been watching?
Why the Pound’s Going Higher
In this weekly chart I’m looking at the British pound against the U.S. dollar. We see a very pronounced double bottom in GBPUSD. You could say it’s even a triple bottom at the 120 price area:
Once GBPUSD broke above the neckline I’ve drawn, we bounced back and forth until we had a decisive outside key reversal last week.
By an outside key reversal, I mean it went both lower and higher than the prior week. So that means we have a very robust key reversal bar here. That projects prices perhaps to the 135 price level.
Don’t forget that we have a crucial inflation report coming out of the U.K. which could be the catalyst for a further rise in GBPUSD.
Whither the Yen?
In this weekly view of the U.S. Dollar against Japanese yen, we’re seeing an interesting case study because I talk a lot about key reversals.
As you can see, we had a key reversal in USDJPY where the market made a new high and then closed on the low.
A key reversal is simply observing how the price closes relative to the high and low.
Remember, each one of these bars represents one week, and last week we obviously closed closer to the low than the high which indicated the sellers “won” the week. Normally that would indicate lower prices ahead.
However, key reversals must be examined within the context of an underlying pattern or trend. So what’s governing USDJPY? We could make a tentative case that the recent key reversal marked a double top.
But below that we have a double bottom too. So there’s a scrappy fight between the two patterns right now. I believe the double bottom will prevail, however. That’s because I feel its the governing price pattern in USDJPY and it will protect against any significant downside action.
So even though we had a key reversal last week, I would be very careful here and would look for any consolidation as an entry point to go higher. Even if USDJPY goes a little bit lower, I wouldn’t follow that because I think it will go ultimately much higher.
That’s because the yen is looking weak against a number of currency pairs.
So this key reversal could be a landmine for any short entries. I would not be inclined to follow any downside action at the moment in USDJPY. At worst, I think we’ll see further consolidation between 112 and 115 but ultimately we should be headed higher.
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AUDUSD’s Governing Pattern Continues To Influence – But Be Patient
In this weekly AUDUSD chart, the governing pattern in this pair is the double bottom at the 68 – 69 level.
Even though this pattern occurred over a year ago, I feel it remains the one that governs the underlying movement in AUDUSD and will determine its ultimate direction.
See the chart for how a low was hit and re-tested to form a W or double bottom pattern. Prices have been traversing above and below the resulting neckline for the last year and a half.
But the governing pattern is our reference when we have a hard time making up our mind about the price direction. It’s effectively our “cheat sheet” for what will happen over the long term. That means the W bottom determines the ultimate path AUDUSD will likely take — up!
However, the seasonality of the summer period we’re in now means I wouldn’t get too excited about the recent new high right now now. We’re likely get a reaction move to retest it a recent support level first.
But once AUDUSD starts moving up again, that’s when it’s good to go.
All Conquering Canada?
For the weekly USDCAD chart, we’ve formed a long term ascending wedge triangle from which there was a false breakout and then an eventual breakdown from the pattern.
I suspected the breakout was a false one because of the key reversal bar when it made a new high (it subsequently closed near the low). And then there was a series of inside bars. I said if we dropped below that level, it would probably trigger a downside move.
That turned out to be absolutely correct. Because once we broke through the uptrend line of the USDCAD ascending wedge triangle, that was a catalyst for a serious move lower.
I projected any move or break below this would probably open up a move to this 124 area and possibly below. We certainly look like we’re on a path to do that.
There’s another factor at work too. I had previously nominated the Canadian dollar as the currency to watch. It’s strengthening across the board against other major currencies right now.
That’s why I’ve been long CAD and I’ve made a lot of money on CADJPY. The Canadian dollar also seems to be strengthening against Australian dollar, New Zealand dollar and Swiss franc too.
So there should be lots more profitable CAD trades in the future for my subscribers. To find out more about getting my weekly or daily CAD trade recommendations as I make them, please check out:
If you’ve been following me for awhile, you’ll know I’m quite bearish on the U.S. light crude oil market.
That’s because we’ve formed a long term rounding top with the neckline at or below the $39 area. Due to the seasonality, I project that we could continue to trend sideways in this market for a short while yet.
But once we break below that $39 neckline, I see a BIG move lower. Be alert for any move to the $40 level or below as that’s going to be my catalyst for establishing short positions in U.S. crude oil.
What’s Coming Up (or is it Down?) in Gold
In this chart I’m looking at XAUUSD (spot gold).
Last week we had a key reversal bar. We made a new low before closing at the high at an important support area.
I wasn’t surprised, even though I was short during the prior week. That’s because I took my profits in anticipation of XAUUSD going to that level and establishing some support.
However, just because we had this key reversal here doesn’t mean we should automatically take the long side. That’s because I feel the governing price pattern in XAUUSD is the double top at the 1300 level right now.
There’s some symmetry forming, though. The XAUUSD price could easily rise to the 1260 level to form a right shoulder and therefore create a head and shoulders formation.
That and the double top are why I’m not in the bullish camp for gold.
In fact, I’m expecting prices to follow through to the downside soon. For now, I’m watching to see how XAUUSD behaves following last week’s key reversal. We will likely see further consolidation and even a bit more upside, but ultimately gold is going down.
I’ll keep you posted as prices continue to congest in this area.
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I’m going to finish off this week’s analysis with a look at the U.S. stock market, in this case the tech sector in the form of the NASDAQ100.
A couple weeks ago I alerted you to a potential double top in the NASDAQ. Prices reversed rather abruptly on two occasions: NASDAQ made a new high and then closed on the low.
I thought this could be a stalling point and potentially even a top in the NASDAQ, but it appears the bull isn’t dead yet. This has been a relentless nine year bull market and it’s going to take a lot of time to turn this thing around to a truly bearish stance.
So for now, it’s most likely that there will be a trading zone between 5500 and 5900.
And because of the strength of the bull market, I’m remaining open to the possibility of much higher prices to come in the NASDAQ100.
Remember that we make money in this game by not only being right on the direction, but also the timing. That’s why the Pattern Trader has racked up such a steady stream of wins, including more than 6,108 pips in the last 12 months.
My objective is for you to rack up regular steady wins based on the patterns I’ve shown you today.
You might find that Pattern Trader is a great fit for you, especially if you’re only used to stocks and aren’t aware of just how hugely profitable currency trading can be.
As always, I wish you a happy and profitable trading week. Until next time …
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