A few weeks ago, I wrote a report for you called “Changing of The Guards” and opined that we could be at the beginning of a market paradigm shift.
You see, for the past decade, we’ve seen U.S. stocks go higher while precious metals dropped lower. But based on recent price action in these respective markets, it appears there’s a “re-balancing” underway, one that could shift into high gear in the weeks and months going forward.
For example, last week’s highly anticipated Fed rate cut plus President Trump’s decision to double-down on the accelerating trade war between the US and China provided rocket fuel for the gold market. It also provided potential kryptonite for long stock investors. I’ll talk more about the stock market later in this Report because we need to look at the U.S. dollar (USD) first.
The picture for the dollar is somewhat muddled. That’s because USD is strong against GBP, NZD and AUD (the British pound, New Zealand dollar and Australian dollar) but weak against JPY, CAD, and CHF (Japanese yen, Canadian dollar, and Swiss Franc).
Here’s how the dollar looks against a basket of currencies represented by the U.S. Dollar Index (USDI):
USDI made hew highs for this year on the back of the rate cut, but fell back to close near the low of the week. The dollar also failed to penetrate a long-term resistance area that’s been in place since 2016.
Is this recent move a bull trap or a genuine move higher to new levels?
The very weak close suggests that it’s a bull trap for now. (A bull trap is a false breakout that gets bullish investors excited, only for the price to reverse course and begin making lows instead of highs, much to the chagrin of the bulls trapped at the higher price point).
The best way to get a sense for the dollar’s next move is to look at dollar-based pairs like GBPUSD (the pound against the dollar).
As you can see, GBPUSD has been dropping for the last five years (It’s actually been close to a decade but this chart doesn’t reach that far into the past.)
In fact, GBPUSD is now close to making a new multi-year low.
Starting at the left side of the chart, we first see a triple top (alternatively a head and shoulders) pattern which sent the market down significantly.
Then a triple bottom delivered a significant rally which ended in a double top before the market dropped once again.
Now we’re seeing yet another bearish pattern: a small head and shoulders which should have the same effect as the earlier head and shoulders back in 2016 at the left-hand side of the chart.
So I expect to see new lows in this pair sooner or later. At the moment, GBPUSD is at an area of considerable support at the triple bottom level. I would expect this to hold in the very near term and we might see a small bounce here. That would represent a great opportunity to go short, considering the overall bearishness of the chart.
As for AUDUSD (the Australian dollar against the U.S. dollar), this is another pair with a pronounced multi-year downtrend:
The recent double top represented a great opportunity to go short once the price penetrated the neckline of that pattern. Since then we’ve seen a relentless downtrend marked with repeated failed rallies.
As with GBPUSD, this pair has reached a zone where there’s been previous historical support within the last two years. But at best we’ll see another failed rally within the downtrend. I think any rally here represents a great short opportunity.
AUD across the board is looking very weak, by the way. I’ll show you another AUD-based chart in just a moment.
But first, let’s take a look at USDCHF (the dollar against the Swiss franc) as we haven’t examined it for a while. Normally I avoid trading this pair as there are few clear patterns or trends on its weekly chart.
As you can see, it’s primarily traded within a range over the last few years.
I see a good risk-reward opportunity emerging now, though.
The long-term resistance at 1.03 is significant, but on its last rally USDCHF fell short of that level and turned around early. That suggests we could see a breakdown in the near future.
This is especially interesting when you consider the very negative price action of last week: the price made a new high and then closed on the low – that’s a very bearish key reversal. In fact, there was another recent key reversal within that same cluster, which adds to the bearish outlook for this pair.
Consider shorting USDCHF with a sell stop below last week’s low. The next level of support is at the 0.97 area and after that, it might drop lower yet.
Now for my favorite short of the year: USDJPY (the dollar against the Japanese yen).
Since March I’ve been a strong advocate of being shorting USDJPY. I’ve taken several short positions and taken numerous profits too.
I’m very bearish on USDJPY thanks to the head and shoulders with a double top at the left of the chart. Then we’ve seen a descending triangle where every rally since the head and shoulders has proved to be nothing more than a dead cat bounce. Each bounce gets progressively weaker (and lower) over time.
Last week this pair peeked above 109 before crashing to 106.50. It won’t be long before this pair will challenge the December lows of 104.50 and lower.
Last week also offered a great chance to go short once again as USDJPY. I had taken a profit earlier and stayed on the sidelines in USDJPY as rallied to its near-term resistance level (over 109).
I watched the price action last week at the daily bar level. As the price rallied above the resistance zone I went short once it fell back to where it opened the week. Momentum subsequently carried USDJPY far lower by the close on Friday. It’s been a very profitable trade already, but I’m not exiting yet as I feel 104.5 is all but inevitable in the next few weeks and months.
JPY is getting stronger across the board, by the way. That’s another sign of the paradigm shift I mentioned: strengthening JPY is a harbinger of a risk-off environment which has negative implications for stocks.
But before we look at the stock market, here’s one more FX pair for you: AUDCAD (the Australian dollar against the Canadian dollar).
This is a very long term monthly chart, by the way. I’m very bearish on this pair as AUD is weak across the board and CAD has been looking strong.
AUDCAD formed a double top at 1.8 and even since the price has failed on each rally.
In fact, the price just broke to multi-year lows.
There’s lots of white space below, so this pair could drop a lot farther yet. The next level of support is about 300 pips lower than where AUDCAD is right now. Consider shorting any rallies.
Precious metals are getting very interesting. They’re a key part of the paradigm shift.
Let’s start with the XAGUSD (spot silver) monthly chart.
You can see how last month’s price action has breached the bearish descending triangle.
And going a few months farther back, the market didn’t touch the neckline of that triangle. Both of those added together look bullish, at least for now.
But I’m still not totally convinced this is a true breakout. That’s because I want to see $18.50 and up. Silver needs to clear some key resistance levels before things look truly bullish. Gold’s done it already, but silver hasn’t …. Yet.
That’s why this recent rally could be just a head-fake before XAGUSD drops back down inside the trendline. We need to see further price action to the upside before I’ll believe silver is truly ready to catch up to gold.
For its part, XAUUSD (spot gold) is looking very strong on the monthly chart. Following a breakout above a six-year resistance level, XAUUSD soared to $1,452.
In recent years we can see a complex inverted head and shoulders with multiple shoulders on each side of the double bottom. That ultimately proved to be bullish, although it was a long time coming!
But now that it’s happened, we can measure the $350 height of this pattern (from neckline to lowest point) and project it upward to arrive at a $1,750 price target for XAUUSD.
Currently, this pair has settled in a consolidation zone marked by a symmetrical triangle between $1,380 and $1,450, mostly contained within a symmetrical triangle on the daily chart
A break above previous highs would likely be a catalyst for further momentum to the upside.
Here’s a trade to consider for exactly that scenario: place a buy stop for XAUUSD at $1,452 but be careful of the volatility if you try that trade. Set your stops wide and keep your position size small (don’t risk more than 1% on this trade). My stop would be at $1,405 with a profit target at $1,525.
While we wait, it will be interesting to see if the recent upward momentum in the metals markets can be sustained in the face of a strengthening U.S. dollar. Will gold and silver stall out for the foreseeable future, or is this just the pause that refreshes?
We could ask the same question about the U.S. stock market too.
Recently, the U.S. stock indices soared to all-time highs. You can see this in the Dow Jones Industrial Average (DJIA / Dow 30) chart below.
But after those new highs appeared, storm clouds gathered. In the two weekly bars prior to last week, the Dow formed two narrow range bars at the peak.
A narrow range bar represents stored energy. The market is effectively coiled up like a spring and preparing to explode in one direction or the other.
In this case, I suspected the recent rally was stalling out. And last week the Dow did indeed plunge below those narrow range bars. I believe this may have set up what could be a bull trap for long investors above 27,000. There should be near term support at the uptrend line I’ve drawn here but for now, the Dow looks to be headed lower.
I’m not currently short stocks but I’m definitely leaning toward the bearish case at this time.
So there you have it: there are currently many pending long-term opportunities across multiple trading pairs. In this week’s report, I’ve attempted to give you an overview of several of them, including how to use market action to anticipate and capitalize, on important moves.
I expect relative strength in XAU, CAD, CHF, and JPY and weakness in GBP, AUD, and NZD too. I’m currently on sidelines for XAG and the Dow (and U.S. stock indices in general).
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I wish you a very healthy and prosperous trading week.
Mark “MarketsParadigmShift” Shawzin