There have been some very interesting developments this past week in the U.S. dollar. I think there are profound implications for other currencies and precious metals too.
I’ve also had some thoughts on the U.S. stock market’s most likely path.
But first, let’s tackle the dollar and why I think the dollar’s bullish case is stronger than the bearish one.
In this chart, I’m looking at the U.S. Dollar Index (USDI) on a weekly basis.
As you can see, USDI been playing a game of chicken for the last several weeks and months at major highs. That leaves us guessing whether it’s going to roll over at this major resistance area or pause before making new highs.
The double top with two key reversals is very bearish, for example. (A bearish key reversal is when the price makes a new high but by the end of the week, the sellers are in control as the price closes at or near the low.)
That kind of price action ordinarily has me believing we’re on the cusp of rolling over.
But how can the dollar go much lower against the Euro (EUR), the Australian dollar (AUD), the New Zealand dollar (NZD) and other currencies against the U.S. dollar after looking at their charts?
That’s why I now feel it’s just a matter of time before the U.S. dollar resumes its march higher despite the bearish patterns.
So here’s the bullish case for USDI:
I’m looking at a very small reverse triangle here.
USDI’s current price action is very reminiscent of similar patterns where a reverse triangle proved to be nothing more than a fakeout before the earlier trend resumed. These are instances where there was an initial drop out of the triangle, the price grabbed a foothold, and then the price went on to make new highs.
These charts illustrate this behaviour:
On this NASDAQ weekly chart, we can see how a reverse triangle preceded a price drop featuring a double bottom that subsequently led to new highs.
Now for Facebook (FB):
Again, a reverse triangle was followed by a double bottom and new highs.
So let’s take another look at USDI as it stands right now.
The similarity with the NASDAQ and FB is undeniable.
You can see that when prices topped out within the reverse triangle, prices fell exactly as we’ve seen with the NASDAQ and FB charts. Also, the price appears to have grabbed a foothold. There’s no distinct double bottom yet, but if the price has indeed bottomed at this level, we can surmise that this will lead to new highs in USDI.
So this is why charts are very valuable. History does repeat and these patterns do reoccur on different instruments in different time frames. We can make certain decisions based on that history.
And ultimately that means the U.S. dollar looks like it’s going to resume its multi-year rally despite the bearish double top and key reversals we’ve seen earlier.
There’s more evidence in other currency charts to back up this view too.
We can see additional evidence for this in USD-related charts, starting with EURUSD (the Euro versus the dollar).
This weekly chart provides conclusive evidence that the dollar is likely to resume its rally. We can see the Euro remains in a major downtrend from 1.70 (off the chart) to the current price around 1.10. In the midst of this decline, a large head and shoulders pattern acted as a continuation pattern. It halted the EURUSD rally and when the price broke down below the neckline, the prevailing downtrend has resumed along the channel ever since.
In fact, there’s nothing to suggest EURUSD is not going to keep dropping lower and ultimately retesting the lows from several years ago around the 1.03 – 1.05 area. After that, I would expect a further drop toward 1:1 parity between the Euro and the dollar.
Now let’s look at NZDUSD (the New Zealand dollar versus the dollar):
As with the Euro, NZDUSD is in a long-term downtrend and there’s also a continuation pattern here which stopped an attempted rally. NZDUSD is showing what I call a complex head and shoulders pattern. “Complex” because there are numerous shoulders on either side of the head (which is a double top in this particular case).
Once NZDUSD pierced the neckline of the double top head and shoulders, it’s been all downhill once again. Last week the price retested the upper bounds of the support area and reversed. In my mind, NZDUSD is on its way lower. There’s nowhere to go but down.
So how about my long-time favorite short USDJPY (the U.S. dollar versus the Japanese yen)?
It looks like the dollar will continue to rally against the yen. However, I’m not chasing this one.
That’s because USDJPY has been trading for over a year within the confines of a descending triangle, which I expect to break to the downside eventually by virtue of the earlier long-term head and shoulder bear pattern.
So while I think USDJPY could still go higher, we’re likely to run into some headwinds not far above the current price at 110. After all, we’ve seen only lower highs off a common low at 104 within this descending triangle. Every time we bounce the height is a little less.
What would change my bearish stance on USDJPY is close above the triangle’s trendline. I’ll address that if and when it happens.
Until then, I remain bearish on USDJPY as I feel the long-term path in this pair remains lower.
Now moving onto a non-dollar currency pair, here’s GBPNZD (the British pound versus New Zealand dollar).
If you’ve been a subscriber of mine for any length of time, you know I’ve made no secret of being a long-term bull on this pair thanks to the bullish patterns established several years ago in the late 2016, early 2017 timeframe.
Those patterns are the double bottom followed by a rounding bottom with a common neckline around 1.80. That price subsequently became support for a new double bottom.
As you can see, GBPNZD recently cleared the neckline for that pattern and has been consolidating just above it. Sideways action might not look very exciting, but the longer GBPNZD consolidates, the more explosive the move when all that congested energy is released to the upside.
Members of my Elite program or Accelerator program know we’ve been building long positions in GBPNZD all the way from the 1.85 area. We’ve seen a 1,700 pip rally and I think there’s a lot more to come as it continues its inevitable march higher.
Now for the silver dagger I mentioned in the headline of this report. Here’s a monthly chart of XAGUSD (spot silver against the dollar).
In June through August this year silver had a massive run-up as the U.S.-China trade war ramped up, there was talk of the U.S. sending troops to Iran, and a move toward negative interest rates by central bankers around the world.
There was a lot of emotion flying around during silver’s tremendous run up from $14 to over $19. But a couple months ago, silver completed a key reversal at a major resistance level. I said this was likely to be a very large dagger in the heart of the silver bull market.
What I meant was that this key reversal was likely to end the bullish run. Prices made a new high close to $20, yet by the end of the month silver was significantly lower. The key reversal was significant for its size and also where it occurred at previous strong resistance.
Just look at the massive double top pattern that formed several years ago. That’s very bearish and silver has yet to recover from it. It’s what I consider a governing pattern because it ‘governs’ future price action.
Once the double top’s neckline was pierced at $26, silver has been a deteriorating market. There’s nothing to suggest that we’re not going to revisit recent lows around the $14 area and perhaps head toward $12 or even $10 in this metal.
And that’s despite all the emotion and fundamental reasons why people think precious metals have to go higher. Remember, the market is the only thing that counts. Price is always right and right now price is looking lower in spot silver.
Now, what about XAUUSD (spot gold)?
Gold has been substantially stronger than silver as we see here on the monthly chart:
There’s a double bottom and what looks like to be a massive inverted head and shoulders here — a complex one due to the multiple shoulders.
Once gold broke through the neckline, it looked like it would lift off. Instead, the yellow metal has run into massive resistance with a key reversal a couple of months ago.
Price resistance has started looking formidable and I expect we’ll get a retest of the breakout area around $1,400. That’s when we can get a better idea of whether gold can catch fire again or instead go lower.
Let’s look at gold on a daily chart to get a better idea of what might happen:
You can see that after an enormous run up, gold slid sideways for a couple of months. But the double top was very ominous for the bulls. It’s why I didn’t let myself get suckered to the upside — I stayed on the sidelines and I think my discipline has paid off.
Even as late as last week, I was wondering whether gold could still break out to the upside of its symmetrical triangle. But last week’s negative price action has decisively broken below the triangle. The short-term trend is down.
That doesn’t mean a rally can’t happen, of course. But silver suggests the precious metals have exhausted their run up and will march lower. Gold might very well do the same.
So I would be looking at any rally to take a short position in either metal with silver looking the weaker of the two at this time.
I’m going to finish off this week by taking a quick look at the U.S. stock markets now.
Here’s the S&P500:
As you probably know, a couple of weeks ago the markets broke out to all time new highs.
Even when it appeared that a potential double top might end this bull market, I was warning that this wasn’t especially likely by virtue of all the impediments blocking any bearish move.
Those impediments include an irresistible uptrend marked by multiple key reversals. Every time the market went lower, it closed at the high by the end of the week. Reversals like this tell us there’s a lot of support and therefore it’s not wise to go short.
Yet people often believe that when something gets to an all-time high (especially when this market is so mature) that it’s got to be a short. However, I don’t see it yet.
That’s because what we see right now is a very orderly rise – there’s no high-volatility exuberance that you would normally associate with a top. The ranges for each week have not been excessively large, especially when you compare them to the key reversal lows.
So an orderly market is one that’s likely to keep going up. The path of least resistance is higher and so I don’t think it’s worth shorting this market at this point.
And that’s it for the week.
In summary, I’m expecting some kind of rally in the U.S. dollar against the Euro and New Zealand dollar in particular. I’m also expecting a dollar rally against precious metals including silver and gold. I’m also bullish on the U.S. stock market right now.
I wish you a very healthy and prosperous trading week.
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