What a difference a couple of months make…
Last week, Fed Chair Powell indicated a “one and done” interest rate hike scenario for 2019. That sounds a lot different from last October when he was talking about three or four additional rate hikes. That recent about face and increasingly dovish tone suggests further gains are less likely than expected.
While I don’t trade based on comments from government (or any other) officials, when the Fed tells you they’re about to embark on a given course of action, don’t fight them.
Especially when the weak price action tells us the market agrees with the Fed’s recent pivot. In fact, last week’s close in US Dollar Index (USDI) indicates the dollar could gain some real traction to the downside.
You can see USDI has filled out a bearish rounding top near previous resistance back in 2016 (where it formed a double top).
To create the recent rounding top, a few weeks ago USDI went to a new high, then lost momentum on the upside. We saw three small inside week bars until a bearish key reversal occurred. That lead to the breakdown to the recent bullish trendline.
And finally, that trendline has been broken.
All this added together offers increasing evidence that a significant dollar downtrend is on the way. You really don’t want to be long any dollar FX pairs right now, because the path of least resistance is down.
(We’re seeing similar behavior in the stock market as well, but we’ll get to that in a moment.)
First, a few words on how to take advantage of this USD bearishness.
There have been high weekly and monthly key reversals in AUDUSD (higher), GBPUSD (higher) and USDJPY (lower).
This adds even more evidence that a sea change could be underway in these pairs. While we’re likely to see further consolidation of recent gains, it feels like the reversals are for real.
To that end, I would recommend dipping your toe in the water by going long AUDUSD and GBPUSD and short USDJPY at current levels or certainly on any decent pullbacks.
Let’s look at the charts so you can see why I feel confident making these calls.
This long-term monthly chart of GBPUSD (the British pound against the U.S. dollar) indicates a major long term reversal could be on the way:
While the current monthly bar isn’t finished yet – there are still two weeks to go – the price continues to hold at the monthly highs.
Remember, a bullish key reversal is where the price makes a new low and then bounces to close near the high.
This action looks especially encouraging when we see that prices have bounced from this level before during the height of Brexit pessimism. We’re well on the way to forming a double bottom from this level, which means GBPUSD should be set to move up significantly over the long term.
A new GBPUSD bull could be born this month.
Meanwhile, we’re seeing something very similar in the AUDUSD (Australian dollar against the U.S. dollar) monthly chart. There looks to be important price reversal action here too:
The very long monthly bar looks very bullish. Not just the key reversal itself but also where it occurred, which is right near previous support in 2016. See how the price retested that late 2016 support with a significant bounce?
From this price action, we can start basing our AUDUSD trades on the hypothesis that the bottom could be in for a very long time. I think it’s time to consider putting on a long position as we appear to be commencing a significant turnaround in this pair.
So how about USDJPY (the dollar against the Japanese yen)?
Here’s the weekly USDJPY chart – one that’s very familiar to long-time readers here:
Long term bearish patterns and I’ve been bearish on this pair for a long time thanks to the long-term bearish patterns which include a head and shoulders with a double top, a re-test of the neckline, and nothing but downward price action since.
The most recent bearish pattern is the descending triangle which is still tracing out now. However, extreme yen volatility has moved this pair downward very violently in recent times.
In fact, USDJPY went down 500 pips in eight minutes at one point.
Since then, we’ve seen an inside bar where prices have consolidated after the huge move during the previous weeks. There might be more consolidation ahead, but the long-term trend is still down.
That means going (or staying) short USDJPY if you’re a long term trader like me.
Use a wide stop as we work lower in this pair over the course of 2019 because there will likely be lots of volatility ahead.
Now for a few words on spot gold (XAUUSD) price action too.
Like GBPUSD and AUDUSD, this is monthly chart where each bar represents one month of price action.
If the dollar is in fact going to soften, then it follows that spot gold is going to run on the upside.
And yes, there’s increasing evidence that we’re on the cusp of a major development in gold. The symmetrical triangle price pattern has been well established over a number of years. Gold looks very close to a resolution to the upside.
There might be more work to do (i.e. sideways consolidation) but my expectation that we’ll break out on the upside. My near term XAUUSD target is 1310 and then much higher after that.
Here’s a look at the XAUUSD weekly chart for why I picked that level in particular..
On this chart we see a double bottom which finished in 2016 and which hasn’t been touched since.
The lows have held and we’ve seen only higher lows since. Ascending prices have been moving up relentlessly in the last few weeks.
The price is now consolidating near the 1300 level, so what’s important about the 1310 level? There was a large and bearish key reversal last May that drove the recent price dip. The high of that key reversal was 1310.
So to confirm we’re really on a bull run, we need to get past 1310.
There’s no need to panic if it doesn’t happen away, though. The more consolidation we see at this level, the more confident I feel that we’re on the launchpad for a major move up in gold.
I’m not taking a long position in XAUUSD just yet. I want that 1310 level broken. But if and (most probably when) it happens, I’ll be very interested in getting very long on spot gold.
Now let’s turn our attention to the stock market.
The stock indexes have bounced significantly from the extreme sell-off in December. As of Friday’s close, the QQQ ETF (proxy for the NASDAQ100 index) is 12% higher from its Christmas Eve low.
However, trading is at a significant resistance level right now. Friday’s inside-day / narrow-range bar indicates the recent market rally could be stalling out.
For an idea of how this might play out, it’s worth taking a look at what happened when the double top formed – the one that precipitated the huge descent that started in October.
In the second of the two tops, we saw a key reversal where the market closed hard on the low. After that happened, the price continued to stall out and close on the lows at the same price level as the first top (this gave us a hint that a second top was forming).
I saw the initial decline coming. Before the market sold off hard, I bought put options for 20 cents. They were worth $2.00 in just one day That’s a 10-fold (1,000%) gain!
I don’t make trades like that every day, of course. But it illustrates the principle of why watching price action can really pay off as patterns complete themselves.
Now we might get another opportunity just like my 1,000% gain in QQQ all over again. That’s because the most recent price action is similar to that event in October.
The price bounced off a V-bottom and now it’s running out of momentum.
Then we’ve had an inside bar (a very narrow range bar). That often indicates a direction change.
I need to see a bit more price action before buying puts again, but once the price takes out recent lows, we’ll likely see some strong downward price action back toward the V-bottom.
Buying the right put option at the right time could prove to be very lucrative. I’ll keep you posted on my thoughts here if the price hasn’t dropped hard by this time next week.
In the meantime, short the dollar by going long GBPUSD and AUDUSD and short USDJPY.
I think 2019 could be an amazing year for pattern traders and I wish you a very healthy and prosperous trading week.
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Mark “USDTrendReversal” Shawzin