This could be one of my most important articles in some time.
Not only because the period from October to February is the most profitable time of the year — and this year looks to be no exception — but because of the two secular trends I’ve identified as key to your trading for the next several weeks and months.
Those two trends are:
1) The U.S. dollar looks destined to charge higher
2) The stock markets appear determined to drop lower
In fact, there seems to be some as-yet unidentified “boogieman” out there we don’t know about that has the stock markets spooked and everyone running to the safe haven of the dollar. We don’t know what it is yet, but it seems to be signaling troubled times ahead.
Let’s look at some charts to demonstrate why I’ve come to feel so strongly about this.
First, the dollar. Remember the U.S. Dollar Index (USDI) tracks the dollar against a basket of currencies:
The current uptrend started from an an H-bottom (also known as a horn bottom) I first noticed back in April which was subsequently followed by some bullish key reversals. I had been bearish on the dollar until these patterns showed, but switched to a bullish stance which proved to be correct for a subsequent powerful dollar rally.
That rally appears poised to renew its earlier vigor in the near term.
Take a look at the bullish inverted head and shoulders pattern we’re seeing right now in USDI. This is a bit of an unconventional form of this pattern as the right shoulder is above the left.
This creates a sloping and very bullish neckline.
At the moment, we’re not far from breaking above that neckline.
If and when the price breaks above it (and last week’s high), we could see another strong rally at least as powerful as the first leg which propelled us from the March-April lows.
The inevitable conclusion is that for whatever reason, the dollar is perceived as a potential safety haven during a time of uncertainty right now. We see this reflected in key FX pairs too.
One of those pairs is EURUSD (the Euro against the dollar), which is currently at a key inflection point.
EURUSD rests at the neckline of a very long term descending triangle on this monthly chart.
Previously this pair rose from 0.80 to 1.50 and then made a double top at the high. Some vicious key reversals ensued and despite a few rallies, it’s been all downhill since.
And now the more recent mini head and shoulders pattern suggests EURUSD is set to continue this lower trajectory in the near future.
A break below the neckline could trigger an explosive move back to parity (1.00) either immediately or after some churning at the neckline area for a few more months. Whether it happens next month or a couple months down the line, EURUSD appears to be in a “short the rallies” phase before the next decisive leg lower.
We see a similar mini head and shoulders pattern in monthly GBPUSD (the British pound against the dollar).
GBPUSD has been in a long term downtrend since 2008 and this looks set to continue. I foresee a move down to the 1.20 price level if not much lower than that in the near future. We are right on the neckline now and once that’s breached, look out below.
In fact, GBP has been weak against all other major currencies lately, even NZD (the New Zealand dollar) which had previously been the weakest.
So the dollar is king at the moment, with one exception.
On the USDJPY (dollar against the Japanese yen) monthly chart, the mighty yen seems to be even stronger than king dollar.
The key reversal that’s forming during this latest month strongly suggests the dollar will weaken against JPY even as it strengthens against the other currencies.
We see more evidence for this at the weekly level too.
Historically, this pair formed a double top at 126 within the context of a larger head and shoulders pattern.
More recently, a descending wedge has formed, one that recently saw a failed breakout attempt. Since that upward spasm, the price has retreated back inside the wedge. USDJPY now looks likely to track lower to the neckline of the wedge and perhaps even lower to parity (100).
Now let’s turn our attention to the major U.S. stock indices, starting with the NASDAQ 100, the proxy for major tech stocks.
NASDAQ100 has suffered a pretty severe reversal with a 10% loss since hitting new highs (the channel top) and dropping to the channel bottom.
Individual tech stocks have been hit even harder, including Netflix (NFLX) which has lost about 25% over the same period of time.
Now this is either a correction within the previous uptrend or a change in trend (and a major reversal into a bear market). I’m leaning toward the latter interpretation at this time.
That’s because the double top we’re seeing here is a very similar formation to what happened to EURUSD at 1.50: a double top featuring some key reversals, then a vicious drop immediately after.
It hasn’t been pretty for EURUSD since that happened and I fear the same is in store for the NASDAQ too.
That’s why I think this is a ‘sell the rallies’ environment for tech stocks.
Unlike previous declines at the start of this year (which were quickly met by robust rallies) we’re not seeing that kind of bullish price action this time … so far!
The S&P 500 looks similarly grim.
At the most recent top, we saw a tiny inside bar followed by a key reversal.
A tiny inside bar isn’t so benign when it stands on top of a monster rally such as the one we’ve seen in the S&P500. It indicates the market’s energy is “coiled” up and ready to explode — in this case down.
It’s also especially significant that this inside bar happened at previous resistance.
While it’s a bit early, I think we may be seeing a double top in the S&P500. That pattern won’t be confirmed until we hit the neckline at 2550. However, in my mind there’s something very concerning here with the recent market behavior.
This doesn’t look like a standard bull market correction in my eyes. So if you’re in equities, be well prepared to protect yourself on the downside. Especially if we hit that neckline and go through it decisively.
The same goes for the DJIA (Dow Jones Industrial Average, a.k.a. the Dow 30).
Just like the S&P500, we saw an inside bar and key reversals here too. Plus a potential double top.
That double top won’t be confirmed until we cross the 23000 level, but be prepared for that eventuality.
So what’s gold doing during all this?
A look at the monthly XAUUSD (spot gold) chart shows us that gold could be staging a rally even as the stock markets stutter and falter.
Last month’s inside bar might be foretelling a reversal like the ones we saw in the stock market (DJIA and S&P), except this would be a bullish reversal.
For the past several years, gold has clearly been on a trajectory lower. That phase might be at and end since we’re now taking out the high from last month and looking to close near that high.
Like the yen, XAU might prove to be stronger than the dollar despite a powerful dollar rally.
A weekly view adds further strength here:
While XAUUSD looks to have been in nothing more than a huge trading zone at first glance, the multiple bottoms (starting with a double bottom during 2016) are adding some weight to the bull case for gold. It seems gold might be regaining its own safe haven status in competition with the dollar.
So let me summarize where things look to be going for the next few weeks and months.
The dollar looks to be ready to rally further against everything except the yen (and possibly gold) even as the stock markets weaken.
Meanwhile the GBP looks to weaken against all the other major currencies.
Those trends stand to be very profitable for us going forward.
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