One of my favorite quotes of all time is “the only thing new is the history you don’t know.”
I love that quotation because when you think about it, anything we’re seeing today is something we’ve already seen in the past. I feel we’re living through exactly that situation with regard to the US dollar.
By way of illustration, this is a 45-year chart of the USDI (the US Dollar Index) which measures the US dollar against a half dozen other major currencies:
USDI has enjoyed a 10-year bull run, one powerful enough that we saw the Euro drop from 1.60 to the dollar all the way to 1.03. But as I’ve been saying over the past few weeks, the legs under this bull rally are being chopped out incrementally. There’s mounting evidence that USDI has made a major top.
Despite that 10-year run, USDI has reached a much lower level than the top in 2000 and certainly the one in 1985. That’s created a long-term downtrend in USDI, one where the Index is now rubbing up against the long-term downtrend line created by those lower peaks. There’s also a double top reversal price pattern. These two things together suggest a lower dollar is on the way.
Meanwhile the horizontal lows of this triangle act as a support area. Looking at the price history, it’s very likely we’ll see the dollar return there in due course.
Now here’s the USDI again, this time on a weekly chart going back just five or six years.
The same double top from that long-term chart is visible here. The second, spiky top is what happened during the height of the pandemic when there was a panic into US dollar assets.
But now everybody who chased that peak has now been trapped in what looks like a classic bull trap. Any of those stubborn bulls who don’t get out are likely to pay a heavy price soon.
I also see a bearish head and shoulders forming on this chart – that’s where a higher, central head flanked by a shoulder on each side. USDI is trading right at the neckline of that pattern while also touching its long-term trendline.
That suggests that any penetration below current prices should yield a waterfall effect to the downside in USDI and therefore the US dollar against most major currencies. To me, it’s not a question of if this is going to occur, but when. Even if USDI slides sideways for awhile before giving way to the waterfall effect, it’s likely to happen in the not too distant future.
But of course we need more supporting evidence for such an important prediction.
Here’s EURUSD (the Euro versus the US dollar). This chart is quite informative in terms of what EURUSD didn’t do as much as what it actually is doing.
That’s because when I look at a chart and see certain patterns, I expect specific, confirming price action to support that pattern.
EURUSD has been in a long-term downtrend and although it’s not visible in this chart, the drop started from 1.60 all the way to the 1.03. Then in 2018 to 2019, EURUSD bounced a little to trace out a bearish head and shoulders continuation pattern. Once EURUSD went through the neckline of that pattern, it continued dropping lower to 1.06.
Yet that trend has stopped.
This mirrors the stopped trend we’re seeing in USDI, which isn’t too surprising since the Euro comprises a bit more than 60% of that Index. So if USDI is set to move on a trajectory lower, then EURUSD should rise commensurately.
How can that be? Well, the market doesn’t know or care about my analysis. And so ultimately I always defer to the market. My analysis says EURUSD should keep dropping. But by not doing so, EURUSD has shown me that it’s ready to go the other way.
This is being confirmed by some major bottoming price action with three components: the current support is at the same level as support from several years earlier, there’s an emerging inverse head and shoulders and finally a price rise to a major resistance level. All these things are bullish.
I consider the current resistance level significant because there were several key reversals at this 1.15 – 1.16 level before.
That means that if (or when) EURUSD were to break above that area, it would mark a definite turnaround from the long-term downtrend. In anticipation of this happening, aggressive traders can start accumulating long positions in EURUSD based on the collective evidence of these price patterns and the fact that what doesn’t go down, will inevitably go the other way.
If you prefer to be more conservative, wait until EURUSD starts penetrating above that major resistance area. Once this happens, it will open up a lot of blue sky above.
In this chart, I’m looking at USDJPY (the US dollar versus the Japanese yen).
Since my expectations are that the dollar is going lower, it follows that USDJPY will drop since it measures the dollar against the yen.
(Long-time readers may feel that I’m boring you with this analysis week after week, but to me there’s nothing boring about sitting in a position that will eventually make you a lot of money. So I’ll quickly run through my thinking again, especially for newer readers.)
What we’re seeing in USDJPY price patterns and price action suggests there’s nowhere for this pair to go but lower over time. “Over time” is the key phrase here. That’s why even though USDJPY has been sliding sideways for the last several weeks, I’ve continued holding my positions. My expectations of a move lower, perhaps a move much lower than most traders would currently anticipate, are as strong as ever.
My bearishness starts with the double top price pattern all the way back in 2015 which formed the head of a bearish head and shoulders. Once USDJPY cracked through the neckline of that pattern, it’s remained bearish in fits and starts ever since.
The price action over the last few years has been contained within a bearish descending triangle. Note that this descending triangle looks a lot like the 45-year chart for USDI. There periodic rallies with lower highs each time, and a common low which will eventually be reached (and perhaps even broken) on the next descent.
USDJPY’s common low is at 104 with a ‘pandemic low’ of 102.
I expect these prices to be revisited. It may not happen in the next couple of weeks, but if you’re patient and hold your short positions, I believe you’ll be handsomely rewarded.
If USDJPY does manage one last rally within the triangle, this would be an excellent opportunity to add to your shorts at higher levels.
Something doesn’t feel right, does it?
- Much of the world is on lockdown.
- There is 15-20% unemployment in the US.
- Business has practically shutdown.
Yet, the stock market is rallying and the US Dollar is looking strong.
But what is bubbling away under the surface and what is going to happen next?
Well, in this week’s video report, I shared exactly what I’m seeing and why the charts are already showing us what is going to happen next.
- The real reason behind the stock market rallying (and why the government have already achieved what took them six months to do in the 2008 crash)
- With unemployment rates similar to the Great Depression, what does this mean for the US economy and will the trillions of dollars being dumped into the system save the US or ruin the economy?
- Stop asking yourself “WHY?” in the markets and the only two questions that you should ever ask before making any trading decision (understand this, and it will help you to detach the emotion from trading that trips so many people up!)
- The glaring “Ascending Broadening” price pattern on this controversial trade and what you should be doing TODAY to be on the winning side of the next big swing.
- The unconventional AUDUSD bear trap, why it’s VERY DANGEROUS for lethargic traders and where the opportunity is within this trade for the fast action takers
- A real-life example of how to stack risk/reward in your favor and why you must always be objective when trading (ignoring everything that the media tells you!)
- Is the weakest currency emerging as one of the strongest currencies on the board? And what does this mean for the rest of the world’s currencies against the US Dollar
- Why there’s 2000 pips on the downside on THIS pattern (and what you should be waiting for before being part of this HUGE trade) – watch from 16:30
- The 45-year chart that shows why the biggest US dollar collapse could be on the horizon (and what this means for trading the USD today)
- The governing price pattern on XUAUSD and why the future pattern has already been “written in the stars”
- Plus Much More
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