Well it happened at last …
Last week marked the largest setback in the US Dollar’s (USD) relentless march from mid-April lows to an 11-month high. It remains an open question as to whether last week’s USD price action represents a reversal, or a “pause that refreshes” in a continuing uptrend.
It’s been a remarkable rally either way.
Reviewing the price action in the U.S. Dollar Index (USDI) and multiple currency pairs this week, I’m now of the opinion that we’ve seen either the highs or the near-highs in USD correlated pairs for the next several weeks.
USDI failed to keep pushing onward and the decreasing size of each week’s range now has me cautious about continued dollar bullishness.
Also, I’ve highlighted some potentially correlated tops in the USDI weekly chart. USDI is currently stalling out near a previous high and so we’re drifting into a resistance area right now.
Now, I wouldn’t be so cautious if USDI was the only chart I was reviewing.
It’s how many of the other charts are behaving (with key reversals everywhere), that have me changing from my earlier very bullish stance on the dollar.
Let’s start with the EURUSD (Euro against the U.S. dollar) weekly chart.
I’ve been bearish on this pair for awhile, as you can see from the chart formations I’ve highlighted for you: a descending triangle plus a double top within it.
However, I’ve also been looking at the 1.15 price level as a support level. And last week’s bullish key reversal as EURUSD bounced off that neckline suggests the Euro is positioned to rally. (A bullish key reversal is when the price makes a new low and then closes on or near the high.)
Buyers certainly showed up at this intersection of long-term support after that huge 900 pip fall from the descending triangle.
So where do we go from here in EURUSD? There’s likely to be some consolidation and perhaps even a short term rally from the current support area.
But for now I’m sitting on the sidelines just to watch where the momentum lies.
Now let’s take a look at the British pound.
For some time, I’ve maintained GBP correlated pairs have formed long-term bullish price patterns. Those patterns suffered quite a lot in the last few weeks as the dollar ran rampant over everything.
But last week’s price action in GBPCAD, GBPUSD, and EURGBP suggest prices may be poised for a slow turn-around from current levels, as I expect GBP to strengthen over time.
The first pair we’ll look at it GBPUSD (the British pound against the U.S. dollar).
Here we see a small bullish key reversal at support, just like with EURUSD.
This is after the double top and bearish key reversals we saw several weeks ago. Now after falling out of bed, it seems GBPUSD is poised to stabilize and perhaps even begin retaking that lost ground on the upside. Patience is required here, though. Don’t rush.
GBPCAD (the British pound against the Canadian dollar) is another interesting one.
This pair established a triple bottom in the 2016-2017 timeframe. That’s very bullish even though it’s been taking its time to climb higher.
But when there’s a bullish trend in place — and GBP’s strength seems to be returning at last — then you can look at any pullbacks as a buying opportunity.
In fact, we might be seeing one right now with last week’s bullish key reversal. I think it marks an important bottom. Bear in mind that prices won’t go straight back up. That’s because we need to see some further consolidation at this level before I would rate it a buy.
But overall, I think GBPCAD is poised to go higher rather than lower in the foreseeable future.
Here’s a pair I’ve been talking about recently: EURGBP (the Euro against the British pound).
GBP is getting stronger against the EUR right now, and last week’s key reversal within the triangle heralds gathering strength on the downside.
So we want to be going short in this pair. I really like this trade because a lot of the risk has been taken out due to EURGBP’s repeated failure to break through to the upside.
And yes, just like so many other pairs this week — EURGBP also features a key reversal. This one is bearish as it made a high and then closed near the low.
That means the most likely direction of a breakout is down.
Here’s another trade with a great risk-reward profile: going long AUDUSD (the Australian dollar against the U.S. dollar).
There’s been a recent mini double bottom here. Plus yet another key reversal last week.
I think AUDUSD is poised to climb from here over the next few weeks, possibly up to .78 in the short term and maybe beyond that too. I rate AUDUSD a buy at or near current levels on the strength of the double bottom and that key reversal within the longer term uptrend we’ve seen since early 2016.
Now let’s look at XAUUSD (spot gold).
Until very recently, watching gold was like watching paint dry. On the monthly chart we’ve been mired for the last 4-5 months in a mind-numbing trading zone.
But finally we’re starting to make progress below the important 1300 level on that monthly chart:
I think this could open up a major move lower.
So here’s the weekly chart with a bit more information to support that:
On the weekly chart, XAUUSD closed under the last four-month 1300 neckline and then failed to get back over that neckline.
This price action could mark the beginning of a sharp move lower. I think clearance below the 1280 support level will be a greenlight to the bears and there will be a LOT of money in the offing once the momentum gets going.
That being said, the spot gold market has consistently held up by making a key reversal just at the moment of bearish truth. Will this finally be “the time” it breaks down with a vengeance?
I’m cautiously optimistic that’s the case when you look at the daily chart:
At the daily level, we’ve seen a bearish triple top pattern, a break below the neckline of that pattern, a retest that failed with a mini double top.
Furthermore, each of those two tops were bearish key reversals: made a new high and closed on the low. I think this might be the signal we’ve been waiting for … at last.
XAUUSD’s next support level is 1280 – if that breaks then look out below!
Now let me summarize this very pivotal week:
We saw key reversals in multiple pairs, especially those involving the USD.
Therefore we could have seen the highs in USD for now. So I’m cautiously bullish on EURUSD and GBPUSD and more aggressively bullish on AUDUSD.
And because GBP appears to be regaining its strength, I’m also bullish on GBPCAD and bearish on EURGBP.
Spot gold appears to be on the precipice of a major decline too. That could be the most exciting of all the trades I’ve shown you today, but remember we’ve been disappointed before by unexpected XAUUSD strength even when it looked ready to drop. The 1280 level is key.
Picking out trades like this and waiting are how we pile up the profits over the long run. Buy strength, short weakness and be patient.
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