Before I dig into the analysis of last week’s market action, I want to say this week should be action-packed.
There are many potential market-moving announcements this week. For starters, there’s Thursday, December 12th when we learn the outcome of the British elections. It’s priced into the markets that the Conservatives will emerge victorious. But there could be a lot of volatility before and after the elections in British pound-correlated pairs, especially given the enormous recent run-up we’ve had in that currency already.
We also have the U.S. Congress voting on an impeachment inquiry into President Trump’s activities in Ukraine. Plus there’s U.S. Fed Chair Powell having a conference on Wednesday.
And there’s also an OPEC meeting and a raft of other economic events coming out, some of which may have occurred by the time you read this.
But here’s the thing: as regular readers know, I don’t follow events as trading opportunities. Instead, I examine how price responds to events within the context of the bigger picture.
So this coming week is going to be a busy one as we observe what kind of volatility ensues — or not — from all these announcements. Cumulatively we should have a lot of movement in the market.
But you wouldn’t know it from last week. Many markets have continued bunching up in very tight ranges. What’s more, I’m getting the feeling this low volatility, tight range-bound condition could persist for a while.
Will this flood of news prove me right or wrong?
Well, let’s take a look at what happened last week to see where things stood before the accumulated news takes effect.
Here’s the 42-year history of the U.S. Dollar Index (USDI) which measures the U.S. dollar against a handful of major currencies.
As you can see, USDI’s had an enormous run-up over the last decade. Yet it’s still trading within the confines of a large multi-decade descending triangle. A descending triangle is defined by lower highs over time, which includes the most recent high topping out well below the high set in 2000 and far, far below the high set in 1985.
USDI is currently hovering at a key inflection point right now. As you can see, it’s right at the trendline and a major resistance zone too (the recent highs set in 2015). That suggests USDI might be nearing an important top.
However, it doesn’t mean USDI is going to roll over next week or even next month. Remember, this is a 42-year chart.
The main takeaway here is a historical appreciation of USDI price action. I want you to understand the U.S. dollar is at a very decisive level right now.
That puts this weekly chart of USDI into context, I hope:
The resistance in the current timeframe looks ominous when you consider the long-term historical chart. Plus USDI is showing what could be a mini head & shoulders pattern right now.
This is especially important when USDI is sitting on the precipice of a long-term uptrend line that’s been keeping this dollar rally alive for the last several years.
Any violation under the trendline — and support line beneath that — could trigger a reversal in USDI.
But I’m not bearish yet.
That’s because when we examine dollar correlated charts, I can’t make the case for a huge turnaround. You’ll see what I mean in just a moment.
So I believe USDI’s worst-case scenario right now is a low volatility choppy environment that meanders along within a right range. Keeping that in mind, the next few days, weeks and months will give us a better idea on how to approach favorable USD-related trades.
Now let me show you why I’m not dollar-bearish at this time…
In this chart, I’m looking at EUIRUSD (the Euro versus the dollar) which remains a huge downtrend until proven otherwise.
While EURUSD has had higher lows recently, I don’t see any meaningful pattern that would translate into a huge turnaround here. At the very least, I’d need to see EURUSD re-test its lows and then put in a notable bullish key reversal bar.
Until something like that happens, I can’t call a turn in this market.
So as EURUSD sits right now, it looks destined to track lower to the 1.08 level and perhaps lower yet if the re-test of the lows fails to find any support.
Now for AUDUSD (the Australian dollar versus the dollar) for which the prognosis is much the same.
(The Euro and Australian dollar have been the weakest against the dollar. That’s why I’m looking at them first to see if there’s any potential turnaround on the way.)
AUDUSD has been bounded by a long-term downtrend line. While the price is starting to challenge that line once again, it’s far from convincing. I don’t see anything that suggests today’s AUDUSD price action is going to translate into a sustained upward move.
At best, it will take some time and a lot of work before I can say AUDUSD has put in a bottom that heralds a new uptrend. It’s more likely that AUDUSD makes new lows under 0.66 in the next couple of weeks or months.
But there is one currency that really is looking bullish against the dollar.
The British pound has been written off thanks to dire predictions of the outcome of a hard Brexit not so long ago.
But now those perceptions are starting to turn.
Here’s GBPUSD (the British pound versus the dollar):
As you can see, this pair sports a huge turnaround from formidable lows around the 1.18 to 1.20 level.
GBPUSD is not far away from knocking on the door of a key resistance area. That long-term downtrend line is about to be challenged.
This strength is why I believe the pound is the best proxy on the U.S. dollar going forward – GBP is the first currency to start turning higher against it.
The critical area here is the 1.35 – 1.36 level. Will GBPUSD roll over and turn back into the downtrend or will it breakout to the upside? The next few weeks and months will make things more clear.
However, those elections on Thursday, December 12th will surely generate a flurry of activity both up and down in the pound correlated pairs. If you’re going to trade anything involving GBP be aware of the risks.
I should pause here and briefly discuss the ambivalence in this discussion so far.
I think it’s obvious I could make a case for a lot of markets moving in either direction right now. This is important to recognize as a trader.
That’s because I’ve learned from experience that a state of ambivalence means you should be extra-cautious in the markets. After all, you’re very likely to second-guess yourself in a trade when you’re in this state of mind. If your trade starts going against you then start making the case for it going the other way. You reverse position, second-guess yourself again when it turns against you. And so on.
That’s where you can get yourself in real trouble.
But there is a solution …
When I see most markets in flux and ready to go, either way, I step back and then zero in on the one or two markets where I have a high degree of certainty based on price action.
To my mind, USDJPY (the dollar against the yen) has consistently been that pair.
Regular readers know I’ve been very outspoken about my bearish opinions on this pair based on long-term bear patterns going all the way back to 2015. That includes a double top combined with a head and shoulders.
Ever since USDJPY peaked out at 126 it’s been unable to sustain any rally above the neckline of that pattern. It trades at 109 today with more downside to come.
That’s because USDJPY remains trapped within the confines of a descending wedge. (Refer back to what we saw on the 42-year chart of USDI for an earlier example.)
I feel the lows of this triangle at 104 will be revisited at some point.
The real question is whether USDJPY drops there without warning or instead slides sideways for a while first.
This directional bias offers a solution: the best way to play this pair is to place a sell stop under recent lows. Sell on stop just under the reverse triangle that seems to be forming in USDJPY right now.
With a sell stop in place, you may be surprised with a nice windfall as USDJPY plummets.
Normally I add some thoughts on GBPNZD and GBPAUD here as they’re favorite longs of mine.
But remember we’re likely to see a lot of volatility with the British elections. Unless you’re willing to take on significant risk, avoid GBP pairs until we know the election results and the volatility settles back down again.
I’ll return to a more detailed GBP pair commentary as soon as the dust has settled.
Instead, let’s take a look at oil right now.
Oil is a commodity I haven’t covered recently, but there have been important OPEC meetings lately. How has the oil price has responded?
Unfortunately for trading opportunities, oil remains moribund within a very defined price level. I feel that ultimately this market is going down, but where it goes in the next couple of weeks is anybody’s guess.
I’m bearish long-term because the double top within a long-term downtrend remains the governing pattern here. Oil has also traced out what appears to be a bearish descending triangle.
There is a cash for bullishness: oil could break out from this pattern as it’s failed to touch the triangle lows on its most recent downturn.
But I wouldn’t be inclined to hop on board any rally. It’s still too early. Oil remains in a long-term primary downtrend and if you get excited too early could get hit with a painful loss.
The recent silver rally (and its subsequent failure) is a case in point.
XAGUSD (spot silver) is one market I haven’t been ambivalent or ambiguous about.
In this monthly chart, it’s clear that silver’s in a long-term bear market. The recent emotional runup was exciting for the bulls. But it was also short-lived.
The key reversal a few months ago killed it off. That’s the month when silver climbed to $19.50 or thereabouts and then closed at $17.
At that time, I said that key reversal was likely to be a dagger in the heart of the silver rally and that silver would most likely turn back in the direction of the major trend, which is down.
Price action has proven me right.
Silver is now making new lows relative to previous months. At best, silver will trade in a choppy range consistent with what we’ve seen over the last four or five years.
Silver might drop even lower, though. Perhaps we could see $12 or even $8 as happened back in 2009.
That’s because powerful bear patterns remain in force and effect, starting with the huge double top from several years back. There’s tremendous weight here no matter what the silver bulls might be saying.
Now I’m looking at XAUUSD (spot gold), also at the monthly level:
In recent months and years, gold has far exceeded the price of silver to the point that the gold-silver ratio expanded to over 90 at one point. (That means gold was trading over 91 times the price of silver).
To put that into context, the ratio used to be 50. So 90 is an historically extreme value.
However, gold’s greater strength merely delays the onset (and severity) of any downturn.
That’s because I don’t see the yellow metal resisting the forces taking down silver. There’s been no follow-through after making a new high several months ago. Note that gold has seen only lower highs and lower lows since. Without a follow-through, gold will ultimately roll over.
Not immediately, of course. After something goes up a straight-up like gold, it doesn’t come down the same way. It should be a more gradual descent and we’ll likely see sideways trading action for awhile.
I would use any rallies in gold (or silver) to hop on board the short side. Just be patient and wait for good opportunities.
Being short is the safer bet because I don’t see a lot of risks to the upside in these metals right now.
Let’s finish this week by looking at the stock market, specifically the S&P 500.
No tree grows to the sky but the S&P500 has certainly been trying its best.
The index has been closing at new highs every week since it broke out above recent resistance several weeks ago. That’s been no fluke.
After all, this market carved out multiple bullish key reversals since last December’s lows. That kind of strength means there’s continued strong support here.
So the path of least resistance is higher, especially after the market made yet another key reversal last week to fight off the bears.
Nothing goes up in a straight line, of course.
At some point, we’re going to see the law of gravity apply (finally) and pull the market sideways for a while. But there’s nothing to indicate an imminent drop right now. That means there’s still mileage left on the upside of the S&P 500 for now. Short this index at your peril.
And that’s it!
To summarize this week’s analysis: the dollar is very ambiguous right now, election-related volatility in GBP-pairs could be quite high (although I remain bullish on GBP in general), and I’m still a bear on USDJPY and the precious metals. Stocks will correct at some point, but not in the immediate future.
I wish you a very healthy and prosperous trading week.