I’ll explain the full reasons why I’m short gold in just a moment.
But it’s more than dollar strength, because right now the US Dollar Index (USDI) is still trading sideways. While I expect the dollar to get stronger later this year, it’s not doing so just yet.
(If you’re not familiar with it, USDI represents the dollar against a basket of major currencies and gives us the clearest picture of the dollar as a stand-alone entity.)
The USDI chart above tells us that the dollar’s currently trapped within a tightly coiled symmetrical triangle pattern. Eventually it will break out, but on which side?
The way to bet is usually on the side of the long term trend. In that case, up. I expect a stronger dollar later this year. It won’t happen immediately, but we’re gradually approaching a break-out from that triangle. So I believe the dollar uptrend will continue over the long term, as based on the evidence we have available right now.
Since the Euro is the currency that’s weighted most heavily against the dollar in USDI, it’s worth taking a look at the EURUSD pair for ideas on what’s going to happen next … and when.
The long term monthly chart for this pair is quite bearish:
It seems EURUSD appears particularly vulnerable to a move higher in the dollar thanks to the descending triangle on the monthly chart. We’ve seen successively lower highs and last month was a multi-month low for this pair.
There’s also a recent bearish head and shoulder pattern that’s just completed.
The net result is that we’re on the precipice of rolling over against the dollar to significant new lows not seen since 2017.
I’ve drawn a secondary support line at 1.12 – if EURUSD breaches that it will likely drop to 1.06.
Let’s see what support we have for that view on the EURUSD weekly chart:
The head and shoulders is more readily visible here, of course.
However, it’s apparent we remain in a non-trending environment. That means the price could slide sideways for awhile longer before the eventual descent.
On this chart it’s also a bit more evident that breaking below the 1.12 level will likely open a path to a big move lower, over the course of the next several months. We need to be patient here, though.
I’m not currently short EURUSD although I’m bearish on it.
However I am building short positions in NZDUSD and AUDUSD (the New Zealand and Australian dollars against their American counterpart). While a prevailing sideways trading-range environment still hovers, I believe these positions are more likely to pay-off sooner than EURUSD.
Let’s look at AUDUSD first.
This pair has been in a long term decline. Last year featured a double top where the neckline was penetrated and from which the price has failed to recover.
Right now AUDUSD is hovering at its support level at 0.70. While it could still go sideways for a while yet, recent key reversals suggest it might begin dropping soon.
The NZDUSD is also in a long term downtrend:
Plus it’s also made a double top with many additional topping patterns showing too.
Most recently, a bullish ascending triangle has been dictating price actions. However, I don’t think it will last much longer. Once that triangle’s trendline is broken, then NZDUSD should resume dropping once again.
There’s a strong bearish fundamental case here too: New Zealand’s central bank recently reiterated that not only will it key keep rates low but also that it may take them even lower – obviously this is bearish for NZD.
Now for the British pound, as it’s been so ambiguous lately with all the Brexit chaos swirling around from day to day.
As we can see, GBPUSD has also been in a long term decline against the USD.
There was a very pronounced double top here, and right now GBPUSD is struggling to breakthrough a key resistance area at 1.34.
Making things interesting is the series of inside week bars we’ve seen recently. Volatility has been very high, and yet the price has failed to make new highs despite an uptrend that started in January.
With an inside bar, “energy” in the form of price action is stored up just like a coiled spring. Eventually that energy will be uncoiled, often explosively.
I think that in this case, GBPUSD’s coiled energy will be released to the downside. The failure to make new highs strongly suggests the next major move will be down.
This has implications for other GBP pairs, including the two I’ve previously been quite bullish on.
GBPAUD (the pound against the Australian dollar) is the first of those.
As we can see, the price has stalled in the last few weeks here too.
This pair is forming a reverse symmetrical triangle, and I could easily see the price dropping to the lower end of this pattern.
That hasn’t happened yet, though. I’m not bearish on this pair and I’m not bullish either. That means I’m neutral at the moment on GBPAUD. This pair is no longer the clear bullish case it was a few weeks ago.
We see the same situation with GBPNZD (the pound against the Kiwi dollar).
The double bottom, rounding bottom and trending channel points to higher prices in this pair, but …
But last week was a key reversal, and as with GBPAUD we’ve seen a lot of recent volatility both up and down. An inability to reach new highs during period of high volatility often signals that the trend (up, in this case) is probably over.
So I’m now more ambivalent about the future direction for GBPNZD and therefore I’m on the sidelines again here.
Let’s take a quick look at precious metals too.
Spot silver (XAGUSD) still shows a hugely bearish price formation with the double top on the monthly chart.
Then for the last several years we’ve seen a bearish descending triangle help grind the price inexorably lower. Ultimately I believe we’ll retest the neckline of that triangle at $14/oz (perhaps even lower) over the next several months.
The bottom line is that there’s no bullish indications on the long-term XAUUSD chart whatsoever right now. And silver could easily drag gold lower with it.
So what does spot gold (XAUUSD) actually look like?
Gold simply can’t penetrate the critical 1360 resistance level at this time.
What’s more, I believe last week's major key reversal near that critical resistance level will set this pair on a long-term trajectory lower. That’s why I’m currently short XAUUSD from 1311.
I’m also looking to add to my position once there’s a breach of last week’s low at around the 1280 level. The price could track sideways for awhile due to the range-bound nature of today’s markets, of course.
But I’m definitely bearish on gold right now and once 1280 is broken, we could see the 1200 level again.
I’m more ambiguous on the stock market right now.
Looking at the NASDAQ100 (the tech stock index) as a proxy for the U.S. stock markets in general, the recent key reversal and the response to it suggests no major action is imminent.
I believe a long-term trading range in this asset class is likely to ensue for the foreseeable future.
Individual stocks might be worth trading and I’ll cover them as I see promising opportunities in the sector. But for now, the trading instruments to watch are NZD, AUD and XAU on the short side.
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Mark "USDAcendant" Shawzin