I want to begin this week's Report with a long-term view of the U.S. Dollar Index (USDI) to put things in perspective. Then I’ll move onto why I think we're at a historic infection point in the U.S. dollar and which currency pair will benefit the most from a move lower in USDI.
So let’s get started with a 45-year chart of USDI:
Over the last 10 years, USDI has been on a tremendous bull run. On the other hand, USDI is still nowhere near its historic highs. It’s made only a pattern of lower highs instead. This long-term price action has formed a bearish descending triangle.
Today USDI hovers at an inflection point along the trendline of the descending triangle. The price is currently churning at a key level where we could see a breakout (as it exits the confines of the triangle) or a rollover to a lower level (and it confirms the triangle).
It could some time for this to play out. That’s because we’re entering the summer season, which is when we typically see lower volatility in FX pairs.
However, it’s important to understand that we’re on the cusp of a major move in the U.S. dollar. Whether it's a few weeks or a few months from now, we’ll see USDI making a decisive move.
Because of the triangle, I’m bearish and I expect USDI start rolling over and dropping within the triangle at some point this year.
And the one pair that’s ideally positioned to benefit from a move lower in USDI is USDJPY (the U.S. dollar versus the Japanese yen).
Here’s another 45-year chart to help you understand why I feel that way.
First of all, it’s clear that USDJPY has been in a profound downtrend from about 350 yen to the dollar in the 1970s the current level of 107.
What’s more, I don't see any pattern that suggests USDJPY is going to reverse this downtrend. I think USDJPY will break down to new lows at some point. It’s done nothing over the 20-30 years except continue a pattern of lower highs.
I don’t see a double bottom on this chart because while there are two distinct lows in place, USJPY simply hasn’t made any higher highs after the second “bottom”. If this were a real double bottom, you would expect to see higher highs already. Yet that isn’t the case.
If anything, USDJPY is looking weaker and weaker.
So that’s why I expect another leg lower in this pair. I think USDJPY will break hard to the downside.
The only question in my mind is when it will happen. And that means the main risk in this short trade is paying swap fees to the broker as we wait for the position to pay off.
However, time is completely against us here. I’ll show you why with the weekly USDJPY chart:
Not only does everything on the 45-year chart confirm USDJPY is in a profound downtrend, but here at the weekly level, we have every bear pattern imaginable too.
There’s a double top at the 126 level in 2015 which is part of a larger head & shoulders top. (Once USDJPY broke the neckline of that head & shoulders, its been all downhill for this pair.)
The descending triangle since that time is also bearish. Note the similarity to the descending triangle on the 45-year chart of USDI I showed you earlier – this is the same pattern with the same bearish implications. A pattern of lower highs over a common low strongly suggests lower prices are on the way.
The other bearish pattern is the H top that formed in the last few weeks. An H top looks like a capital letter H, and some people have also called this type of top a horn top or a steer top because of its resemblance to a steer’s two horns with the head in between.
You’ve probably noticed that pretty much all these patterns have the word “top” in them.
That’s because all this price action added together has created a formidable confirmation of a bearish future for USDJPY. At best, we could have a market environment where this pair goes sideways. But to my mind, the potential of this trade overcomes the risk of extended sideways move where we pay swap fees to stay in the position.
This is a trade where you should get short and stay short. Keep your stops wide and look to be in this trade for some time. When all the patterns add up like this, it’s actually scary that it looks so “obvious” a short. I start questioning my own thinking process because when things are too good to be true, they usually are.
But in this case, I’ve studied the evidence enough that I’ve come to the conclusion that there’s nothing to worry about. The risk of USDJPY moving significantly higher is very low. Just look at all the empirical evidence in front of you, and it’s easy to stay short in USDJPY for the foreseeable future.
We’re at a tipping point.
There are three trades that are aligning to be some of the most exciting opportunities that I’ve seen in a long time.
Based on long-term markets, rock-solid patterns, and scary alignment, I shared all in this week’s video report.
My biggest fear for you is just how fast these could happen, the major moves are imminent. Act fast if you want to be part of these.
- Are we on the major cusp of a huge move in the US Dollar? What is going to happen next based on the 45-year dollar index (not good news for the economy)
- Why the USDJPY is one the most opportunity-rich currency pairs on the board (with a detailed explanation of exactly what is going to happen) – watch from 2.49
- Why things are setting up in a SCARY alignment on this currency pair and why the risk/reward is uncomfortably stacked in our favor
- As my mother used to say, “when things seem too good to be true, they usually are” … but why in this situation, with all the evidence, this may just be the “dream trade”
- What to do when you see a combination of contradictory patterns, and how you should read difficult charts (great teaching moment from 7:13)
- The clear pattern that shows that we have reached the top of the stock market, and why we’re going to get a move back into the range (the breakdown of what is coming next)
- The governing price pattern on the GBPNZD that has indicated where this unpredictable currency pair is going to go next (watch from 15:55)
- Why I have avoided XAUUSD (Gold) even though it has been getting the headlines and is on the tips of the trading communities tongue
- Plus much more
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