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A Hot New Candidate To Profit From USD Weakness

Mark Shawzin
November 18, 2020

The US elections are now about two weeks back in our rear-view mirror. And quite frankly, not much has changed in the markets.

This validates the fact that patterns indicate price trajectories regardless of outlier events such as pandemics and elections.

Let me demonstrate, starting with the USDI (the US Dollar Index which correlates the US dollar against a half dozen of the most liquid major currencies):

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At the height of the pandemic, USDI made a huge thrust to the upside, but this appears to be a big bad bull trap which trapped the traders who chased it.

This not only created the second of two tops for a double top (a reversal pattern), that bull trap is also the head of a bearish head and shoulders pattern (also a reversal pattern), meaning the last 10 years of the USDI bull market should be pretty much over.

USDI has broken through the neckline drawn through that head and shoulders pattern and currently rests at support.

How long will this last? I don't know. We could still see back and forth price action at first, but ultimately prices will give way to the downside. There’s nothing on this chart to support any kind of meaningful rally now.

Here’s NZDUSD (the New Zealand dollar versus the US dollar):

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For the past 10 years, NZDUSD has been in a long-term downtrend but prices are starting to look more bullish. Since the dollar looks likely turn, NZDUSD now poses the best risk/reward for a long-term outlook.

That’s due to an inverted head and shoulders (the upside-down version of what we just saw in USDI) with prices now peeking above the neckline of that pattern. I expect higher NZDUSD prices in the future.

For a long time, NZD has been one of the weakest currencies, but it appears to be coming out of the pandemic with one of the strongest currencies across the board.

Start establishing NZDUSD positions with the view of holding them for the long-term. I’d consider any dip as an opportunity to consolidate and add to a long position.

To further illustrate this theme of renewed strength in NZD, here’s NZDCAD (the New Zealand dollar versus the Canadian dollar):

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In the last couple of years, there’s been some extreme bear price patterns in this pair which suggested NZDCAD was going lower, perhaps much lower. There was a double top flanked by multiple shoulders on each side to form a “complex” head and shoulders due to the number of shoulders flanking the head.

All this foretold a dramatic decline once NZDCAD thrust through the neckline at the 82 price level.

But during the pandemic, this happened only briefly before the trend reversed.

The lack of confirmation of huge bear price patterns indicates a reversal of price trend. That complex head and shoulders is now a busted price pattern.

The implications are very bullish for NZDCAD. What doesn’t go down must go up instead.

We can now view NZDCAD as having completed an inverted head and shoulders where the left shoulder is lower than the right shoulder. This creates a sloping neckline which is very bullish.

Prices are about to burst above this neckline and could move very swiftly. The nearest resistance is at 93, about 300 pips higher.

So I also like the long-term prospects of NZDCAD as well as NZDUSD on the long side.

Another USD pair worth watching is USDJPY (the dollar versus the Japanese yen):

Going back to 2015, a host of bear patterns began with this pair’s double top and head and shoulders. That has been the governing pattern ever since because it’s governed all subsequent price action.

Now prices are starting to bunch up at the bottom of a descending triangle, including a number of attempts at the 104 level.

To my mind, it's just a matter of time before USDJPY gives way to lower prices. It’s conceivable we could still have one more spike to the upside, but USDJPY will once again revisit 104 and below.

It’s taking longer than anticipated, but the primary trend (down) remains intact.

In general, JPY-correlated trading pairs have been a grinding affair lately.

Perhaps so we can get some insight into the future direction of yen pairs by looking at CHFJPY (the Swiss Franc versus the Japanese yen):

This is an ‘under the radar’ pair, but it’s worth a look this week.

The governing price pattern was established all the way back in 2015: a large double top. Ever since CHFJPY broke the neckline of that double top, prices have been unable to breach that line despite multiple attempts.

Currently, CHFJPY has formed a small symmetrical triangle and price action will shortly resolve to the upside or the downside. In my mind, the bearish price history suggests the most likely direction is down.

There was also a bearish key reversal last week, which is why I’m highlighting this pair today. (A bearish key reversal is when prices went much higher early in the week, and by the end of the week the price collapsed and settled on the low. This indicates that by the end of the week the sellers were in control.)

So my expectation is that CHFJPY is headed down … quickly.

Now here’s GBPNZD (the British pound versus the New Zealand dollar):

I’ve had to put GBPNZD in the “ambiguous column” for now due to the conflicting patterns in this pair.

For many weeks and years, I’ve formed bullish opinions in GBPNZD thanks to the double bottom and rounding bottom price patterns, both of which are joined by a common 1.80 neckline.

While 1.80 did become new support for GBPNZD and the price has trended up overall, the trend is now looking fairly tenuous.

There could be a potential head and shoulders price pattern forming, which suggests prices could go lower before they find a foothold.

I’m watching the current price action very carefully, but for now this pair is one I would now consider “ambiguous” as I wait to see future price action.

Now here’s XAGUSD (spot silver). During the pandemic, prices broke out above the seven year downtrend line.

We also had an inverted head and shoulders bull price pattern, which at the time I suggested would yield a robust move to the upside. We subsequently saw a breakout from the $18 level all the way to $30 -- almost a 40% rise in just three weeks.

Since then, silver has been very volatile and has thrashed around between $22 and $28.

I'm not sure if this is just “the pause that refreshes” in a continuing uptrend or if silver will instead collapse to the downside to retest the $19 or $20 breakout area.

The high (and apparently directionless) volatility simply reflects tremendous speculative retail interest and emotion right now. Typically that precedes a reversal in prices, yet silver has refused to drop significantly … yet.

How prices evolve in the next few days or weeks will tell us whether we're going to see a further decline in silver or a continuation in the breakout direction.

Gold is looking more bearish, though.

In this chart I'm looking at XAUUSD (spot gold) where prices dropped from over $1,960 all the way to the $1,850 area. This was the biggest price decline in gold in six years.

Just prior to that collapse, gold peeked above its descending triangle trendline. This suggests a bull trap for those who chased prices higher.

Another attempt at the $1,850 lows would increase the chances at a break to the downside with the target being the breakout area around $1,750.

I’m short gold right now, perhaps too early as I didn’t expect that head fake. My stop loss is around the $1,900 area which may be a little tight, especially if we see some kind of rise.

However, any rally that occurs should not be sustainable because I feel that ultimately -- by virtue of this descending pattern -- gold will break to the downside.

Let’s take a look at gold at the daily level to see why I feel so bearish:

The weekly descending triangle is more clear at this level, including the multiple touches of the $1,850 neckline.

Multiple touches like this suggest that the neckline is likely to give way and take out that price level. (Yes, just like USDJPY and its own descending triangle.)

That’s because a healthy market that’s going higher shouldn’t give you so many opportunities to get in that market. It’s too easy.

Combine that with the head fake/bull trap and the most likely direction is down.

Just remember that the long red bar on that daily chart was the biggest down day in six years in spot gold. So keep in mind the volatility and trade your risk accordingly.

Here’s the NASDAQ stock index, which has hit multiple resistance levels around current highs:

While this might appear to be a triple top, the price behavior doesn’t reflect that just yet. We haven't seen any huge key reversals and instead this just looks like a huge consolidation zone.

In fact, the path of least resistance still looks tentatively higher. And when I say “tentatively” I'm considering the rule of thumb that when you see a huge expansion of volatility, you typically get some kind of reversal price behavior and a drop.

That hasn’t happened so far. Prices could still launch higher and it’s a better idea to buy the dips rather than short the highs.

I’m watching this index for any kind of price behavior that would indicate a reversal of trend. But right now, the path of least resistance remains higher in US tech stocks.

This is borne out by the S&P500 as well:

This index broke out to all time new highs, even as it trades at the apex of a reverse symmetrical triangle. So this is definitely going to be an area to watch. This could be a huge potential resistance area (as with the NASDAQ’s new zone) but I'm not ready to go short yet.

I’m waiting for further price action, because even though the S&P500 is trading at a resistance area, it doesn't mean that prices can't keep going higher and actually break out of the symmetrical triangle.

Remember that price action ultimately directs everything I do and look at in the markets. Until the future trajectory is more clear, I’m happy to wait for price action to give me a clear signal as to what’s most likely to happen next.

And that’s it for the week!

To summarize, I’m bearish on the US dollar and bullish on the New Zealand dollar. I favor going long NZDUSD and NZDCAD accordingly. I’m bearish on USDJPY although it’s definitely trying my patience. I’m bearish on CHFJPY as I feel it will drop sooner.

GBPNZD is now in the “ambiguous” column for me, as are the US stock market indexes and silver.

I’m also bearish on gold.

I wish you a very healthy and prosperous trading week.