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A New Currency King Emerges (Plus Bad News for Precious Metals Bulls)

Mark Shawzin
September 11, 2019

Following a surge to a multi-year high last week, the US Dollar Index (USDI) reversed course at a critical inflection point on the historic 42-year charts.

That inflection point is apparent on the long-term chart we see below with its successively lower highs. USDI is now at a significant resistance area.

So what’s next?

The descending triangle suggests USDI will oscillate lower over time, rather than higher, even if it goes higher in the short term.

Does that mean it’s time to short the dollar yet? No (or probably not), as you’ll soon see.

But I’m showing you this 42-year chart now to give you a good long-term perspective on the dollar’s price history. Long term, it suggests the dollar is headed lower.

The short term is a little different. The jury is out as to whether last week’s dramatic dollar reversal opens the floodgates to a move lower…

… or if it’s just a pause that refreshes within the USD bull market we’ve seen over the last few years.

At the moment, I’m inclined to go with the ‘bull market pause’ interpretation as the weekly chart looks decidedly bullish.

You can make a bear case for the dollar, of course: USDI made a multi-year new high and then closed at the low – that’s a major key reversal. Plus this key reversal occurred at a major resistance level, which makes it even more significant.

However, I’m still in the bullish camp. That’s because there’s a strong uptrend in this weekly chart which has not yet been broken. USDI has room to fall from this key reversal while keeping the overall bull trend intact. If that trendline gets broken then I’ll reconsider being bullish on the dollar.

In the meantime, EURUSD, GBPUSD, AUDUSD and NZDUSD (the Euro, the British pound, the Australian dollar and the New Zealand dollar, respectively) bounced significantly last week. The bounces came at long-term support lows too.

While we could see further short-term rally momentum, I think each one will ultimately revert in the direction of their primary downtrends.

EURUSD is a good example of this.

Here we see a multi-year low and a key reversal from that level. In many circumstances this would be bullish. However, this pair has done this several times before and still ground lower after the initial bounce

There’s no real bottom apparent here at all. And that’s why I don’t see a scenario where EURUSD is about to turn around and go on an extended bull run. At best the price will slide sideways before the next leg down

Now let’s look at GBPUSD.

This pair made a major bounce from new lows from support at the 1.18-1.20 area.

Is this a double (or even a triple) bottom? Quite frankly, I don’t see that happening any more than for EURUSD.

That’s due to the long-term downtrend, the double top, and the head and shoulders patterns which are all bearish. I expect we’ll see new lows below the existing support level sooner or later.

It’s the same story for AUDUSD: a bounce off new lows but as with the other pairs it’s unlikely to last very long or go very far

The overall downtrend, double top and successively lower highs all point to continued bearish action.

But there is one currency – and currency pair – I think will benefit greatly even if the dollar remains strong. This currency is the presently the strongest currency versus ALL major currencies.  

I’ll get to that in the moment, but first a word on a pair with a bullish future ahead of it and one with a bearish future.

Following a bounce from significant support levels around 1.83, GBPNZD (the pound against the New Zealand dollar) is consolidating between 1.90 and 1.93. Based on the inherently favorable long-term bull price patterns, I expect this pair to head higher over time.

There will likely be a lot of volatility in this pair going forward, however.

GBPNZD is typically very volatile and right now it has lots of room to swing around within the symmetrical triangle we see here. I do expect the eventual triangle breakout to happen on the upside, though. That’s why I see dips in GBPNZD as buying opportunities.

I’m still bearish on USDJPY (the dollar against the Japanese yen).

When I went short earlier this year, my objective was to ride this pair down to the support level at around 104. That’s happened, and now we’re bouncing from that level.

I’m monitoring this pair with an eye on going short at what appears to be the top of the next bounce. I expect any such bounce to be contained within the descending triangle we see here.

Once I’m short again, I intend to ride the price down to parity with the dollar at 100.

Now for the strongest currency I mentioned earlier, the one even stronger than the U.S. dollar right now.

It’s the Canadian dollar (CAD).

The Canadian central bank appears to want to avoid interest rate cuts right now and that will translate to CAD strength over time. Let’s look at the monthly USDCAD chart first:

Here we see a long-term symmetrical triangle. Due to a lack of follow through from what looks like it should have been a double bottom, USDCAD should start heading lower over time.

You see, the price action after the double bottom is not consistent with that pattern.

That’s because the price failed to take off following the apparent breakout. Now it’s about to drop down to the breakout area once again (and probably through it). A real double bottom doesn’t behave like that.

In fact, USDCAD’s current price action looks like a bull trap to me.

I see a great looking opportunity in EURCAD right now. This pair looks set to go lower with a breakdown below support in the last week.

There’s also plenty of bearish history here to support the expected move down, such as a double top and descending triangle. EURCAD’s price has retraced since the initial breakdown and now looks set to be making new lows sooner rather than later.

This is about as strong a short signal as I can imagine. Just as good as my short USDJPY call earlier this year which netted us hundreds of pips. To me, the biggest risk in this pair right now is NOT being short.

So consider shorting any rallies in EURCAD and waiting for the rewards.

You could also go short AUDCAD too as that’s looking bearish as well.

Here’s there’s a double top and a large rounding top where the neckline has just been broken in recent weeks. With AUDCAD, we’ll likely see a bounce back to the neckline before any serious downside action. That will be an excellent opportunity to go short this pair.

Things look a bit different with NZDCAD, although I still hold a bearish verdict for this one.

NZDCAD still has to break its long term support. However, I think it will do so soon based on the prominent Adam and Eve double top here, plus multiple shoulders on each side making a complex head and shoulders pattern.

An Adam and Eve double top is where one top is a spike (Adam) and the other is more rounded (Eve). Such a double top is a reversal price pattern.

That makes NZDCAD another short on any bounce.

So what about the precious metals?

The news isn’t good if you’re a gold bug or a silver bug, I’m afraid.

The outsize key reversal in XAGUSD (spot silver) last week appears to be a “dagger-in-the-heart” to the bulls in this pair.

Here’s why: this market has been flat for so long — with multiple retests of the lows — that it’s had very little opportunity to build any momentum to the upside.

I feel this key reversal has halted the newborn bull in its tracks for the foreseeable future and the recent rally can now be viewed as a bear market rally. Not a bull market.

That means we’re likely to see a lot of whip-saw price action and high volatility at and around current levels. I’m inclined to short any sharp rallies in XAGUSD when and if they present themselves.

Gold is looking better but I’m now bearish on this metal too.

For the past two consecutive weekly sessions the price of XAUUSD (spot gold) has stalled and reversed at the $1,555 price level. While it may not be an ultimate turning point, it feels like the $1,555 resistance level will hold for some time.

So I’m looking for a potential move down in XAUUSD to $1,465.

That doesn’t mean gold will go straight down, of course. We’ll likely see lots of dips and rallies along the way until solid support can be established. Consider taking a short position on any rallies with a probable bottom forming around the $1,465 level.

The stock market looks quite bullish in contrast.

U.S. stock markets have shown enormous resilience and all major US stock indices now sit not far from their all-time highs.

By way of example, the S&P500 remains in a long-term uptrend sustained by multiple key reversals to keep the bull alive.

How can stocks show such staying power?

Perhaps it’s because the S&P dividend yield is now above the 10-year Treasury yield. Accordingly, in the face of a global economic slowdown, and tremendous political uncertainty, the U.S. stock and Treasury markets are providing a “safe haven” to global investors.

The path of least resistance in U.S. stocks remains higher. At least for now. This is not a market to be shorted at this time.

​​So let’s recap: I expect continued strength in CAD and JPY and continued weakness in NZD. Silver and gold are on the way down, at least in the short term, whereas U.S. stocks are likely on their way up (again).

I wish you a very healthy and prosperous trading week.

Mark “TheStrongestCurrency” Shawzin