A Tale of Two Dollars … And Precious Metals Too
Last week the US Dollar Index (USDI) surged to its highest level since May 2017 as greenback strength dominated currency price action.
So it seems the U.S. dollar is set to continue its advance against all other major currencies except one.
It’s easy to make a bullish case for the dollar-based on this inverted head and shoulders pattern within a long-term uptrend. While head and shoulders are often reversal patterns at the end of a trend, in this case we’re seeing it acts as a continuation pattern to support another leg of the dollar bull.
As you can see, the left shoulder is much lower than the right shoulder. This creates a sloping neckline which points in the direction of the continuing trend.
There’s further confirmation of dollar strength in the EURUSD pair (the Euro against the dollar). In fact, EURUSD is effectively an upside-down version of USDI since the Euro is the most heavily weighted currency in the USDI index.
When EURUSD crashed through the neckline of it's head & shoulders pattern, the price kept grinding lower within a trending channel. Any rallies were short-lived.
As with USDI – except going down instead of up — the head and shoulders act as a continuation pattern within a prolonged long-term downtrend.
EURUSD has now traded under 1.10 and appears to be on a trajectory to its Jan 2017 lows around 1.03. I think we’ll ultimately see parity (1:1) with the dollar here.
GBPUSD (the British pound against the dollar) is another pair that’s been in a long-term downtrend for the last several years.
Here we see a double top acting as the ‘head’ of a longer-term head and shoulders with multiple shoulders on the right side.
GBPUSD has temporarily found support at historical support levels but I don’t expect that to last for long. The rally we’re seeing right now should run out of steam soon.
At best, the price will slide sideways for a while before crashing to new lows.
In the title of this Report, I alluded to a tale of two dollars.
The first dollar is USD and its overwhelming strength.
The other dollar is NZD (the New Zealand dollar) and it’s pretty much the opposite story to USD. That’s because the New Zealand dollar is the weakest of all the major currencies right now.
NZDUSD is now trading at multi-year lows going back to 2015 and I expect those lows will be taken out soon. Note the large double top within a complex head and shoulders and how the support levels have all been breached one after another. There is nothing bullish about this chart at all.
For additional context, here’s how NZDUSD looks at the monthly level:
You can see the double top that formed from two highs in 2010 and 2015 and how it’s been all downhill since then. The sole rally halted with a mini head & shoulders pattern (or triple top, if you prefer) at the neckline of the earlier double top.
There’s a lot of white space under the current price so there’s lots of room for NZDUSD to drop in the weeks and months to come. In fact, I wouldn’t be surprised to see a re-test of NZDUSD’s all-time lows on this chart.
The U.S. dollar is king against everything except the Japanese yen (JPY).
USDJPY is the one pair I expect to counter the “stronger USD” trend and work its way lower. The double top forming the head portion of the head and shoulders pattern has defined the price action for literally years and I don’t see any evidence that will change.
USDJPY has never recovered from the bearishness signaled by that pattern.
This pair did catch a bid at relatively recent historic levels and bounced a bit. But I don’t expect this to hold for very long.
The descending triangle pattern means we could see some sideways action, even a couple of rallies before it crashes through the neckline. Look to sell any such rallies to take short positions.
Patience will be rewarded if you get short this pair and wait it out.
In a weakening global economy, it’s a race to the bottom amongst competing currencies. Some are weaker than others.
While neither the pound and the New Zealand dollar are pillars of strength at the moment, NZD is even weaker than GBP. And that’s why we’ve enjoyed some recent success on the long side of GBPNZD.
For the bullish case, note the historical double bottom followed by the rounding bottom. GBPNZD held at key support levels ever since.
Right now this pair will probably be very volatile for the next few weeks between 1.90 and 1.93, but the long-term trend is up thanks to NZD’s extreme weakness.
Consider using any dips as buying opportunities before the next leg up. I expect this pair to head higher over time.
Now onto commodities, starting with crude oil.
This is a bearish chart marked by a long-term downtrend and not one, but two double tops that halted any presumptive rally in its tracks. What’s more, there’s a pronounced downtrend with inside week bars underway right now.
That strongly suggests a significant move lower in the foreseeable future. Consider shorting any rallies that appear.
Meanwhile, it’s a very different picture in the precious metals.
The surge in XAGUSD (spot silver) continued unabated last week, while the price of XAUUSD (spot gold) stalled for now.
Since the gold/silver ratio maxed out at astronomical, multi-decade highs last month (the measurement reached around 93), this ratio has come back down to earth and is currently trading at around 82. Historically, the gold/silver ratio trades around 50.
That suggests there’s more room to go on the upside for XAGUSD.
It’s been quite a run already, seeing as how silver stagnated for years with multiple bottoms at $14. But today is a different story.
The recent double bottom had a neckline at $15.50 and the price has surged north since breaching that level. Silver currently needs to clear a couple more resistance levels to get the worst of its price action behind it. Once that’s accomplished XAGUSD has a free run into the low to middle 20’s.
So how about gold? XAUUSD has been on a run since clearing its six-year resistance level after multiple failed attempts.
However, the yellow metal is now taking a bit of a breather. The price just made a key reversal after an attempted breakout past old highs. This isn’t bullish.
I’m not expecting a significant drop from here. But we’ll likely see a pullback in gold for the next few weeks. Perhaps the price will drop to the $1,480 level and slide sideways as it builds support before its next run.
This could very well be the “pause that refreshes” for the new gold bull. I will be looking to buy any dips to build a long position in gold.
I’m less confident about entering the stock market right now, despite last week’s rally.
In the face of conflicting news and reports of the US-China trade war, interest rate curve inversions and other anomalies, the U.S. stock markets have shown enormous resilience to close at the high end of their respective trading ranges.
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 US stock, and Treasury markets are providing a “safe haven” to global investors.
Here’s the weekly chart for the Dow Jones Industrials (Dow 30):
There have been some huge price movements lately with significant volatility. This type of market often leads traders to make rash decisions.
So please be careful. Try not to make any emotional trades based on the events shaking the markets right now. Don’t trade the headlines or you’ll likely get whipsawed by the extreme volatility.
That’s because I believe the most likely path forward is continued extreme volatility without any real trends established. This is not the kind of market I like to trade
There’s still an intact uptrend, of course. And the market has made bullish key reversals to keep that uptrend alive. However, there’s also significant overhead resistance too.
A market without a clear direction is a market I want to avoid.
In the meantime, I expect relative strength in the U.S. dollar and weakness in its New Zealand counterpart. I remain bullish on the precious metals too.
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I wish you a very healthy and prosperous trading week.
Mark “DollarSurge” Shawzin