Changing of the Guards? What To Trade Now
Four key events happened last week which may signal major changes in the trends of various asset classes.
Last week we saw the dollar hit a snag at a long-term resistance level … the yen rise … gold soar to six-year highs … and the U.S. stock market reverse markedly from its all-time highs.
These market events (weaker dollar, higher yen, gold strength, and a stock market reversal) have led me to openly question as to whether we’re seeing a “changing of the guards” in the major asset classes.
You see, for the past decade, we’ve watched equities and the dollar soar in a “risk-on” environment. And when we’re rushing along the raging torrent of such macro trends, it feels like these things will go on forever. However, we also know this is not possible. Easy money papers over a host of sins, but eventually those flaws are exposed.
As Warren Buffet puts it, “You only learn who has been swimming naked when the tide goes out…”
Now it may take the rest of the summer for these emerging trends to play out …
… or else be revealed as nothing more than fakeouts before the real “changing of the guards”.
But for now, let’s examine the possibility these trends are beginning now, starting with the U.S. dollar weakness.
The US Dollar Index (USDI) once again failed to penetrate above a multi-year resistance level. And last week's major key reversal suggests the dollar could continue weakening over the course of the year.
As you can see in the USDI chart above, the dollar’s been trapped in a huge congestion zone near current levels.
And while the dollar has been in a long-term uptrend, this is increasingly fragile due to the number of bearish key reversals at long-term resistance. (A bearish key reversal is where the price makes a new high but closes at or near the low of the week.)
At best, the dollar appears to be in a holding pattern as the market awaits the expected rate cut announcement from the Fed at the end of this month.
If the Fed cuts by 50 basis points then the dollar will weaken significantly.
Otherwise, I’m not sure how weak the dollar is likely to get.
But recent weekly price action reversals in AUDUSD (the Australian dollar against the U.S. dollar) suggest a bottom – whether temporary or permanent – has been established.
There’s market support for AUDUSD showing up with multiple bullish key reversals. (That’s where the price made a new low but closed at or near the high.)
That suggests this market is going higher – the question is whether there’s a significant move ahead of us or nothing more than a consolidation within the prevailing downtrend.
As you can see, the recent downtrend line is containing the price action for now. AUDUSD needs to go through the 0.72 level before we can say there’s a bull market. For now, the most likely price action would be sideways between 0.70 and 0.72.
Now for my favorite risk/reward short: USDJPY (the dollar against the Japanese yen).
There are multiple dominant bearish price patterns on this chart including the head and shoulders with a double top, plus the descending triangle marked by a succession of lower highs.
I remain short this pair because I believe we’ll see 104 at the lower edge of the descending triangle sooner or later.
Having said that, typically listless FX trading during the summer months could mean we move sideways for the next few weeks before the next leg down.
While we wait, I expect gold (XAUUSD) to continue to do well.
But before we look at the yellow metal, let’s check out silver (XAGUSD) first.
Silver has been in a slumber for several years within a descending triangle.
It’s been very bearish … until now. Silver has finally broken out against my earlier (and bearish) expectations. The only forewarning we had of this breakout was that on its most recent downturn, silver failed to hit the neckline of the descending triangle as it always had for the last several years.
The latest development means silver’s descending triangle is now busted on the monthly chart.
The next level of interest is the $18 area. Silver has to break that and hold above it before we can declare a genuine silver bull has joined the newborn gold bull.
That bull may be a bit quiet at the moment, but after last month’s significant breakout gold’s price action looks very strong.
We can now say there’s an inverted head and shoulders driving gold up. A complex inverted head and shoulders, that is. There are multiple shoulders on each side of the double bottom as I’m showing you here.
And right now we’re consolidating after the breakout. Gold needs to rest for a bit before the next leg up.
As I demonstrated in previous reports, we can project the likely target of this gold bull market by taking the height of the inverted head and shoulders ($350) and projecting it above the head and shoulders neckline at $1,400. That gives us $1,750 as a likely target in the months to come.
Meanwhile, the NASDAQ 100 made a new high last week but closed at the very low of the week.
That’s a textbook key reversal!
It doesn’t mean a crash is imminent, but it’s significant that this reversal happened after a new high.
That type of price action often indicates a bull trap. A bull trap is otherwise known as a false breakout – it traps the bulls into losing positions as the market reverses and heads south to the lows of its current range.
So keep that in mind if you’re inclined to chase this stock market up right now.
Another point: in the last few weeks, the stock market soared to all-time new highs based on indications of the Fed lowering interest rates by just 25 basis points. This leads me to question the strength of this economic expansion. After all, if it’s so robust, why’s the market rallying on the whiff of a small cut in rates? Why, after a decade long rally, does the market still need its “training wheels on” (lower rates) to sustain this rally?
Also factor in the increased volatility that began in 2018. See how long the bars became at that point? There were very short until then, and suddenly volatility began spiking in the early months of 2018.
A significant pickup in volatility often precedes a change in market direction, so that’s another reason to consider being bearish.
If you’re inclined to short this market, place a sell stop below last week’s low with your stop above last week’s high. Otherwise, I’m prepared to stay on the sidelines for now and see how things play out over the summer months before the real action begins in the fall.
Don’t forget that all good things must come to an end. We will see if last week’s reversal at all-time high's translates into a “bull trap”.
I remain long gold and short USDJPY while we wait.
I wish you a very healthy and prosperous trading week.
Mark “GuardChange” Shawzin