Gold’s on the Way Up as the Dollar Hits Major Resistance
Is it significant or not?
Once again, the US Dollar Index (USDI) failed to penetrate above a multi-year resistance level last week.
Considering the 42-year length of the USDI (U.S. Dollar Index) chart shown above, it could prove to be a major inflection point.
Especially when you take into account Fed Chair Powell’s remarks about lowering interest rates … the various trade wars/spats in which the Trump administration has embroiled itself … and the apparent currency ‘race to the bottom’ between major central banks all intent on cutting rates to zero or below.
As you can see, the dollar has rallied significantly since 2010. Yet despite all that momentum, it remains bounded within its very long-term descending triangle.
As a pattern trader, I pay a lot of attention whenever we see a triangle. That’s why I know descending triangles like this one can be continuation patterns and also reversal patterns.
So which one is this? It depends on whether the trendline can be broken (or not).
The answer so far is that the dollar can’t break that trendline. And since each major dollar rally has been followed by a substantial decline over the last 42 years, that adds weight to the suggestion we’ll see a decline shortly.
This has enormous implications for just about everything in the FX universe including gold and other commodities and just about anything normally priced in U.S. dollars.
But let’s take a closer look at the weekly chart before we start prognosticating too much:
Last week's bearish key reversal in USDI suggests the dollar could start weakening into the summer. (Bearish key reversals are where the price makes a new high before closing at or near a new low.)
This isn’t the first key reversal, either.
Price action over the last year or so has been bearish with multiple key reversals that settle on the low of the week. Each reversal means the sellers are firmly back in control by the end of every breakout attempt.
Key reversals typically point in the future direction of the price. Sometimes not right away (as we’re seeing here) but the breakdown happens eventually.
That suggests that once we break down below the lower edge of the current trading channel, then things will get really interesting. That’s when we get to see if there’s a major move in the offing – such as breaking below the long-term uptrend line — or if the dollar’s going to remain within a wider sideways range.
It’s too early to tell just how weak the dollar is likely to get, but recent weekly price action reversals in AUDUSD and other dollar-related pairs suggest the dollar’s strength is about to recede.
A dollar top – whether temporary or permanent – has been established.
Let’s look at AUDUSD (the Australian dollar against its U.S. counterpart) first.
As you can see, this pair has grabbed a foothold at a major support area. There are also bullish key reversals at the bottom. (These are the opposite of bearish key reversals in that the price sets a new low and then rebounds to close at or near a new high).
This price action has changed my earlier bearish stance on this pair. I’m not bullish yet, though.
That’s because AUDUSD still has to break the downtrend line and hold above 0.73 and then 0.74 before we can be truly bullish on a major uptrend lasting weeks and even months.
For now, at least a temporary bottom has been established here and at the very least we’re in for sideways action in the 0.70 – 0.72 range for the next several weeks.
GBPUSD (the British pound against the dollar) is also showing signs of strength despite GBP being one of the weakest currencies across the board.
There are a lot of reasons to be bearish here: the prolonged downtrend, a prominent double top, and then more recently a rather crowded head and shoulders pattern.
All that, and yet we’re seeing a bounce at recent support levels combined with a key reversal – just as with AUDUSD.
The other similarity with AUDUSD is that I’m ambivalent that this is a significant bottom – it could very well be temporary. You see, because GBP is one of the weakest currencies across the board right now, it’s a good idea to take a look at another GBP pair before I start feeling bullish here.
GBPAUD fits the bill perfectly since we’ve already looked at AUDUSD.
In this pair, we see a reverse symmetrical triangle. As with conventional triangles, these can be continuation or reversal patterns.
I’m leaning toward a continuation of the earlier downtrend that started a couple of years back. That’s because recent price action has given us a double top with key reversals. All without breaching the upper side of the triangle.
In fact, GBPAUD broke the neckline of that double top and then established an inside week bar last week.
I always find inside bars very significant in spite of the fact they’re such small bars. That’s because the small size of the bar represents a coiling of energy. That stored energy is always released explosively, one way or the other. The direction of the energy release can often be predicted in advance.
In this case, the double top and key reversals suggest a strong move downward to 1.75 and perhaps even 1.70 from current levels. The bottom line of the reverse triangle would represent the most likely support level.
Here’s another pair I think is set for an imminent drop: EURNZD (the Euro against the New Zealand dollar).
EURNZD is tracing out a complex head and shoulders right now. (A ‘complex’ head and shoulders is when there are two or more shoulders on each side of a more prominent head in the middle.)
There’s also been a bearish key reversal.
That’s of course very bearish all together, but right now the pattern isn’t yet complete. The pattern neckline is around the 1.55 level. If and when we breach that level, that completes the pattern and would set this pair on a trajectory for a much lower price.
Last week’s key reversal suggests shorting this pair represents a very good risk-reward opportunity.
Now onto my favorite short: USDJPY (the dollar against the Japanese yen).
Unlike AUDUSD and GBPUSD there’s no ambiguity with this pair in my mind.
I’m very bearish thanks to the double top back in 2015 which was followed by a descending triangle. You can see how that triangle’s succession of lower highs just keeps driving USDJPY lower.
Most recently this pair formed a mini double top from which it has yet to recover. That’s why I believe the best risk/reward FX trade right now remains short USDJPY.
In last week’s email stated, “…. I believe any price rise (in USDJPY) will inevitably flame out, and this pair will head in its primary direction…lower.” That’s exactly what happened.
Last week, following a rise to the 109 price level, this pair collapsed under 108 with a key reversal by the end of the week.
That key reversal is a strong indicator we’ll be heading even lower soon. I believe USDJPY will challenge the 104.50 December lows in the not to distant future too. That’s why I’m still short from the 111.50 area and plan to keep holding until we see the 104.50 level here.
If you’re not short this pair yet, consider entering with a sell stop at the 107.75 area under last week’s low.
Because of typically lackluster summer FX market performance, don’t expect to see 104 in the next couple of weeks though. USDJPY could slide sideways for a short while before the real action starts.
If you’ve been following these reports, you know I’ve been paying a lot of attention to XAUUSD (spot gold) lately too.
Following a breakout above a six-year high to $1,440, XAUUSD has settled in a consolidation zone between $1,380 and $1,440. I believe this pair has put in a major bottom and will head higher for the next few years.
The monthly chart shows just how significant this breakout is from a long-term perspective:
As you can see, gold broke out from a symmetrical triangle going back 10 years. What’s more, there’s an inside bar forming in the current month. That represents stored energy that’s most likely going to be released upward as XAUUSD is still trading above that six-year resistance level.
We see more support for this view at the weekly level.
Here we see a double bottom in 2015 as part of a complex inverted head and shoulders. Remember, a complex head and shoulders are one with multiple shoulders on each side of the more prominent head in the middle.
This pattern was confirmed after a very long wait with that break above the neckline. It feels like we’re headed substantially higher … finally!
We can even measure the most likely move up by taking the height from the bottom of the pattern to the neckline and extending it upward. From the chart, this is $1,050 to $1,400 which gives us a $350 range. Add $350 to $1,400 and we get the $1,750 level which I expect to reach over the course of the next several months.
Meanwhile, the U.S. stock indices soared to all-time highs.
It appears the path of least resistance in stocks remains higher (for now). The S&P500 has closed at new highs as you can see:
Everything looks great, right?
However, I’m getting the feeling chasing stocks at current levels could turn into a trap in the not too distant future. That’s why I’m not chasing any index trades right now. The strength is too much for me to consider a short, yet I’m not confident enough in the staying power of this rally to be bullish either.
I’ll be willing to go short when we see a key reversal or other such sign to warn us a downturn is imminent. Until then I will remain on the sidelines even though expect the S&P500 to continue trending higher one way or another.
I wish you a very healthy and prosperous trading week.
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I wish you a very healthy and prosperous trading week.
Mark “USDInflection” Shawzin