Gold’s Still Going Down – Beware The USD “Correlation”
This has been an interesting week with lots of emerging trends looking more promising than ever. Plus there’s also a few still stubbornly stuck in neutral for the time being. I’ll comment on each of these and make it clear which is which.
Let’s start with USDI (the US Dollar Index) which correlates the dollar against a half dozen of the most liquid currencies on the planet.
At the height of the pandemic, USDI hit a major resistance level that should hold for the next few weeks, months and possibly even years. At that time, investors rushed to safety by selling off their assets and running to the dollar.
But that created a huge bull trap when the dollar subsequently collapsed, as the price has mostly dropped since that time.
That bull trap is now the head of a bearish head and shoulders, a reversal pattern that looks to be strong enough to put an end to the 10 year USDI bull market. USDI recently retested the neckline of that pattern and then made a small double top, which is also bearish.
This has set the stage for the dollar going lower yet. I’ve highlighted the most likely short-term target, but I expect much lower prices in the dollar over the course of the next few weeks, months, and probably years.
Here’s AUDUSD (the Australian dollar versus the US dollar):
Thanks to the expected decline in the US dollar, AUDUSD should rise. Most major currencies should strengthen against USD, but I especially like the patterns and the price action in AUDUSD.
An inverted head and shoulders is quite bullish, especially when the right shoulder is higher than the left one. This creates a sloping neckline, which implies that not only is this a bullish price pattern, but that prices could bolt higher rather quickly.
There’s some resistance at the current 0.75 level, but I would use any setback in AUDUSD to establish a long-term position for a significant move to the upside.
My co-favorite pair against the US dollar is NZDUSD (the New Zealand dollar versus the US dollar):
There are some very bullish price patterns emerging here too. Those include a double bottom which has subsequently formed the head of an inverted head and shoulders price pattern. Both are bullish.
The neckline here is horizontal, not sloping as with AUDUSD, but NZDUSD has already broken through and is now at resistance at 0.70.
I feel there are much higher prices on the way here, so I would look to buy any pullback in NZDUSD for the long term.
Now here’s USDJPY (the dollar versus the Japanese yen):
My expectations are that the dollar will go lower against the Japanese yen.
This pair first showed bearish price patterns five years ago, starting with a double top which eventually became the head of a head and shoulders. Since then, a descending triangle has defined the price action with lower highs over a common low at 104.
USDJPY has hit that 104 low eight or nine times, so I expect it to give way sooner rather than later.
However, there’s a real struggle at the moment. This pair has been inching its way down with a “three steps forward, two steps” back routine. The support zone at 102 – 104 is posing a real barrier to the price action I expect to see in USDJPY.
Ultimately, this pair should give way but I'm not sure in what timeframe. It could be a very herky-jerky affair, but I would sell any rally in the expectation that USDJPY is going considerably lower.
Sticking with the yen theme, here’s EURJPY (the Euro versus the Japanese yen) which has been a tough chart to read:
That’s because it’s been bouncing between prices for the last couple of years. However, the way to determine the most likely price trajectory in a chart like this is to identify the governing price patterns.
While it looks like the path of least resistance may be still higher in EURJPY, I’m highly skeptical this will transform into a sustained rally because of the long-term bearish governing price patterns.
Those bearish patterns include the head and shoulders all the way back in 2014 - 2016, followed by the double top in 2017 – 2019.
EURJPY has stalled at the neckline of that double top. However, there appears to be a few pips left on the upside. I’m still long for that reason, but ultimately I'm watching for a turn that sends this pair lower.
That turn could be several days or several weeks away, so I’m not selling my long position yet.
Here’s GBPJPY (British pound versus the Japanese yen) for comparison:
GBPJPY has recently been making higher lows as it inches along the trendline of a symmetrical triangle. This triangle sits at the base of a major downtrend which started with a double top at the 195 price level. That double top was the head of a head and shoulders.
You can see that once GBPJPY cracked the neckline, this was the green light for much lower prices.
Because a symmetrical triangle is a neutral pattern where prices can break either way, I’m on the sidelines here until I see a clear sign.
However, I don't think it's going to be too long before GBPJPY bounces out of this symmetrical triangle. Just be aware that the very first move could be a bear trap (or bull trap) before price reverse violently in the other direction.
My best guess is that prices will eventually move down here. That being said, I want to see price action confirming that before I take a new position.
Continuing the GBP theme, here’s GBPNZD (the British pound versus the New Zealand dollar):
For the past three or four years, I've been very bullish on GBPNZD because of the double bottom way back in 2016 – 2017. This was followed by a rounding bottom soon after.
By and large, prices went higher until the height of the pandemic, when GBPNZD zoomed to 2.18 before settling 1,800 pips lower at 2.00 the same week. That’s now the head of a new head and shoulders which can now be viewed in conjunction with an older, historical double top to create a bear case here.
I think GBPNZD could now rechallenge the lows established by the double bottom unless it grabs some support along the way.
But for now, the path of least resistance appears lower here. I think we’ll see at least 1.85 on this move.
Another interesting chart is that of NZDCAD (New Zealand dollar versus Canadian dollar):
NZDCAD has been pretty range-bound with big moves back and forth, but I feel this pair is getting ready for a gigantic move higher.
This is largely by virtue of what didn't happen: there’s a huge double top price pattern here, one surrounded by multiple tops (shoulders) on either side to create a complex head and shoulders pattern.
This is very bearish, and you would expect that once it cracked the neckline of that pattern, prices would spiral lower. Instead we saw the opposite as NZDCAD formed a bullish double bottom.
I consider the complex head and shoulders a busted pattern now, and the bearish governing force it brought is no longer in force.
When a pattern gets busted because the price doesn't do what it's supposed to do, then it's going to go the other way – usually quickly.
The new and more important pattern in NZDCAD is that double bottom. And it looks like there’s nothing to stop this newly-bullish freight train from pushing up even more.
If you don't have a position in NZDCAD yet, consider establishing one soon as it doesn't look like there's anything standing in NZDCAD’s way. I would use any kind of pullback to take some bite sized chunks with the view of holding this over the long run.
Now a brief discussion before I get to my analysis of gold this week …
I want to offer a few comments about my trading approach and what I try and do in the markets.
Remember, my objective is always to is extract the bigger moves. I’m not interested in small moves and normally I don’t make many counter-trend trades (EURJPY is one of those exceptions).
I wait until a potential big trade is confirmed not just by the trend, but also a major pattern or two and then the most recent price action.
In a moment I’ll show you how gold collapsed from $1,950 to almost $1,750 in just the last few weeks – that’s a huge $200 move.
That’s exactly the type of move I like and I always want to take a huge chunk of these bigger moves. That’s how I overcome all the inevitable losers between the big trades.
This is also a good time to point out the myth in this business that many people feel you need to have more winners than losers to be a winning trader. I think that’s wrong.
To my mind, it's the quality of your winners versus the number of your winners that really counts. You can have five out of six losing trades and still be a winner.
This way you come out a long-term, consistently profitable trader. Especially when you’re doing better than one win in six! Even a 50% win rate can be very profitable when you trade for big market moves.
To illustrate my point, I want to direct your attention to a couple emails, starting with the one I sent out on November 9th advising members to sell gold at a limit of $1,871. This order was triggered and anybody who took that order was in the market. I suggested a take profit of $1,750.
I ended up jumping that and advised members to get out at $1,795. That may have been a little conservative in hindsight (I still expect the market to go to $1,750), but given the huge price move lower, I thought it advisable to take profits.
We ended up taking 760 pips out of this trade
I also advised members to add to their short gold position by selling another position at $1,875 on a sell stop.
This order was also triggered and the take profit at $1,817 was also triggered, bagging another 580 pips.
This is how we took 1,340 pips from gold in over just one week as this huge move materialized.
Even if you’d lost 100 pips on each of five losers before this trade, you’d still be well ahead with a large profit like this one. That’s why waiting for big trades is well worth it. You just need to ride out the tough times with careful risk management until you’re onto another major win.
I hope that all makes sense!
Now to my analysis of XAUUSD (spot gold):
Many months ago, I began advising members to bail out of their long positions in gold due to the huge volatility expansion we saw at the time. There were three weeks where XAUUSD moved $80 - $100 a week as it ramped up from $1,780 all the way to almost $2,100.
When you have a huge volatility explosion, it often precedes a slowdown or a turn in the market. And that's exactly what we've seen.
Gold also recently formed a bearish descending triangle, one that featured a bull trap where prices broke out above the trendline before crashing back into the triangle. That bull trap was one of the biggest one-week downturns in six years.
It’s why I advised members to continue looking at the short side of gold. We had several profitable short trades although none went as far as I would have liked.
Finally the most recent of those trades paid off with a huge $200 crash in just the last couple of weeks.
What catalyzed that most recent win?
Within the triangle, gold formed an inside bar. An inside bar can be thought of as a coil or a spring representing stored energy ready to be released explosively. I anticipated this release would be to the downside by virtue of the bearish descending triangle.
With last week's price action, XAUUSD came very close to the $1,750 target I foresaw.
We took our profits, but there could be more to come. Here’s another view of XAUUSD incorporating an ascending broadening formation:
As you’ll see in a moment, this is a pattern the NASDAQ stock market has also established.
And if this proves to be correct, we could see a move to the lower edge of the formation. This means a gold price under $1,700 if gold hits that lower trendline.
Let’s take a look at the daily timeframe to see if there’s more evidence to support this idea:
Here we can see the weekly descending triangle a little bit more clearly. Especially the way it’s tested $1,850 over and over again.
The more times something tests a support area, eventually it's going through that support. This was my hypothesis for the last several weeks and it’s finally played out as expected.
There was another bearish sign too: the head and shoulders within the triangle, with the head being the short-lived bull trap that poked above the trendline.
Since XAUUSD has now broken out of the triangle, it’s reasonable to expect a retest of the neckline at $1,850. If so, use that opportunity to sell the rally because I anticipate that gold still has further to go on the downside.
This is a good time to mention another key point about trading in general.
We know that gold is correlated to the US dollar and recently the dollar has been going lower too. Because of this association, most people assume gold and the US can only move in opposite directions. (Meaning that if we have a collapse in the dollar, then gold should go higher.)
Instead gold has collapsed alongside the dollar. In fact, gold on a relative basis has gone down more than the dollar.
This is why it's dangerous to trade with certain correlations in mind. Just because you think the dollar’s going lower doesn’t mean you should automatically buy gold.
Instead analyse what the chart is telling you in each case. Whether you're trading pork bellies or the dollar or gold, just look at what the chart pattern is telling you in that particular instrument. That’s how I do it and I strongly recommend you do the same.
Now let’s take a look at XAGUSD (spot silver) on a daily basis:
Some months ago, silver broke out from an inverted head and shoulders pattern and ran from $20 to $30. More recently, we've seen much more bearish price action in the form of what looks like a fairly ominous double top.
The second of the two tops is also a head and shoulders (much like XAUUSD) and silver is trading at the neckline right now.
While there’s a bit of support at this level, silver looks likely to retest the breakout area at the $19 to $20 level. I’m therefore silver on bearish for now.
To finish off this week, here’s the NASDAQ stock index:
You can see the ascending broadening price formation I pointed out in gold too.
But unlike gold, the NASDAQ has grabbed support and enjoyed an enormous rally that’s carried it outside the formation to very high levels.
Volatility is definitely expanding here but (also unlike gold) the NASDAQ continues to move from strength to strength and the path of least resistance appears higher.
With this volatility, I would expect some kind of snapback at some point, or at least a consolidation. But so far there's been nothing to stop this market. I would not get in the way of the NASDAQ right now.
And that’s it for the week!
To summarize, I’m bearish on the dollar, gold and silver as well as GBPNZD. I’m bullish on AUDUSD, NZDUSD and NZDCAD. The yen pairs should go down eventually but are taking their sweet time about it and may still rally in the short term. The stock market should correct one day but remains unstoppable right now.
I wish you a very healthy and prosperous trading week.
Mark "USDCollapse" Shawzin