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The Newest FX Bully in the Markets

Mark Shawzin
December 16, 2020

A contender for the strongest currency in FX is now emerging and there are several ways to trade this exciting new development. I’ll cover those in detail in just a moment.

But first, a word on the US dollar …

The USDI (the US Dollar Index) tracks the dollar against a half dozen of the world’s major currencies.

I've been saying the same story as far back as March and April when I felt the then-current spike was likely the peak for a very long time in the US dollar.

Ever since then, week over week and month over month, the US dollar has done nothing but track lower. This is unlikely to change due to longer-term and newer trends. USDI has made both a long-term double top and a short-term head and shoulders. Both are bearish.

In fact, once USDI crossed the neckline of that head and shoulders, it provided final confirmation that this reversal pattern is in full force and effect. USDI’s previous 10-year uptrend is now a downtrend.

What’s more, USDI just traced out an inside bar. Such inside bars build energy for a subsequent explosive release, usually in the direction of the major trend.

That's what I would expect over time, but there could be some minor short-term support at the current level. How could this happen?

Well, the dollar has gone down very quickly lately. I wouldn’t be surprised if it takes a breather at current levels.

Then again, any penetration below the inside bar would open up new and lower levels.

One other thing: since breaking below the neckline of the larger head and shoulders, USDI has carved out a mini head and shoulders with a double top as it rebounded off that original neckline.

That adds extra bearishness even if the price does snap back in the very short term.

The summary of all this is that on balance, a weaker USD will be the big story for a very long time. I would look for any significant dollar rallies to get short.

My favorite pair for a dollar short on a risk-reward basis is AUDUSD (the Australian dollar versus the US dollar). That’s because the Australian dollar is strengthening against most major currencies across the board, and especially against the US dollar.

Until recently, AUDUSD has been in a 10-year decline. It dropped from about 95 cents at its peak to about 55 cents at its trough. And at the height of the pandemic, AUDUSD made a panic low and then rebounded to create a bear trap. Anybody who chased those lows and didn't take their profits quickly is now trapped in a wrong-way market.

Not only that, AUDUSD has formed an inverted head and shoulders which is just an upside-down version of what we saw in USDI.

This particular inverted head and shoulders is a bit different than a “normal” one though. The right shoulder is higher than the left one. That creates a sloping neckline, which is even more bullish than a flat neckline. Prices are even more likely to burst through and get traction very quickly.

That being said, consider taking some profits if you were long AUDUSD from a few weeks back when I first recommended this trade. I’m still very bullish on this pair, but in the short-term you might want to take some profits, reduce your risk and keep the rest for the long term.

I still recommend buying AUDUSD on any dips that materialize because I expect this pair will

to go much higher in the months to come.

Now let’s look at a couple other Aussie pairs, starting with AUDCAD (the Australian dollar versus Canadian dollar):

AUDCAD has turned around significantly and like AUDUSD also exhibits an inverted head and shoulders with a sloping neckline. So I feel this pair will be bursting upward very soon.

In fact, with last week's key reversal, the market closed on the high on the high after making a new low. The buyers are now firmly in control.

AUD has become the new “bully on the FX block” and is likely to go higher against most liquid currencies around the world.

So let’s look at GBPAUD too (the British pound versus the Australian dollar):

Again, the Australian dollar is stronger.

Because of the way this pair is configured, a stronger AUD in GBPAUD means the pair will drop. (Note that in AUDUSD and AUDCAD the AUD is in the first “base” position whereas it’s in the second “cross” position in GBPAUD. If AUD is stronger than GBP then GBP is weaker than AUD and so this chart price will drop.)

The pattern behind GBPAUD weakness is the formidable long-term head and shoulders pattern now in place. Price has just broken through the neckline with a huge move. And when price crosses a neckline, it's typically a green light for further momentum in that direction.

However, given the fact GBPAUD had a very large trading range last week (500 - 600 pips) it’s not wise to short it with a sell stop here.

I feel we’re likely to see a rebound before the next leg down.

So try to get short here with a limit order. Normally I prefer stop orders to catch a move’s momentum, but in this case, a limit order seems to be a better tactic. (We’re trying to short any rally that appears.)

Of course, the danger with a limit order is that price could retrace but not hit the limit price before heading lower. The other risk is that GBPAUD could bounce much higher than expected before the drop, leaving you exposed to an adverse price movement.

That’s why I typically don't use limit orders, but here it's worth the risk as I think this market is going much lower after any short-term rally.

One of the other dollar-correlated trading pairs I'm watching is USDJPY (the dollar versus the Japanese yen):

There are a multitude of bear price patterns extending back many years here, starting with the double top and head and shoulders in 2015. USDJPY headed sharply lower after cracking the neckline of that pattern, then rebounded all the way back to the neckline before forming a long-term descending triangle.

This triangle has been very much a “three steps forward, two steps backward” grind as it gradually keeps working its way lower over time.

Most recently, USDJPY has formed a coil of tightly wound prices with no real direction one way or another.

Coils always indicate a containment or suppression of energy. And once that energy is released, it will move price explosively. I expect this movement to be lower but given that USDJPY is close to the 104 support area, we might get one more move higher before the major drop I’ve been anticipating.

So this continues to be a very tricky pair.

Eventually, I expect prices to drop due to the numerous retests of the vulnerable 104 area. Many, many touches of a given support level are not evidence of strong support but instead increasing bearishness due to weak rallies off support.)

It’s impossible to tell which retest will be the one that breaks support for real and delivers the big move to 100 or even lower. In the meantime, try to be patient here.

Now here’s EURJPY (the Euro versus the Japanese yen) for comparison:

EURJPY is hovering at a major resistance area around 127. How price moves from here will be very interesting, especially since last week traced out a very narrow inside bar.

These innocent looking bars are often overlooked because they’re so tiny. But they can set the stage for big reversals or sometimes continuations too. I’m net bearish here after taking profits on a long position last week.

That’s because the long-term governing price patterns include a head and shoulders and also a double top. These suggest that ultimately, this pair should give way to the downside.

But there might be a little bit of horsepower left and EURJPY might reach 130 before that happens.

Typically I would sneak a sell stop under the inside bar to catch any kind of reversal, but there could be some turbulence here before another run higher.

That’s why I’m content to just sit on the sidelines and watch this one for now. I don’t see a good enough setup I can take with confidence either way even though my bias is bearish here.

What’s more, I find the GBPJPY pair (British pound versus the Japanese yen) similar in terms of trading prospects:

As with EURJPY, there’s a series of long-term governing price patterns here including a double top as part of a head and shoulders formation, followed by a rounding top defined by multiple tops over several years.

GBPJPY looks to be about to break down below its recent support line. So I expect prices to ultimately go lower here.

But as with EURJPY, there could be a few more kicks left in GBPJPY before the decisive move to the downside. I don't see the current price action as a classic top yet. And I'm a little bit suspicious of getting short at current levels.

But keep a close eye on this because sooner or later, we’ll see some kind of shorting opportunity that could yield some very good pips in GBPJPY.

Another trading pair that’s presenting an emerging trading opportunity is EURGBP (the Euro versus the British pound):

For the last several years, EURGBP has shown a lot of ambiguity about its future direction.

However, if we look at the governing price pattern, I see a long-term double bottom from many years ago. You could also make the case that it’s a triple bottom.

The key point is that this bottom appears to be a governing pattern since it’s dictated bullish price action for so long.

There’s even an interim, double bottom from which prices have been traversing higher within an ascending triangle. I expect EURGBP to break through to the upside sooner rather than later.

So if you’re patient and have a long-term view, consider going long EURGBP and keep that position in your hip pocket going forward. There should be a breakthrough on the way in this pair.

Let’s look at commodities now, starting with the biggest of them all: oil.

In this chart, I'm looking at US light crude oil:

The oil market busted through a major support level during the pandemic and now has formed a funky double bottom where the bottoms are at different levels.

The initial pandemic plunge looks like it’s created a bear trap -- we’ve seen a giant short squeeze since then.

Momentum still looks higher in crude oil, but serious resistance looms not too far away at $55 to $58. I’m not long crude oil yet but the path of least resistance appears higher.

Now here’s XAGUSD (spot silver):

By now I'm a bit ambivalent about where we are with silver. I could make the case for XAGUSD to go higher or lower.

The case for a higher price is the inverted head and shoulders. After all, I’ve reviewed a couple of pairs today (AUDUSD, AUDCAD) with this classic bullish pattern. There’s also what could be an emerging double bottom right now.

But on the bearish side, silver continues to show a lot of volatility. It’s also established a pattern of lower highs over the past several months. (Volatility refers to the large ranges of the weekly bars since silver broke out from that inverted head and shoulders. The magnitudes of individual bars are much larger than in the past.)

This kind of volatility expansion often heralds a top or at the very least a lengthy consolidation before another move higher.

In addition, we’ve had two opposite and opposing key reversals in the last two weeks.

So which is it? A consolidation before another epic run-up, or a breakdown to retest the breakout area between $19 and $20?

I can’t say yet. I’ll be monitoring prices going into next week as to how to get aboard silver’s next big move.

XAUUSD (spot gold) has also had a tremendous expansion of volatility:

Again, such volatility typically indicates a turn or consolidation and we’re seeing that more clearly in gold.

Gold has traced out a descending triangle after taking a poke at the upper trendline and then at the neckline of that triangle. As with silver, we’ve had two opposing key reversals in a row too.

So it's a tug of war at the current level. However, gold is different from silver in that I feel prices are quite vulnerable to going lower. Not only are we seeing a series of lower highs, but gold is moving within a vast ascending broadening formation.

In fact, gold’s price action suggests it may take another stab at the $1,700 price level before it finds major support to springboard higher.

This actually looks a lot like the NASDAQ price chart, which I'll show you in a moment. As you’ll soon see, the NASDAQ retraced to the lower end of the ascending broadening formation to set the stage for a massive move higher.

I very much look forward to the same thing happening in gold because anything around the $1,700 level would likely represent an enormous buying opportunity.

So here’s the NASDAQ stock index which represents the tech sector in the United States:

As with gold, we can see that the NASDAQ traced out a vast ascending broadening price formation. Typically these formations have bearish implications, but the market's ignored conventional wisdom this time and broken out above the formation. Now it’s trading significantly above the resistance line of the formation.

Just to put this in context with gold, I feel gold is on its way to one final touch of the lower line of the formation. So gold could fall back to the $1,700 level before it catches a bid, as happened with the NASDAQ.

In the meantime, the NASDAQ itself has made some key reversals at the top, which add an element of caution for me, but the path of least resistance is still higher. The prevailing pattern above this ascending broadening formation is the double bottom, which I feel probably will hold and serve as a base for higher prices over time.

I’m not confident enough to go long here but for the moment higher (or at least neutral) prices are more likely than lower prices.

And that’s it for the week!

To summarize, I’m bearish on the dollar even if we see a minor rally in the next week or two. I’m bullish on AUDUSD and AUDCAD and bullish on AUD in general (meaning that I’m bearish on GBPAUD). I’m also bullish on EURGBP and bearish on gold. I’m waiting to see confirmation of bearish price movements in USDJPY, EURJPY, GBPJPY, and silver.

I wish you a very healthy and prosperous trading week.

Mark "Aussie$Bull" Shawzin