The Reversal of Doom For Gold And What’s Ahead for 2021
This is my first report of 2021 and I hope everyone had a festive holiday season. I wish you a healthy, happy, and prosperous year ahead.
Certainly, it looks to be an eventful one. We’ve already had no shortage of fireworks in the United States, figuratively, metaphorically, and literally. That includes a storming of the Capitol building and a huge spike in coronavirus cases (over 258,000 per day).
But as regular readers know, ultimately the news doesn’t matter for us as traders. Our job is to objectively look at the price patterns and the price action on our charts. That’s because the market is a discounting mechanism and points where it wants to go ahead of news or events.
That’s why the best way to be successful in trading is to focus on objective information in front of you.
So let’s start looking at our first charts of 2021 so we can piece together a strategy that will hopefully make us some solid profits this year.
Here’s the USDI (the US Dollar Index) on a weekly basis, meaning each bar represents one week of trading:
I've been very bearish on the dollar since March 2021 -- at the height of the pandemic -- when a huge double top price pattern formed. Not only was this double top very ominous in and of itself, it coincided with a major resistance area along a 43-year downtrend line in USDI.
That double top has thrown the previous 10-year uptrend into reverse. That’s why I feel that over the course of time, we’ll see USDI get much weaker.
Having said that, USDI is at a major support area right now. Just last week it traced out a tiny bullish key reversal. (By bullish key reversal, I mean that the market made a new low, and then by the end of the week, it closed on the high.)
That key reversal suggests USDI is trying to grab a foothold at a major support area, so USDI could bounce back and forth for a while before an eventual capitulation to the downside.
The drop seems inevitable when you look at not just the double top, but also the head and shoulders with a sloping neckline. (A sloping neckline is when you have the right shoulder lower than the left and you draw the neckline to connect the entire pattern.)
A sloping neckline on this pattern is extremely bearish, so notwithstanding the fact, USDI could have a slight pullback above the neckline, the decisive move should be down.
In anticipation of this weakening trend in the US dollar, the currency I favor most is the Australian dollar.
So here’s AUDUSD (the Australian dollar versus the US dollar):
AUDUSD shows the upside-down version of USDI with an inverted head and shoulders. This too has a sloping neckline as the right shoulder is sitting higher than the left.
This implies extreme bullishness for AUDUSD. The pair should go higher very quickly and I would greet any pullback (if we see one) as an opportunity to go long in anticipation of much higher future prices.
Sticking with my theme of a strong Australian dollar, here’s AUDCAD (the Australian dollar versus the Canadian dollar).
Much like AUDUSD, AUDCAD has similar patterns and implications.
There is an inverted head and shoulders and a sloping neckline. Again, this implies a swift move to the upside in the near future.
This reinforces my thinking that the Australian dollar is the strongest currency on the board against most major currencies right now.
Here’s AUDJPY (the Australian dollar versus the Japanese yen):
We see the same shape here too with all the same bullish implications for a swift move to the upside.
I'll be looking at more yen pairs in a moment and several of them are more ambiguous than others.
However, there’s not much ambiguity with AUDJPY if you’re looking to play a potentially weakening Japanese yen.
But before I look at JPY pairs in more detail, I want to wrap up my case for a strong Australia dollar by examining GBPAUD (the British pound versus the Australian dollar):
Those of you new to currency trading might not understand why this chart is poised to drop if AUD is strong. However, note that the Australian dollar is in the second position here (GBPAUD vs AUDUSD, for example). If the Australian dollar is going to strengthen against the British pound, it means the British pound is going to weaken against the Australian dollar and so the outlook for this chart is bearish.
Again we see the evidence of a strong Australian dollar across the board.
GBPAUD traced out a massive historical double top and then a head and shoulders more recently. GBPAUD is sitting on the neckline right now. There’s support at the 1.72 level (about 250 pips lower) and then nothing but white space for this pair to fall into overtime.
So again, the Australian dollar looks like it is going from strength to strength versus most major currencies across the board.
Let’s shift the focus back to USD correlated trading pairs with a look at EURUSD (the Euro versus the US dollar).
Consistent with USDI having a bullish key reversal higher, EURUSD had a bearish key reversal lower. (Earlier in the week, it made a new high but by the end of the week, it closed on the low.)
I don't look at these reversals in a vacuum, but they often imply meaningful short-term support or resistance.
Therefore EURUSD could see a short-term move lower before another reversal to resume its climb.
I’m confident EURUSD will resume its upward trajectory before long due to the bullish inverted head and shoulders. Also in the bullish column is the more recent double bottom which provided a base for the latest rise.
EURUSD could retreat as low as the neckline of that double bottom at 1.20. If so, that would be an excellent area to begin taking long positions before the next leg up.
Now here’s a chart I review in every report I publish: USDJPY (the US dollar versus the Japanese yen):
For the last couple of years, I've made a ton of money shorting the rallies in this pair while saying it was only going to go lower.
However, by virtue of recent price action, USDJPY has become a very complicated trading affair.
It traced out a bullish key reversal last week after making what was a new low for the last several months. That’s after bottoming against the neckline of a very large descending triangle pattern. And that happened after a slow grind lower.
Every time USDJPY has rallied, I've made a ton of money shorting it, but right now trading is likely going to be difficult in this area.
Even though I think USDJPY is going to drop over the long-term, a plunge doesn’t look imminent. There’s support at this area and a lot of potential obstruction to lower prices.
When I put on a trade I want to sit on it without obstruction. But right now there just isn’t a clear path down in USDJPY.
Sometimes prices can create traps where it looks like a pair is ready to fall, but instead moves counter-trend. And that’s why I've been racking my brain here: while the historical patterns look very, very bearish, the historical support and last week's key reversal suggest USDJPY could strengthen and rise.
USDJPY might climb all the way back to the trendline of its descending triangle before creating a tradable top we can short once again.
If you’re a regular reader you’ll know that before the holidays, I spent a lot of time examining yen pairs as I felt they were at inflection points. I felt there was going to be a lot of opportunity in them although I was on the fence as to where and when the next move would go.
We’re still in that phase, so let me peel back the layers and share my thinking about how I look at markets and how I try to find not only the opportunities but also the traps within price patterns.
So here’s EURJPY (the Euro against the Japanese yen) on a monthly timeframe where each one of these price bars represents one month:
What stands out is that EURJPY is in a long-term downtrend where prices peaked at 170 in 2008. The pair is currently trading at 127, so that would suggest lower prices are in the offing.
But where will this downtrend resume?
There’s still space on the upside before EURJPY hits its long-term trendline at the 130 level, so I think there's room for another 200 - 300 pips.
If and when that happens, I would expect EURJPY would start finding its way once again in the direction of the trend. But I don't want to get ahead of myself because EURJPY is currently at a resistance area. Will it start turning down from here?
Let’s look at EURJPY on a weekly basis to get a better idea of what’s most likely to happen:
EURJPY has been trading somewhat aimlessly, so how do we dissect this? How do we capitalize on opportunity or avoid being lured into a trap?
You start by looking beyond an apparently meandering price wave to identify the dominant patterns that will likely determine the next major direction.
To that end, there’s a dominant head and shoulders price pattern here, plus a double top. Together these suggest a long-term downtrend.
Now of course EURJPY could surge and take out these dominant patterns and cause them to become busted patterns (once a pattern is busted, its bullish or bearish implications no longer apply).
There are a pair of double bottoms here that suggest potential for that scenario. However, once those bottoms formed, there was little follow-through. Price action from the first double bottom failed to bust the head and shoulders. And so far the price action from the second double-bottom can’t bust the double top.
So ultimately this chart remains bearish.
And so the question is how much momentum is left on the upside?
Right now I see a reverse triangle forming on this weekly chart, which could set the stage for a reversal at meaningful resistance at 128. But until we see a clear signal (such as a key reversal), I prefer to sit on the fence and wait for further evidence.
We need more price action that will point in the direction the market wants to take. This means I might miss the first move one way or another. But by sitting out until the signal is clear, I avoid unnecessary losses.
In the meantime, the weekly chart confirms what I think I see on the monthly chart: even if we get another upward thrust from current levels, EURJPY will ultimately reverse in the direction of its primary downtrend.
The same set of questions I have for EURJPY also apply to GBPJPY (the British pound versus the Japanese yen). Here’s the weekly chart:
A double top combined with a head and shoulders combination kicked off a massive downtrend for GBPJPY.
And since that downturn, GBPJPY has been trading within the confines of a rounding top which features a dominant double top.
But most recently, GBPJPY has been trading within a bullish ascending triangle. There will be a breakout one way or the other, especially since trading in the last couple of weeks has formed a small coil.
(A coil is a series of inside bars where the trading ranges of the last two (or more) weeks reside within the earlier trading range. It represents stored energy as price congests around a very confined price level. Once this stored energy is released, it tends to be explosive.)
So are we now looking at a potential burst to the upside?
Or will GBPJPY’s price action eventually roll over in the direction of the long-term downtrend?
It looks like the path of least resistance is higher at the moment. So GBPJPY may thrust to the 145 - 147 level before the dominant downtrend resumes.
However, as with EURJPY, there’s also a lot of resistance at the immediate price level. We could see a quick fakeout higher before the reversal lower.
For now, I’ll wait to see how the market plays out with respect to that structure. I’m biased to the downside here, but I need a clearer signal to get into the market.
Now let’s take a look at some of the commodities markets, starting with US light crude oil:
Oil has been in a long-term downtrend as it dropped from $105 all the way to zero at the height of the pandemic. Since then, oil has rebounded smartly over $50.
Along the way, oil formed a rather funky looking double bottom and broke the neckline for that pattern a few weeks ago. The path of least resistance seems higher, perhaps until the high $50’s where there’s lots of overhead resistance waiting.
Here’s XAGUSD (spot silver):
I don't know where to start on this chart. Last week we had a disastrous bearish key reversal where silver made a new high and closed meaningfully lower by the end of the week.
This was a large bar, as you can see. Yet XAGUSD still has some support with a double bottom at $22. This level needs to hold if silver is going to turn around and for this bull market to stay intact.
But right now it's somewhat of an open question if silver can hold up. This chart seems very negative with a huge overhang going back to 2010 – 2012 with that huge double top. From that top, silver traced out a long-term descending triangle which threw prices into reverse.
That was followed by an even longer descending triangle from which XAGUSD broke out to start the recent bull run. Yet all that's happened is that silver rallied back to retest the original breakdown area from the huge double top.
Note that the recent rally began with an inverted head and shoulders and the subsequent penetration of a seven-year downtrend line. This was enough to send prices skyrocketing higher to $30.
But since then, momentum has stalled badly.
What really concerns me about this recent run-up is the huge increase in volatility. For a sustained rally, you typically want to see very controlled, very orderly prices (small bars on the chart).
Yet we’re seeing just the opposite. We’ve seen huge volatility and this usually indicates speculators and emotional traders have come in. That phenomenon often precedes the end of or a meaningful turn in that market.
But it remains an open question as to whether XAGUSD has exhausted its potential to the upside. Will it now revert back into the doldrums from whence it came?
I remain on the sidelines as I wait and see.
For comparison, here’s XAUUSD (spot gold) which suffered a similarly large bearish key reversal last week:
Gold took a huge hit and collapsed from the $1,950 level to $1,850.
The bigger the reversals, the more indicative they are. So further pressure on gold prices is looking increasingly likely.
How low can XAUUSD go? Gold’s ascending broadening price pattern gives us a hint. This is a bearish price pattern and suggests we may see gold trade to the lower end of the support level of that pattern.
That means somewhere in the vicinity of $1,650 to $1,700. That’s where gold’s likely to find its next major level of support.
And perhaps that will be the level from where gold takes off again.
But for now, I would look for any kind of bounce into next week as an opportunity to short gold. It’s a difficult trade though. That’s because your risk extends to the top of that bearish key reversal, which is far away from current prices.
So approach a short position cautiously and with a small position sizing. Your price target should be $1,700.
Now I'm looking at the NASDAQ stock index:
Just like gold, we’ve seen the NASDAQ trade within the confines of an ascending broadening price pattern.
As I mentioned, gold could very well descend to the lower end of its ascending broadening price pattern before it sees another move up and breaks out of the pattern on the upside.
I feel that scenario is possible for the yellow metal because the NASDAQ did exactly that some time ago.
Since then it’s been going from strength to strength.
In fact, last week it traced out yet another major key reversal. Every time we've seen these reversals the market has shot higher. So while it feels like this market is getting frothy and that there's a lot of perfection priced into this chart, the path of least resistance remains up.
After all, the President-Elect has promised to unleash trillions of new spending and this money will find its way into the stock market. The NASDAQ has powered higher on that expectation.
However, this also suggests that a lot of the potential upside has been well discounted.
That means I’m not inclined to chase higher prices right now in the NASDAQ. I’d be looking for some consolidation or a pullback to establish further positions.
And that’s it for the week!
I’m bearish on the US dollar and bullish on the Australian dollar. AUD looks strong against pretty much everything including USD, CAD, JPY, and GBP. I’m expecting a bit of a pullback in EURUSD, however. And I think the yen pairs could all move higher before dropping later.
I’m somewhat bearish on silver and very bearish on gold.
I wish you a very healthy and prosperous trading week and the year ahead.
Mark "GoldBroadeningCollapse" Shawzin