The US Dollar Has Run It’s Course: What is Going to Happen Next and How You Can Profit
As you’ll see from this week’s analysis, I believe we’re at an inflection point in the markets right now.
The first and probably most important of the asset classes in question is the dollar. Here’s a chart of the USDI (the US Dollar Index):
This is a 45-year chart and one I’ve discussed this before, but it’s vital enough to highlight for you again.
Note that USDI has had a 10-year bull run from 2010 to the present. I believe this ascent has run its course, USDI’s bull run has maxed out and that we're going to start reversing lower.
Think of a long plane flight where you take off and reach 26,000 feet in the atmosphere, and then you’re approaching your destination. Suddenly you feel that first bump that marks the start of the descent to lower levels. It usually takes 30-45 minutes after that bump to land, but the descent has to begin before it can end. I think we're at that first bump and USDI is on the way to a major descent against a host of other major currencies.
What makes me so bearish is the pattern of lower highs that’s been playing out over the last 45 years. Even though USDI is much higher than it was 10 years ago, it’s at a much lower high than in 2000 and certainly 1985 too.
That means USDI has been in a long-term stealth bear market. And now we're at a key inflection point along the trendline of lower highs. To my mind, it's not “if” the dollar going down but “when”. It may drift sideways from here, but inevitably it’s heading lower.
How long should the descent last?
The chart informs us that each major trend in the USDI lasts 5-10 years and sometimes longer. That suggests the next move down should also last several years.
Now here’s EURUSD (the Euro versus the US dollar):
Consistent with USDI’s multi-year rally, EURUSD has declined from about 1.70 ten years ago to its present level of around 1.10.
Consistent with the view that USDI is going to turn and go lower, it would make sense that EURUSD should begin to turn and go higher. This is what we're starting to see.
EURUSD has established multiple bottoms around the 1.04 – 1.06 price level and now there’s been a recent curve where EURUSD has been unable to go lower. This is like a beach ball where you try and push it underwater. Once you push it down as far as you can get it – and then lift off your hand – the ball explodes into the air.
Since EURUSD has been unable to press lower, it follows that when something can't go in one direction, it goes in the other.
That’s why I feel EURUSD looks like a bear trap right now where all the bears that were chasing the lows could now be trapped as the pair begins moving up. A bear trap could set the stage for and explain an explosive move to the upside.
Now the danger here is the timing of the summer season during which most FX pairs tend to go sideways. So we could see nothing but choppy, back and forth price action into July, August, and even September.
But I do think it’s worth taking a position in EURUSD. Assuming you set a sensible risk level and stop-loss, the worst thing you have to endure is prolonged sideways behavior.
However, I strongly believe you’ll ultimately be rewarded if you’re patient here. The current level might prove to be a phenomenal place to get in, take a position, and wait for the long term.
There’s more evidence to support this view with EURGBP (the Euro versus the British pound) because it looks like the Euro has dug in against the British pound too. It looks set to resume its trajectory higher.
If we go all the way back to the 2015 timeframe, EURGBP shows a governing double bottom that has defined the lows and led to a long-term rise in prices. As there’s still no top pattern in place, we can assume prices will keep going higher and so the double bottom remains the governing pattern here.
This is reinforced by a more recent double bottom that occurred earlier this year, plus an even more recent rounding bottom. EURGBP looks set to keep going higher for the foreseeable future.
Now here’s USDJPY (the US dollar versus the Japanese yen):
I’ve talked about this pair and this chart ad nauseum for weeks and months because there are so many bearish price patterns that suggest USDJPY’s long-term trajectory is lower.
However, the summer season appears to be holding this pair within a lackluster back and forth trading range for now.
A tight trading range was also the scenario for a significant portion of last year, yet while it might have looked boring for some, it did pay off. By waiting for the right opportunity, I made 1,000 pips when USDJPY crashed to the neckline of the descending triangle.
I feel USDJPY will touch and probably breakthrough that neckline again this year. That doesn’t mean this pair won’t go back and forth for a while yet. It might even rally to the trendline of the descending triangle. But I see any such rally as an opportunity to add to my short positions.
In the meantime, I’m maintaining my shorts on the basis of the descending triangle, the recent H-top which also appears to be part of a head and shoulders pattern, and the historical double top/head and shoulders pattern that started the initial descent.
Ultimately, the direction of the USDJPY is down. We could go nowhere for the next few weeks and then suddenly breakdown with no warning. That’s why I’m staying short and waiting this out while adding on any rallies.
Let’s take a look at AUDUSD too (the Australian dollar versus the US dollar):
If the US dollar is going to weaken then it makes sense AUDUSD will rise.
This pair is an interesting inflection point right now. It’s approaching its long-term downtrend line while also beginning to break above its long-term support (now resistance) line.
AUDUSD is not far from the 0.67 – 0.68 level and could very well march higher to significant resistance at 0.70. My expectation is that we’ll see consolidation and perhaps even a setback before AUDUSD has the strength for a major run to the upside.
That’s because so far AUDUSD has established only a V bottom. This pattern normally doesn’t provide a stable foundation for a sustained move. I think we need to see more consolidation or even a second (higher) bottom here.
Certainly, the first bottom is well-established when AUDUSD initially dropped under the repeatedly-tested 0.67 level. However, the speed of the bounce makes that drop look like a bear trap.
So I'm now inherently bullish long-term on AUDUSD, but very open to the possibility that we could get back and forth price action at current levels. I think we're unlikely to test or make new lows here.
Be on the lookout for opportunities to initiate long positions in this pair.
An interesting side effect of AUDUSD’s price trap phenomenon also shows up in AUDCAD (the Australian dollar versus the Canadian dollar):
The historic patterns in AUDCAD overwhelmingly suggested that prices had to go lower since there were multiple tops all across the price history. I said for many months and years that AUDCAD had to go lower and drop beneath the 0.91 price level (marked as support on the chart) due to all these bear patterns on display.
Yet once all the sell stops under 0.91 were triggered, the bears didn’t get much long-term joy from their trades.
Although AUDCAD went 1,000 pips below the support level, it’s now right back at the breakout area. That’s created another bear trap for those still holding their short positions.
I would like to see some kind of consolidation here before AUDCAD moves higher because I can’t see how this pair can keep rising through heavy resistance at what used to be supported.
That resistance looks particularly heavy at the 0.92 level. So while I believe AUDCAD may have turned, I’m going to wait and observe price behavior at current levels first. To my mind, this pair needs to consolidate before the next leg higher.
But on the other hand, but if this is truly a bear trap condition then the price can go vertical very, very fast.
I will monitor the price activity here for an opportunity to go long when it presents itself.
Now here’s a chart we haven’t reviewed for awhile: US light crude oil …
It serves as yet another example of the potential bear trap phenomenon that’s occurring in a number of markets.
For many years I’ve been bearish on oil due to the number of bearish patterns. I was predicting oil would go under $20 and even $10 while it was still at $60.
Obviously that was the correct call as oil actually went to -$37 on the main contract at one point. The crazy conditions that occurred during the earlier stages of the pandemic were quite remarkable.
And this happened just like the other markets: price broke a critical support level (under $30, in this case) and triggered a lot of sell stops to drive the market lower. But if you didn’t exit your shorts quickly, you got trapped in a short position as the market rebounded so strongly.
There’s one difference between the FX pairs and oil, though. Unlike the currency pairs I’ve highlighted so far, I have less confidence about where the oil price is going from here. While oil’s path of least resistance looks higher, there’s still a lot of uncertainty and the price is in no-man’s land.
So I have no potential trade idea for oil at this time. I just wanted to show you another example of the bear trap phenomenon that’s happening across a number of markets before I go to the most interesting of all the traps: silver.
Here’s XAGUSD (spot silver):
The bear trap phenomenon -- where sell stops got triggered under the shelf of the six-year support line ($14 in this case) -- should be pretty obvious to you by now.
Once the bear trap was set by silver’s quick rebound, momentum to the upside has gathered quickly. Silver is now threatening the long-term resistance line of the descending triangle which began many years ago.
If silver can maintain its momentum, it should soon start making multi-year highs above $20. That could trigger a substantial rise in the price of silver and it’s why I advised my Elite members to go long last week.
So how high could it go?
For a possible answer, I’m going to review a gold/silver price chart. That’s because we can make certain assumptions about the price of silver-based on its relationship to gold.
Here’s the two-year relationship between the price of gold and the price of silver:
You get the gold/silver ratio by dividing the price of silver into the price of gold and right now that ratio is about 97. That means that gold is 97 times the price of silver.
This ratio recently climbed to a historic high where the price of gold was 125 times the price of silver. This had never happened before. The ratio broke out above its long-term resistance area at 95, skyrocketed, and then bounced around until it created a double top formation.
This is why I’ve been saying that the gold/silver ratio should drop at some point.
For this to happen, gold can go sideways while silver accelerates, gold can go down faster than silver, gold can plummet while silver holds firm, and so on. But based on the price charts, it really looks like the price of silver is going to accelerate and drop the gold/silver ratio back below the resistance line at some point.
So what about gold?
Here’s a 45-year chart of XAUUSD (spot gold):
Gold has risen from over $200 in the late 1990s to over $1,700 today, meaning that it’s been in a long-term secular uptrend. It’s safe to assume that uptrend will continue, but right now gold is at a heavy resistance area.
That suggests that while gold could still power higher in the short term, it’s going to have a lot of difficulty doing so. Gold price action could be quite bumpy at these levels.
It follows from the gold/silver ratio chart that the prospects for silver to go significantly higher in the near term are better than the prospects for gold to do the same. The better bet is to shift to silver.
I don’t think we’ll have to wait much longer before the price starts informing us as to which way these metals are going to go.
Now I'm going to finish up by looking at the US stock markets, starting with the NASDAQ.
The NASDAQ has almost fully retraced its February sell-off and is close to challenging new highs. Of course, there’s some major resistance at hand and so I don't think we're going to slice through like butter. I would expect some turbulent action near the old highs.
For comparison, here’s the S&P500 which is considerably lower in terms of old highs:
As with the NASDAQ, the path of least resistance looks higher, but I’m inclined to chase the rally at current levels.
I would look to be increasingly selective and I feel it comes down to the risk/reward opportunities on individual stocks right now.
Lastly, here’s the Dow:
As with the S&P500, the Dow is also well off its high. I don’t think you're going to be rewarded by going short right now, but neither should you chase the current rally.
By the end of the week, the Dow (or any of the major US indices) could look very different by setting a new high and then selling off with a key reversal.
My instinct is to let these indices settle before we can take a sensible look at what the next play is most likely to be (and then place a good risk/reward trade accordingly).
So with that said I hope you’re safe in your respective locations around the world. There’s a lot of uncertainty in certain cities and a lot of uncertainty in the markets. So place your bets accordingly, keeping in mind there are some very good risk/reward trade in EURUSD, EURGBP, silver, and certain other trades.
Just be patient wait for your opportunities. Wait for the market to come to you and don't feel like you need to chase the market.
In the meantime, try and enjoy your summer in the Northern Hemisphere.
I wish you a healthy and prosperous trading week,
Mark "AssetClassInflectionPoints" Shawzin