Watch These Historic Market Inflection Points in the Dollar, Yen and Gold
During trading action over the past two weeks, USDI briefly broke out above multi-year highs. However, recent twin bearish reversals suggest a short (or even a long) term reversal in the dollar.
If you’re not familiar with a ‘key reversal’, the bearish version of a key reversal is when the price makes a new high but then closes at or very near the low. We’ve seen this happen over two consecutive weeks in USDI. This means the sellers are firmly in control.
(Bullish key reversals are exactly the opposite to their bearish counterparts, but that’s not what we have in USDI right now.)
Last week's about-turn in USDI could be the catalyst for a major turn lower. It could also mean a reversal into an extended trading range that could last throughout the summer period.
So which is more likely? Right now we don’t know.
However, it’s important to note the bearish M-Top (double top) pattern in USDI which completed early in 2018. Once that pattern formed, the dollar fell significantly. USDI has failed to challenge its old highs ever since. Therefore that M-top is still a dominant bear pattern in USDI.
Adding to the bear case is that a more recent double top might be forming right now. We can’t confirm that until the price crosses the neckline at 121. But if and when that happens, USDI would be due for a major reversal and an extended trip to the downside.
In the meantime, USDI has already broken below its most recent trendline by a hair. This could be the first sign of the breakdown.
A thrust above 1.18 in EURUSD and 0.74 in AUDUSD would also suggest a major turn lower in USD.
Let’s look at EURUSD (the Euro against the dollar) first.
As we can see, the overall trend is down.
However, the bearish head and shoulders pattern has failed to follow through … so far.
This could be a busted pattern but as I’ve warned in previous reports, summer trading tends to be range-bound trading in many pairs. It’s too early to say this pattern is busted yet, although EURUSD has already poked its head over its short-term downtrend line.
The key level in EURUSD to watch is 1.18. That’s where we saw a major key reversal occurred to send EURUSD lower. (This key reversal finished the right shoulder of the head and shoulders pattern.)
If the price can trade — and hold — above 1.18 then the downward trend in EURUSD is probably over.
Now for AUDUSD …
Most recently, AUDUSD has caught a bid at a key support area and rallied.
Two things are most likely to happen now: sideways trading through the summer doldrums … or a continued rally higher.
So this is a lot like the EURUSD situation.
AUDUSD’s key level is 0.74. Any meaningful penetration above the 0.74 level would suggest there are some legs behind this bounce off support. (Another key level to break is 0.71 — the downtrend line I’ve drawn for you.)
A break above 0.74 would suggest a new bull trend is in place. The 0.74 level is particularly significant for the same reason as 1.18 in EURUSD – there was a bearish key reversal here and if the price can hold above that level, there’s good reasons to be bullish for the next several weeks and months to come.
Having said that AUDUSD has to do a lot more work before we can seriously discuss any AUDUSD trades on that basis.
Because this could be a critical turning point for the dollar (and subsequently most everything else), let’s look way back in history to get an idea of what’s happened before …
Look at this 42-year chart of the dollar:
As you can see, the dollar has halted at the long-term downtrend line of a huge descending triangle. The dollar can either break out of the descending triangle, or it can roll over and drop. As it is, the dollar is already at a major resistance area.
If the dollar does roll over, that suggests it could be on its way to the neckline of that triangle down around the 82 – 85 level over the next few years.
The price action in the coming weeks will tell us if the dollar really is doomed to drop as long and hard as this 42-year chart suggests.
There’s a great way to trade this breakdown if it happens.
For the past two months, I’ve consistently maintained that should we get a turn lower in the dollar, USDJPY (the dollar against the Japanese yen) would be the most vulnerable to further downside action.
That prediction has yielded some very robust trading gains already. USDJPY has collapsed from the 112 level just a few weeks ago to close at 108.30 on Friday. We’re currently sitting on a 350 pip profit in trades associated with that movement.
One of the key signals that USDJPY would drop was the tiny inside bar I’ve highlighted for you. Inside bars are where the high and low is completely inside the previous longer bar. They represent stored “energy” that gets released explosively one way or another.
My bet was that it would be released downward as USDJPY was already bumping up against the bearish descending triangle it’s has carved out since 2017.
Where to next? Despite the recent price drop, I continue to believe USDJPY keep declining to the December lows of 104. It will likely pause there and then drop below 104 in the weeks and months to come.
Now here’s another pair to consider for a trade on the short side:
GBPNZD (the British pound against the New Zealand dollar) broke out above an ascending triangle price pattern, then a few days later broke below that pattern. This set up the possibility of a ‘bull trap’ and a potential decline in prices in this pair.
A bull trap is when the price looks like its ready to break out on the upside, but then falls back dramatically to bust the original pattern it broke away from (in GBPNZD, the busted pattern is the ascending triangle).
It’s happened once already in this pair. And now it’s happening again with the most recent ascending triangle. The previous bull trap was good for a 1,500 pip drop. We might see that again – or a move even lower – on the latest trap.
I’m bearish on GBPNZD now for another reason: there’s been a lot of volatility recently. Volatility usually precedes a change in trend. This suggests we could be seeing a major move lower in this pair.
Now for something even more interesting …
Right now, XAUUSD (spot sold) is the pair that’s fixed most firmly on my radar.
The recent price surge in XAUUSD to $1,350 effectively pierced the downtrend line of a 10-year symmetrical triangle price pattern. Any penetration above $1,380 – $1,400 could be the catalyst for a multi-year up-trend in this asset class.
That’s going to be a tough ceiling to break, but so far gold is looking strong.
We can measure the magnitude of a potential breakout by taking the height of the resistance area from the downtrend line. That’s $330, so $330 more than $1,400 would place XAUUSD at the $1,700+ level.
That will be a very lucrative trade for us if it comes to pass.
But right now, we need to see if gold can break through that ceiling … or not.
For now, there’s a breakout above the triangle but nothing more. Spot gold is at a very pivotal area right now.
One other thing that’s holding me back on becoming a gold bull is the gold/silver ratio. The ratio is trading at a 332 year high of 90. I’m not bullish on silver at all, so either gold has to drop (so the ratio returns to a more normal level) or else we’re entering a new paradigm for the gold/silver ratio history.
If you’re bullish on gold regardless of that ratio, consider a buy stop on gold at $1,351 with a stop loss down around $1,315 and an initial take profit near $1,420. Don’t risk more than 0.75% of your account on this trade if you decide to go for it.
Let’s look at stocks, specifically the S&P500 index for the U.S. market.
Last week the S&P500 made an impressive bullish key reversal. However, it’s now resting below a significant resistance area featuring a double top. I don’t think we’re going to see a lot of follow-through on that bullish key reversal.
Accordingly, I’m on the sidelines in the stock market pending evidence of a breakout one way or another. We could see a very volatile trading range between 2700 and 2950 for the foreseeable future, but nothing that defines a “big trade” for me in terms of a major trend.
Until the S&P500 breaks out one way or another, I’m staying out.
In the meantime, we’re at pivotal price levels in the U.S. dollar and also gold. Interesting times are ahead! I’ll be keeping a close eye on USDI, USDJPY, GBPNZD, and especially gold action in the days and weeks to come.
I wish you a very healthy and prosperous trading week.
Mark “USD42YearPivot” Shawzin