What Looks Best Against The US Dollar Right Now
Many months ago, I predicted the US dollar had topped out and was about to fall precipitously. That's exactly what has happened since March.
So how did I do it? I'm not a genius. I don't have a degree in economics from MIT, either. All it took was a careful analysis of the dollar’s long-term chart.
This 43-year chart of the USDI (US Dollar Index), to be precise:
USDI has enjoyed a huge rally over the past 10 years while EURUSD (the Euro against the dollar) plummeted from 1.60 to about 1.02.
This chart lags a bit and hasn't caught up to where we are now, but it's still a significant reference because it clearly gives you the big picture. Note the sawtooth pattern with each peak lower than the last. Today’s peak is lower than the one in 2000, which in turn is lower than the one in 1985.
At the most recent peak, I felt the dollar was about to end its bull run and turn lower due to earlier resistance and that history of lower highs.
Not only is that exactly what we’ve seen, we can also anticipate that the dollar’s going lower and substantially lower yet in the days, weeks, months, and years to come. That’s because each leg of the sawtooth pattern lasts 5 – 10 years.
The main takeaway is that once the dollar picks a direction, it keeps going in that direction for a substantial period of time.
It won't be in a straight shot, of course. But the main trend should be clear from the 43 years of history we see in front of us.
Now here’s USDI at the weekly level -- each bar represents one week in time:
The double top from the 43-year chart is more visible here, with the second of the two tops occurring during the peak of the pandemic in the March-April timeframe. That’s when global investors faced with a lot of uncertainty got out of their assets and rushed into the US dollar.
That panic created the conditions for a bull trap where all those investors who chased the dollar higher are now trapped by a falling market.
That bull trap is now the head of a head and shoulders pattern, which was confirmed when the price dropped through the neckline. That was the green light for the reversal of the massive ten-year uptrend.
More recently, USDI retested that neckline and made a double top, which itself formed the head of a much smaller mini head and shoulders. Just last week, the price fell through that neckline too.
USDI is now destined to test the next support area. It’s not far away and we’ll likely reach it soon.
So now that we’re armed with the knowledge and near-certainty that the US dollar is going to decline, we can review which dollar-correlated pairs should benefit the most from this.
I particularly like AUDUSD (the Australian dollar versus the US dollar):
This is one of my favorite setups because the risk-reward on this looks fantastic.
Despite the fact that AUDUSD has been in a long-term 10-year downtrend, there are clear reversal signs here with an inverted head and shoulders pattern. What’s more, the right shoulder is higher than the left shoulder.
This creates a sloping neckline which is very bullish, because a sloping neckline implies AUDUSD should rise at a much faster clip than we might ordinarily see.
So AUDUSD is a buy on any dips that may happen.
I also like EURUSD (the Euro versus the dollar):
The Euro dropped from 1.60 to as low as 1.02 as USDI rallied, but it’s showing turnaround behaviour in recent months.
There’s a massive Eve and Adam double bottom in EURUSD where we see multiple prongs for the Eve bottom and then just one for the Adam bottom. This is an enormous bottoming pattern overall.
EURUSD has also traced out an inverted head and shoulders which has been confirmed by a breakout above the neckline.
This has been followed by a double bottom for which that neckline has also been broken.
As with AUDUSD, this is a buy on any dips.
Now here’s USDJPY (the dollar versus the Japanese yen) which features numerous bearish price patterns:
This chart is getting a little tricky as it gets harder and harder for prices to move. It just keeps consolidating.
The bearish patterns include the head and shoulders with a double top forming the head of that pattern, plus a long-term descending triangle too.
Note that the descending triangle is the same pattern we see in USDI and has the same bearish implications. In the meantime, USDJPY is banging on the door at 104.
The more times you test support like this, the more likely it will break.
It’s just a matter of time, even though the momentum right now is three steps forward and two back – still bearish, but painfully slow to break out of the consolidation. In fact, we could see a rally and bull trap from the current consolidation before the drop begins in earnest.
But regardless of any short-term rallies, the trend is still ultimately down here …
For comparison, here’s EURJPY (the Euro versus the Japanese yen):
This is a tough chart to figure out until you determine the governing patterns and what a busted pattern means.
For the record, I’m currently long this pair despite the bearishness of the head and shoulders and the double top here. Those patterns strongly suggest prices should go down and therefore “govern” the market here.
Yet we’re up about 200 pips in our long position. I plan to take profits soon -- I think there’s a bit more upside momentum left.
But the reason I’m long is because the bearish patterns here strongly suggest EURJPY should be going down … and yet it’s not.
So are we facing a busted pattern? (A busted pattern is when the price action fails to confirm the existing patterns and instead does the exact opposite, suggesting a major turn in the market.)
I’m still not sure.
This rally in EURJPY could turn out to be a bull trap before the overall bearishness takes hold again. In fact, the odds favor that the head and shoulders and the double top will be the determinant and ultimately EURJPY will turn bearish once again.
The target area to watch is 132 – we’re not too far away from there now.
If this is a bull trap, that’s where I expect the price will turn. But until then, I’m long in expectation of more profit before we get there.
It's almost the same discussion with GBPJPY (the British pound versus the Japanese yen):
This suggests GBPJPY is in a long-term downtrend which started with a double top reversal pattern coupled with a head and shoulders. Once it broke the neckline this was the green light for lower prices and that’s what we’ve seen. GBPJPY has been unable to break out from a continued bearish rounding top.
So has GBPJPY fulfilled the objective of these bear patterns? Is there now some kind of bottom forming for a paradigm shift and a reversal in trend?
As with EURJPY, this is an open question. While it seems likely that the long-term bearishness will prevail, there seems to be bullish strength here for now.
GBPJPY is bumping up against what could be a breakout of the rounding top right now. It’s too early to call a busted pattern, but if price starts going through 145 or 147 or so, I would certainly be on the lookout for a reversal.
My gut instincts are that GBPJPY will find resistance soon and then turn back into the long-term downtrend. But let’s wait and see.
In the meantime, I draw my structures and then defer to the market for a clearer view. This avoids a locked in view where you start ignoring evidence of a paradigm shift until it’s too late. It also avoids premature leaps into trades destined to fail because there isn’t enough evidence in their favor.
So I wait for now. Once the market tells me where it wants to go, I’ll be happy to hop aboard.
Here’s for a chart I haven’t reviewed for awhile: US light crude oil.
Oil has been in a long-term downtrend with numerous tops along the way. Price broke down spectacularly since the neckline for those tops was breached. This was aided by the coronavirus panic where everyone dumped oil at once.
Oil has rallied since, but resistance will likely start to kick in right around the $55 to $60 area.
That suggests oil is at a moment of truth – an inflection point. There’s a chance all the recent price action is just one big bear trap where anybody who chased prices lower could be facing some tears as the market suddenly roars higher.
But I want to see some price action above that resistance level first. For now, I’m on the sidelines and waiting to see how oil performs and whether it can follow through with a genuine turnaround.
Now let’s take a look at XAGUSD (spot silver):
During the height of the pandemic in the March-April timeframe, silver created a bear trap with a multi-year low and then traced out a very bullish inverted head and shoulders. You've seen this pattern in EURUSD and AUDUSD already.
That’s the beauty of these patterns – they can be applied to almost any trading market, regardless of whether you’re trading pork bellies or corn or IBM or EURJPY or spot silver.
These patterns emerge and they usually have the same implications, meaning that once the pattern’s neckline is crossed, it’s a green light for a significant price move – up, in the case of an inverted head and shoulders.
This was the warning we had to get in before silver burst from $18 to $30 for a 40% gain in just a few trading weeks.
Since then, an emerging double bottom appears to be emerging after a retest around the $21.50 - $22 area. Adding to that bullishness, silver made a key reversal (price made a new low and then closed at the high by the end of the week).
This means the buyers were firmly in control.
The combination of a double bottom, inverted head and shoulders, and this key reversal indicate
the price of silver is now poised to move higher again. The only hesitation I have is that we've had so much volatility in this area. I like to see markets build over time, with the volatility usually coming at the top after a move is over.
But stay focused on the patterns and be careful with your risk management. It does feel like higher prices are on the way.
In the meantime, XAUUSD (spot gold) is also looking interesting.
Over the long-term, gold traced out a double bottom at $1,050 in the 2015-2016 timeframe. When coupled with other bottoms on each side, this created a complex inverted head and shoulders pattern.
Once gold crossed the neckline of this very large bullish pattern around $1,360 to $1,380, that marked the beginning of a significant bull run in the yellow metal.
There’s been extreme volatility starting a couple months ago. That’s why I warned members to get out at the top. That volatility (as with silver) strongly suggested the market was going into a short-term consolidation and perhaps a sell off … which is what it did.
We recently profited from a nice selling opportunity around the $1,875 area before getting out at $1,795. This made us a bunch of money but since then gold has found support and bounced to the initial breakdown area at nearly $1,850.
Prices do have a way of retreating to key levels like that.
But I’m not bullish on gold just yet. I feel gold has more work to do on the downside. I feel gold could potentially drop to $1,700 to retest the bottom of its ascending broadening formation.
If you decide to go long gold right now, be cautious.
Let’s finish by looking at the NASDAQ, which best approximates the tech sector in the US:
This has just been in a big bad bull market since 2008 and it doesn't look like there's anything that’s going to stand in its way right now.
Note that the NASDAQ has also traced out an ascending broadening price pattern, but unlike gold it’s broken out on the upside above the upper bounds.
The index has even established a double bottom above that formation. While there’s some near-term resistance nearby, the price looks destined to keep powering higher.
And that’s it for the week!
To summarize, the dollar has turned meaningfully and in fits and starts, we’ll see a lower dollar. Eventually, this should lead to a higher gold price, but for now, I’m bearish to neutral on gold. I’m bullish on AUDUSD, EURUSD, and spot silver (XAGUSD) too.
USDJPY should drop over time, but I’m ambiguous about EURJPY and GBPJPY (although still long EURJPY for now). I’m tentatively bullish on oil but won’t be taking a position just yet.
I wish you a very healthy and prosperous trading week.
Mark "DollarTrouble" Shawzin