Why the Dollar Could Start Dropping Now
Before I get to the chart discussions, it’s worth nothing one particular piece of fundamental news about the U.S. dollar…
Last week, U.S. Federal Reserve Chairman Powell reduced interest rates for the third time this year. He also indicated there would be no more cuts until further data becomes apparent. However, we’ll see about that.
Because as we know, the road to hell is paved with good intentions. Despite Powell’s statement to hold interest rates steady, ultimately his hand could be forced. I think rates in the United States will have to follow the global trend lower over time and Powell will have no choice.
This is what’s indicated on this 42-year price chart of the U.S. dollar.
The dollar’s price history over 42 years suggests that the recent uptrend is coming to an end. The dollar has made a series of lower highs to trace out a descending triangle. And right now we're trading at the downtrend line with what looks like an emerging double top.
Could the dollar break out of the triangle? My bias is to the downside because I don’t see the triangle’s lows as a meaningful triple bottom able to sustain a rally. Instead, the lower highs suggest we’ll ultimately see the dollar traverse lower within this triangle and perhaps much lower over the course of the next several years.
Let’s take a closer look at the U.S. Dollar Index (USDI) on a weekly basis.
The USDI measures the dollar against a handful of the major currencies around the world and now it seems the evidence is starting to mount for what could be a sizeable turn in the dollar. That would be consistent with what we just reviewed on the longer-term 42-year chart.
That double top on the 42-year chart is easy to see on this weekly chart. And recent weekly headwinds are pushing the dollar down. By headwinds, I mean the bearish key reversals within the second of the two tops.
A bearish key reversal is when the price makes a new high during the week, but closes on the low instead. That means the sellers are in control by the end of that week.
On this USDI chart, it’s happened repeatedly.
What’s more, USDI has now also penetrated its long-term weekly support line. That suggests we could see a large downside movement in USDI quite soon.
Should that dollar drop happen, the one pair that’s best positioned to take advantage is USDJPY (the U.S. dollar versus the Japanese yen). On this weekly chart, I continue to be bearish.
As long-time readers know, I've been looking at the short side of USDJPY for four or five years when it first formed a double top price pattern. A double top is often a reliable sign that an uptrend is finished and that a downtrend is about to begin.
As you can see, that’s exactly what happened. More recently USDJPY has formed a descending triangle, also bearish. (Therefore USDJPY and the 42-year USDI chart I showed you earlier show a similar bearish pattern.)
So I expect USDJPY to continue lower, especially when last week’s meaningful reversal coincided with recent highs at the 109.50 area.
I believe USDJPY is now setting up for another high probability trade to the downside, one where it's very likely we’ll revisit the 104 lows from October and December. It’s a great time to short this pair. Just be sure to keep your risk reasonable with an appropriate stop loss in case USDJPY takes an unexpected detour to the upside.
There’s at least one more promising candidate for profiting from USD weakness.
In this chart, I'm looking at AUDSUD (the Australian dollar versus its U.S. counterpart).
In the past, I've been somewhat skeptical about a meaningful bottom in AUDUSD. But the price action is indicating a meaningful turn in this pair. There’s a small double bottom forming and we're now sitting right at the neckline of that pattern.
There’s also been a lot of support at this level in the past. However, there’s also a long-term downtrend line in place. We're not far away from breaking out above this line and such a breakout would be a catalyst for a sizable move higher.
But I’m not buying AUDUSD I see the breakout happen first.
It's still possible AUDUSD could reverse and drop below the long-term trend line. Let’s wait and see what happens before jumping aboard. I’m looking forward to launch beyond 70 levels in this pair, but we need more evidence to make a high-probability trade.
If the Australian dollar is truly going up, another pair that’s piqued my interest is EURAUD (the Euro versus the Australian dollar).
There’s a significant double top here plus a looming head and shoulders too. Now this pattern won’t be confirmed until we see penetration below the neckline at or around the 1.59 area. But it does look like prices are poised to hit that neckline pretty quickly.
There’s also a long-term uptrend line to keep an eye on at the 1.61 level. If EURAUD takes that out, I’d expect to see 1.59 at the neckline. And should that happen, I see 1.54 as the most likely support level in line with recent lows.
So looking at the big picture here, it does look like there's an evolving turnaround in EURAUD. We just need to wait a bit longer for confirmation.
Now for my favorite FX pair on the long side: GBPNZD (the British pound versus New Zealand dollar).
As you can see, this pair has shot up about 2,300 pips over the last six weeks or so. Now it's going into a consolidation, which is normal after you've had this kind of run-up.
There are presently two inside bars in the past two weeks as GBPNZD meanders back and forth. This is good news. The longer this pair consolidates, the healthier it will be for what I anticipate will be a lift-off to much higher GBPNZD price.
I believe we’re going higher based on the long-term price patterns I’ve observed since early 2017. These patterns include the double bottom in late 2016 and early 2017 which was followed by a rounding bottom.
Once GBPNZD traded above the neckline for these patterns, that line became support for a new double bottom. Now GBPNZD is trading at a new neckline for that pattern.
It's entirely possible we could retest this neckline and trade perhaps 300 or 400 pips lower before the price turns around and heads up again.
That’s why I’ve hedged my very profitable long-term long position in GBPNZD in anticipation of a potential downward move. I’ve taken a short position that partially offsets my long position.
The idea of a hedge is to protect profits against a price drop. It ensures I stay objective because any long profits evaporating in a dip will be countered by profits from the short. I will lift the hedge once the price action convinces me there’s no more potential downside.
Unfortunately, you're not able to use this strategy in the United States as U.S. brokers don't allow hedging. To get around this restriction, open a second account. The first account is for your core position and the second account is for your hedging position.
Remember, the minute GBPNZD again turns in my favor, I'll lift my hedge and unleash my long positions for maximum profit. I’m still very bullish on this pair and plan to stay long for the foreseeable future.
Now let’s cover the precious metals, starting with the monthly chart of XAGUSD (spot silver).
A couple of months ago silver suffered a very bearish key reversal right at a meaningful resistance area. I said that bar looked like a dagger in the heart of the bulls and that it was likely to turn XAGUSD back into its long-term bear trend.
However, you can’t have a big ego as a trader. That’s why I watch how the market behaves after establishing my initial price pattern. So far, we can see that silver has NOT collapsed. In fact, it’s dug in.
Should XAGUSD start going higher, it would indicate that reversal was a false one and that it accomplished nothing more than shaking out the weak hands before a bull run ultimately gets underway.
That’s why this month is crucial. I'm very interested to see how the silver price behaves in November. Will silver stall out and drop as indicated by the key reversal? Or will it continue to dig in and gain some momentum to the upside?
Either scenario would get my attention very quickly, especially if silver moves up. After all, XAGUSD has the U.S. dollar as part of the pair. So if the dollar looks like it's rolling over, silver should go higher. Perhaps significantly so.
This weekly chart of XAGUSD is looking interesting too.
Several weeks ago, I felt those two bearish reversal bars (where XAGUSD made a new high and then closed on the low) would start driving silver lower. This is the ‘dagger to the heart’ zoomed in a bit more, after all.
Instead, it's getting harder to ignore what looks like a very prominent double bottom a few months back. Silver broke out of this pattern by penetrating the neckline. Since then it’s formed a nice support level with bullish key reversals that fly in the face of their bearish counterparts.
While that’s encouraging, there’s going to be a lot of resistance in this area due to those bearish reversal highs. I’m waiting to see if prices can push through.
It could take weeks to see how this plays out, but the evidence is starting to mount for a large turn in dollar correlated pairs — including silver. With the dollar weakening, multiple currencies and metals could be ready for significant upside moves.
Gold (XAUUSD) is certainly a candidate for this potential move when you look at its weekly chart.
Gold formed a long-term double bottom many years ago at the $1,050 area. It also established a complex inverted head and shoulders with multiple shoulders on each side.
That double bottom and inverted head and shoulders was confirmed when gold penetrated the neckline around the $1,375 price level. And since then, post-breakout gold has formed a symmetrical triangle. Any significant price move above the triangle should be followed by further momentum to the upside.
It shouldn’t take long to see a result. That’s because last week we had an inside bar which created a coil of contained energy. Sooner or later, that energy will springboard XAUUSD out of the triangle.
I think that energy release will be upwards because the long-term price patterns in the yellow metal are all bullish at present.
Now let’s look at the major stock indexes.
In this chart, I'm looking at the S&P500 stock index at the weekly level.
This is a weekly chart and you can see that last week we broke through to all-time new highs in this index.
The long-term bull trend remains in force. In earlier weeks I mentioned how the bullish key reversals indicated the S&P500 was going to break to the upside.
So what’s next? Either the index will continue this upward momentum or else it will drop back to retest recent support.
It’s worth noting that there’s some divergence. Although the NASDAQ also made new highs, the Dow Jones Industrials haven’t yet joined the other two key indexes.
This could be a bearish divergence, or perhaps the Dow is just playing catch up with these indexes. Right now it’s too early to tell.
And that’s it for this week!
Let’s summarize: it looks like the dollar is about to weaken, perhaps significantly. This has bullish implications for the precious metals and other currencies. I expect USDJPY to drop while I wait to see if AUDUSD will breakout to the upside. I also remain bullish on GBPNZD for the long term. Stocks are looking bullish but I remain cautious about the strength of the recent breakout.
I wish you a very healthy and prosperous trading week ahead.