Why The Government’s Ten Trillion Dollar Stimulus is Going to Crash the US Dollar and Why This Downwards Trend Could Last Up to 10 Years
A few weeks ago, I titled one of my emails “A Historic Inflection Point” because I felt we were at a pivotal moment in the markets. However, I had no idea how right I was going to be, so quickly.
Since that email the U.S. stock market crashed 37%, the U S dollar raced to new highs, and gold has gone all over the place. I'm going to unpack it all for you in this report, but the key point remains that we’re at a historic juncture across a number of asset classes.
Certainly, the U S dollar is front and center right now as measured by the U.S. Dollar Index (USDI):
USDI measures the dollar against half a dozen of the world’s major currency pairs. And you can see that while oil, gold, and stocks were crashing, investors around the world bid the U.S. dollar to its highest levels since 2010.
However, last week I warned you not to chase this rally. To me, this was a sucker play.
Before I explain why let me tell you a story about ice hockey legend Wayne Gretzky. During his career, one of his team’s games was postponed because there was an electrical outage. The lights went out and so for about 20 – 30 minutes the game was shut down.
The broadcasters went down to speak with The Great One and asked him, “Wayne, you're not the strongest player out there. You're not the fastest player out there. What's your secret? Why have you got all the records? Why are you able to do the things you're able to do? Why are you able to score the most goals even though your physical attributes aren’t at the same level as some of your colleagues?”
Gretzky summed it up with a quote that was perfect for him and perfect for trading too.
He said, “I don't skate to where the puck is. I skate to where the puck is going to be.”
So how do we as traders know where the puck is going to be?
Well, that’s the beauty of charts and price patterns to establish your perspective. This is also why I rail against looking at short-term charts, meaning 5 minutes, 15 minutes, one hour, even 4-hour charts. You can’t establish and maintain a historic perspective with such short-term views.
That’s why when the dollar was racing up last week, this seemed like a large trap to me.
On this weekly chart (I’m repeating it again here for ease of viewing), there are now two peaks in the same area.
Plus with last week's price action, USDI crashed and closed below the low of the most recent peak from 2016. So not only is there a double top, this also looks like a bear trap where anybody who bought above the breakout area is now trapped as the dollar reverses.
I’ve been told throughout my career that you can’t identify tops or bottoms, but I would politely disagree with that.
To my mind, when a market reverses, it always establishes a pattern. Then within the pattern, there’s supporting price action, such as the inside bar that was formed last week.
(By the inside bar, I mean that the most recent bar’s high and low is contained within the high and low of the previous week.)
So, there’s an inside bar in USDI right now, just where prices collapsed at a major reversal. Future price action will tell the story, but I’m getting the sense that we’re looking at a major reversal in the U.S. dollar right now.
To show you how it’s possible to anticipate major turns in the market based on price action. Here’s an email I sent to our Elite members last Wednesday:
EURUSD (the Euro against the U.S. dollar) was trading a hair under 1.09. I recommended putting a buy stop on this pair at 1.0897.
Yet EURUSD had crashed from 1.15 all the way to 1.06. How was it possible to see a turn here? I looked at the price action which included an inside bar and I said that while it was an early call, I felt a major top in a 10 year long a dollar rally was in and therefore a strong EURUSD bounce was due.
I felt we were in the early stages of a major double bottom in EURUSD and that any penetration above the inside day bar could result in a massive move to the upside.
That was then, this is now:
After I alerted our Elite members to get in at 1.0897, the market exploded and closed 240 pips higher at 1.1142. I think there's a lot more upside in this currency pair so we’re not exiting our position yet.
In the same email that recommended buying EURUSD at 1.0897, I also suggested putting a sell stop in USDCHF (the U.S. dollar versus the Swiss Franc) at 0.9745 on the same premise of an emerging dollar top.
That was then, this is now:
USDCHF has crashed to give another 240 pip gain.
That means we’ve racked up nearly 500 pips in unrealized profits by shorting the dollar in those two trades.
We also bought GBPUSD (the British pound versus the dollar) for another 250 pip gain but I think you get the point by now.
Let’s step back and take a look at the big picture because the perspective is very important. Here’s the USDI over the last 45 years:
Most recently you can see the double top that’s visible in the weekly chart I showed you earlier.
But this helicopter view now helps you see why I was so confident about a major turn in the dollar despite the fact USDI has been rallying for the last 10 years.
Note the pattern of lower highs in the dollar to create a descending triangle. This is a very bearish pattern.
And then in the most recent high (much lower than the earlier high in 2000), we had a double top as well. That suggested USDI was at a major resistance area.
Now there’s a culmination of events where the U.S. government and the Federal Reserve has turned on the printing presses and delivered a huge injection of stimulus. We're going to have up to $10 trillion of stimulus coming out of the U S reserves and maybe more to come.
While I’m not an economist, when you turn on the printing presses and print dollars willy-nilly then it begs the question of what those dollars are worth.
That’s why the next trajectory in the U.S. dollar is likely to be down for the next several years.
Another key point: note that when the dollar picks a direction, it goes in that direction for many years. From 1975 to 1982 (seven years) the dollar rose. Then from 1985 to 1995, it went 10 years in the other direction. Then from 1995 to 2000 (another five years), it went back up, and so on.
So if you think you've missed the dollar drop, if you missed my trades last week -- don't worry about it. I think you're going to have lots of opportunity to short the dollar for the next 10 years.
I don't think it's going to be pretty, but that’s what the chart is strongly suggesting to me right now.
So forewarned is forearmed. While other people are scratching their heads because they didn’t see this happening, you now have some compelling evidence for a huge opportunity going forward.
Let’s look at other pairs, such as GBPUSD (the British pound versus the U.S. dollar):
For the past 10 years, GBPUSD has been in a spectacular decline from over 2 to about 1.15 last week. And then within just a week, it rebounded from 1.15 to almost 1.25 -- a thousand pips in the other direction.
Consistent with my long-term thinking about the U.S. dollar, we've likely reached a blow off low in GBPUSD after it reached levels not seen since 1985. That recent plunge now looks like a bear trap. Everyone who had the sell stops below 1.20 had those triggered and now they’re likely to be on the wrong side of the newly-reversed trend.
Another thing to note: increased volatility (i.e. the length of each bar from its high to its low) is also an indicator of a potential market turn). Since we’re seeing thousand pip trading weeks in GBPUSD, this increased volatility looks to precede a significant change in direction.
Now here’s the difficult part: assessing your risk. While I believe GBPUSD is a strong buy, it could easily drop 300 or 400 pips before turning around and powering higher.
I would look at any kind of sell-off as a way to get long GBPUSD. It may need another a week or two to sort itself out.
But at the same time, it could rocket another 500 or 1,000 pips before it settles. So I'm inclined to take small early positions and keep them.
The volatility makes it hard to recommend specific entry points right now. But I think you have to close your eyes and just get in somewhere on a dip.
To keep your risk low, step into these positions very incrementally. Take very small positions and just look to build larger over time as this dollar reversal gains momentum.
Now here’s a 45-year historical relationship in USDJPY (the U.S. dollar and the Japanese yen).
There’s no ambiguity here. Over 45 years, USDJPY has been decidedly bearish as it dropped from 350 to almost parity (100). It never even had any decent fake outs.
Over the last 10 or 15 years, USDJPY consolidated between the 100 and 120 area. However, it doesn’t look like a bottom to me as every rally has been followed by lower highs. That’s why I can’t call a double bottom here. A double bottom should be followed by higher highs.
For the last five years, I've been showing readers a descending triangle pattern on the USDJPY weekly chart. I’ve highlighted it below on this long-term 45-year chart:
A descending triangle can either be a reversal or a continuation pattern. But in this position, and based on the preceding price action, my hypothesis is that this one is a continuation pattern. USDJPY should break to the downside.
There’s a lot of air below current levels and USDJPY is likely to go under 100 and back to 70 or 80. If so, that's $20,000 or $30,000 potential profit for every $1,000 you bet going short USDJPY. I think a 30-1 risk-reward relationship is a good bet.
That Gretzky quote certainly applies here. We want to skate where the puck is going to be, not where it is right now. That’s why chasing after any USDJPY rallies are very foolish. Go short instead because that’s where the biggest gains are going to be.
Earlier I got short at 110 and got out at 102 and now I'm getting short again at current levels. All the signs are bearish and any rallies are suckers’ rallies.
Now here’s the weekly chart with the descending triangle I pointed out above.
It’s also easier to see the double top and also the head and shoulders patterns that preceded it
People always ask me how I can see these things so early. It’s because of the long-term perspective I always take. I'm not skating to where the puck is. I'm looking to skate where the puck's going to be.
That’s why I’m so confident about getting short again.
As an added bonus on this weekly chart, there’s even a mini double top and a bearish key reversal where USDJPY made a new high and then closed on the low. These developments add even more weight to the bearishness in this pair. They’re pointing in the direction the market’s most likely to go when you consider the long-term trend.
Short USDJPY on any rallies and hang on for what could be a wild and very profitable ride down.
Now I'm going to switch to looking at the gold and silver ratio, which is something a lot of industry observers watch carefully.
The gold and silver ratio is simple: just divide the price of gold (around $1,629) by the price of silver (about $14.43) to get 113 when rounding off.
You can see that this ratio has broken out to all-time new record highs. Now the question is whether we’ll see a reversion to the mean or if the historical relationship between gold and silver is now purely historical.
If there’s a reversion to the mean, silver will need to outpace gold on the upside as it’s unlikely gold will drop much more during a secular USD bear trend.
If the ratio is no longer valid, then silver can languish for a while yet. Note that all the way back in 1980 or thereabouts, this ratio completed what looks like a double bottom. If it really is a double bottom, perhaps the silver/gold relationship has changed and in the future, the price of gold will be much more expensive relative to silver.
I'm not looking to make any judgments at this point. I'm just illustrating this relationship before we examine gold and silver individually.
Let’s start with spot silver (XAGUSD):
Since 2013 – 2015, silver bounced off the $14 level multiple times and many observers were convinced that $14 was the bottom when the metal started to break higher in 2019.
However, I posited that when you hit an area so many times, that’s not a good solid foundation for a bottom. A real bottom means a double bottom and maybe a triple bottom. Then the price should move from there. A bullish market should not test the same level for six years and give people unlimited opportunities to get in.
That’s why I believed silver was going under $14 at some point. Last week it finally happened.
However, now I’m wondering if this isn’t another bear trap like GBPUSD where all the sell stops sitting under the market ($14 in silver’s case) were set off to temporarily drive the market lower. I say it could be a bear trap because of just how quickly and violently silver bounced back over that crucial $14 level.
It will likely take a few more weeks to see what this means as it’s still a bit messy. As you know, I don’t feel confident about a change in the direction unless there’s a pattern that proceeds it.
That clear pattern hasn’t appeared yet. However, silver’s robust bounce suggests the drop could be a bear trap and the lows are in.
What will really convince me is a move to higher highs. If silver can take out the $21 level that would strongly suggest a secular reversal in silver. This would be consistent with my thinking of a weaker U.S. dollar, of course.
Until then, I can only watch the prices to see if silver’s going to act like a beach ball held underwater and then released to explode upward into the air. I will jump aboard if I smell an opportunity (as I did with EURUSD, GBPUSD, USDCHF, and USDJPY) but not just yet.
Now for comparison with spot gold (XAUUSD):
The volatility in gold in the last three weeks has been incredible. We’ve seen $100 ranges within a day and in the last week, there was a $250 range.
As with GBPUSD, this makes it difficult to assess your risk.
Notwithstanding the fact I have a visceral feeling that gold is going higher, there’s the very real question of how to enter and stay in a position with an asset that’s moving in such a volatile manner.
I’m bullish because if we step back, the double bottom is the governing pattern on this chart. A governing pattern dictates the direction a chart will take and in this case, that means up.
However, I don’t see a comfortable risk-reward relationship right now. That’s because when I'm looking to get on board, I want to see the price slowly build. I don't want to get into something where the volatility has been so extreme.
So I’ll wait for things to calm down while I assess the relationship between gold and silver. Ideally, I would like to seeing some inside bars and other indicators that the price is consolidating and the risk-reward relationship is improving.
Certainly gold appears to be forming a channel and any opportunity around the high $ 1500s could be an attractive opportunity to start building a long position, assuming the volatility settles down in the meantime.
To finish off this week’s lengthy report, I want to show you the NASDAQ stock index. The NASDAQ is, of course, considered a proxy for the tech sector.
This is a monthly chart and the volatility has been unprecedented. Every day we're going up (or down) literally 5% or 10% each time. Last week the index bounced, not coincidentally from the lower end of an ascending broadening price formation.
The market is setting all kinds of records right now. And this is why it's very important to keep your eye on the long-term patterns. That’s because even though the NASDAQ moved smartly off the bottom, the price remains within the ascending broadening formation.
This particular pattern is a topping pattern, by the way. And the implications are that the price is likely to eventually break out of the lower edge of the pattern and drop hard.
The magnitude of the drop should be down to the level where the pattern started, which is potentially a 33% drop from the lower line of the pattern.
Just be very careful with the volatility right now.
And that goes for the FX pairs and the precious metals too, not just the stock market. Assess your risk before making any trades.
To me, the risk-reward of going long EURUSD and GBPUSD and short USDJPY and USDCHF are fantastic. Those pairs have moved dramatically off my initial entry points, but it’s not too late.
Getting in is a matter of waiting for the market to come to you. Don’t ever feel like you're chasing the market here. Wait for the market to settle down, wait for key reversals or inside bars, and wait for ideal opportunities. Chasing markets in this environment can be disastrous.
Start with small positions and build them gradually.
I think all the action going forward is going to be in the U.S. dollar. That means building positions in the four pairs I’ve discussed in detail today. Don’t rush because it’s not too late.
Remember, I’ve already shown you that these dollar trends last for eight or 10 years.
And with that said, I wish you a very healthy and prosperous trading week.