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Why the U.S. Dollar Looks Bullish Against Everything

Mark Shawzin
January 15, 2020

If you’re a dollar bull, you’re going to love this week’s report.

Before I dig into today’s markets, I want to talk about a price pattern that could foreshadow what I'm seeing in the U.S. Dollar Index (USDI) right now. This should give you a sense of history and how it’s played out when this pattern appears. Then I’ll translate that to the current price action in USDI.

So here’s the NASDAQ back in 2015.

As you can see, the NASDAQ formed a reverse triangle. After peaking at the top of that triangle, the index plummeted and then dug in with a double bottom before roaring back to all-time new highs.

Now I want to show you the same pattern and price action in another instrument: Facebook stock in 2018.

As with the NASDAQ, you can see that FB peaked at the top of a reverse triangle, fell out of bed, established a double bottom and ultimately went on to make new highs.

That seems simple enough, right?

Now I think we’re seeing the same thing with the U.S. dollar. In this chart, I'm looking at the U.S. Dollar Index today (USDI). (As you probably know, USDI compares the U.S. dollar against a half dozen major currency pairs.)

For the past year, USDI has been landlocked in a trading range. We’ve been left wondering whether this was the peak … whether it was going to drop … whether it was going to continue the rally, and so on.

USDI hit a meaningful resistance area recently. But despite the fact USDI was also at a double top area, I had a hard time accepting that USDI was going to crater from that level.

That’s because when looking at EURUSD and AUDUSD (the Euro and Australian dollar against the U.S. dollar, respectively) they simply didn’t look all that ready to turn around.

Plus there was the fact that USDI had formed a small, mini version of the reverse triangle we saw in the NASDAQ and Facebook. What was missing before was the double bottom that’s now put in an appearance.

That means we have USDI now making a very similar pattern to what I showed you in those other charts.

To my mind, this opens up the opportunity for a move that should take USDI to new highs.

Having said that, USDI could still slide sideways for while before rising. We might see this index continue to back and fill for some time. However, I see USDI inevitably moving up within the context of a multi-year trend that started in 2011.

And that’s why I feel a strong dollar trend will continue.

So what other evidence do we have for that view?

Let’s look at EURUSD (the Euro versus the U.S. dollar).

On this weekly chart, I just can’t see the Euro going higher.  The Euro has dropped over the last 10 years from 1.70 to the current level of 1.11 and I don’t see any emerging patterns that suggest this giant long-term downtrend is about to reverse.

In fact, it’s more the opposite.

Sitting within the midst of that long-term downtrend is as head and shoulders continuation pattern. And what I mean by a continuation is that this pattern within a prevailing trend suggests that trend is going to continue.

EURUSD has been landlocked between 1.08 and 1.12. And this could continue for quite some time.  But ultimately the downtrend should resume because I simply can’t see a reversal happening in this pair.

So how about AUDUSD (the Australian dollar versus the U.S. dollar)?

Just like EURUSD, AUDUSD has been in a long-term downtrend while dropping from 95 cents in 2014 to under 70 cents today.  A double top continuation pattern formed recently. And once AUDUSD crossed the neckline of this double top it indicated the next move was going to lower once again.

At the moment, AUDUSD is trudging along a long-term support area at the 68 cent area. But I don't believe this looks anything like a reversal pattern that would signal the end of a major downtrend.

AUDUSD looks set to go lower, especially when AUD looks like the weakest currency on the board against most major pairs.

So I would be inclined to short rallies in AUDUSD while recognizing that it may not give much profit at first. AUDUSD might very well continue to bounce in a narrow trading range which could persist for the next several weeks or months.

Now for a quick observation on trading in general: if you've listened to any of my webinars or any of my recordings, you'll know that I believe the most prized aspect of a trader is to maintain complete objectivity.

I pride myself on being as objective as possible because it really is THAT important.

My focus on objectivity has led me to a rather surprising conclusion if you’re a regular reader of this report: my stance on USDJPY (the U.S. dollar versus the Japanese yen) has changed.

So let’s start by looking at the monthly chart because it’s making an interesting pattern over the past three or four years.

Long-term readers know I've been a long-term bear in USDJPY and advocating the short side at every opportunity.

That’s been very profitable and we’ve taken out a lot of money on the downside. But as I always say, I draw my structures and then I defer to the market. The market is ultimately right.

I have an opinion, but an opinion must change depending on what the market is telling us — not what our ego is telling us. And so, in this case, I’m seeing a potential change. I'm not sure what it represents, but we’re seeing some strength in USDJPY.

Right now USDJPY is trading within the confines of a large symmetrical triangle. It’s right at an inflection point along the resistance line of that triangle.

There's always the possibility that USDJPY rises out of that triangle and then reverses to create a head fake and a bull trap, of course.

But it might not be a head fake. That’s because the current month is tracing out a bullish key reversal, one where the price made a new low and then raced to a new high.

This monthly bar is only halfway finished, of course. It’s too early to call it a key reversal in full.

But if it happens, we could see a major breakout opportunity here. USDJPY could offer several hundred pips on the upside. So I’m certainly keeping an eye on the possibilities here.

So I'm not short USDJPY right now. And I’m not about to try getting short despite my long history of shorting USDJPY over the years.

The weekly chart provides a bit more support for my reluctance on this stance:

For the record, my actions in this pair have been pretty much guided by the double top and head and shoulders bear price pattern since the middle of 2015.  It was my belief once that bear pattern had completed, it was pretty much going to guide the price action lower in this pair.

That is in fact what happened over the years as USDJPY went from 126 down to 104.

But no more. Now USDJPY is moving along an inflection line consistent with the monthly charts.

Note the two bullish key reversal bars where the price dipped low and then closed substantially higher by the end of the week. Those bars stand out because they pointing in the direction they want to go (this is why I prefer bars over candles as candles don’t give you that convenient directional sign).

So in light of recent price action, I think USDJPY could be setting up for a potential breakout.

In fact, anything above the 110 long-term resistance line could drive a move higher.

This could be a bull trap, of course. But I want to alert you to a potential long opportunity here. We're on the cusp of a long-term resistance line.

If you’re an aggressive trader, you could buy USDJPY here with the view of following a winning trade with a trailing stop loss and see how it goes.

If you’re more cautious, stay out. It’s enough to know that key reversals typically indicate some momentum to the upside.

It's going to be very interesting to see how the USDJPY price action unfolds from here. And as I’m feeling cautious here, I’m on the sidelines as I watch prices within the structures I've laid out for you.

Now for a quick word on a couple of my favorite non-USD pairs …

Last year I was very bullish on GBPAUD and GBPNZD (the British pound versus Australian dollar and New Zealand dollar, respectively) and took profits amounting to thousands of pips on the run-up in those pairs.

However, over the last couple of weeks, the price action in GBPAUD and GBPNZD (as with most other FX pairs) has become much more ambiguous.

To use an analogy, these pairs are sitting in the middle of the tennis court.  If you don’t play tennis and aren’t familiar with court positioning, that’s not a good place to be. You want to be on the baseline or you want to be at the net. You don't want to be in the middle as you’re essentially halfway to nowhere.

But that’s where GBPAUD and GBPNZD are right now. I could see prices going either way. I feel these pairs will resume marching upwards, but I'm also open to the fact it could be weeks or months before they finally break through from their current consolidation levels.

So yes, I’m on the sidelines here too.

Now onto precious metals …

On the heels of the U.S. taking an Iranian general and the Iranian retaliation, we saw a huge run-up in silver and gold. I’m trying to assess whether this was simply an emotional run-up or if this is truly the start of an emerging bull market in this asset class.

The next few days are going to provide a lot more clarity on this issue — certainly for gold, anyway.

Silver is more ambiguous — I could make the case either way in silver. On this monthly chart, is this going nowhere or is it starting to form a potential launching pad for higher prices?

If silver starts “digging in” and showing an appetite for a retracement back to previous resistance, that will certainly inform me that a bull market could be on the way. But if silver simply fails to hold and dribbles back into its sideways channel, that will inform me that a bull market is likely NOT on the way.

So again, I'm on the sidelines. The next couple of days or weeks should be instructive as to where silver is likely to go.

Here’s XAUUSD (spot gold) on a daily basis:

Now, this next comment could get me in trouble with some readers: sometimes I don't really know how to articulate or explain how I decide to enter a market. Spot gold today is one of those times.

Gold recently formed a large bearish key reversal. Regular readers know I say these key reversals often point in the direction they want to go (in fact, I’ve said exactly that earlier in this report!).

This is especially true for the largest and biggest reversals (this one is pretty big).

But with gold, I'm not sure that's going to be the case this time around.

A key point here is that markets don't move parabolically up and then go straight down against the earlier move. There’s a concept of “spacing” where the market needs some time to breathe, “digest” gains or losses, and store energy before the next leg up or down.

That’s why even if this particular reversal indicates the gold bull market is over, the market still needs to build substantial space to begin falling. Gold needs to create some room to go down.

So that’s why one reason why I’m not jumping in to short this market just yet.

The other reason is that I have this feeling that last week's reversal could be just ahead fake in a long-term bull market that’s likely to continue to the upside.

I don’t have hard proof on the charts to back up this feeling, but it’s there.

And the good news is that I don't have to bet one way or another right now. I'm just going to wait and watch the ongoing market action to see how things go.

If you’re an aggressive trader, note that gold did retest the breakout area. That might serve as a springboard for a bounce-back up again. Look for another move here, perhaps a bullish key reversal or something of that nature.

Or you could do what I’m doing, which is to defer to the market and watch what it does.

So with that said I'll move on to the S&P 500:

As you know, this is the major stock index in the U.S. and it’s effectively been a stairway to heaven following a breakout to all-time new highs.

The bullish key reversals all along this stairway indicate this market is going to keep going higher.

And that’s why I don't feel that shorting this market is going to work at the present time. There could be a trade here instinctively. I do think 3300 could represent some kind of resistance area. But there’s no obvious pattern on which to base that suspicion.

For now, just accept that the bullish reversals have been pointing the way higher in this market for a long time. The path of least resistance is higher.

And that’s it for this week.

This week’s conclusions include the fact that I’m cautiously bullish on the U.S. dollar and ambiguous about most FX pairs and metals to the point that I’m still sitting on the sidelines … for now.

Sometimes the very best thing to do in the markets is nothing at all.

With that said, I wish you a very healthy and prosperous trading week.

Mark “USDRally” Shawzin