Farewell to 2020 and What To Trade in the New Year
This will be my last weekly video report for 2020.
On behalf of myself and my terrific team at The Pattern Trader, I want to extend heartfelt good wishes, happiness, festivity, and above all good health to you and your loved ones over the holiday season and into 2021.
I can't thank you enough for your support. I get as much out of it as I hope you do.
That’s because I've met people from all over the world, started relationships and inherited a second family, all of which I never anticipated when I started this business. So I want to thank you one and all and congratulate you for your commitment and your dedication to advance your learning and your mindset about the markets.
And hopefully I've provided some valuable input over the course of this year!
So let’s begin …
I want to reference an email I sent at the end of March to all our members. The title was “US Dollar 10 Year Trap”. The pandemic crisis was just beginning and the government had just issued its first round of stimulus. I predicted the US dollar was going to crash.
In fact, I pointed out that despite the USDI (US Dollar Index) booking its biggest weekly gains since the 2000 financial crisis, it was unwise to chase this rally.
That’s because when volatility expands as it did so dramatically at that time, it usually indicates a reversal in the market. I felt the dollar was surging only because investors scrambled for the world's most liquid currency to solve short-term problems, not because they were truly bullish on the US dollar.
In that email, I went on to say that I wasn’t a fundamentalist, but that it was difficult to see how an unrestrained printing press was going to accomplish anything but out-of-control inflation and a dollar crash.
I also pointed out that the long-term price patterns in USDI on the 43-year chart had been alerting me to a major reversal for some time and that it was likely to begin immediately after the recent dollar surge.
I predicted the U S dollar was going to reverse hard, and that's exactly what we've seen for the past eight months since that email.
Here’s that long-term USDI chart I was referring to.
USDI had had a 10-year rally from 2010 to 2020. This was a massive bull run but despite that, the dollar has actually been dropping over the last 43 years
With a series of lower highs going all the way back in 1985, you can see the peak was much higher than it was in 2000 and certainly much higher than it was in 2020.
Note that coinciding with this recent rally, USDI also had a double top where prices have reached the same level as a few years back and right along the downtrend line too.
Another key point here is that when the dollar picks a direction, it goes in that direction for 5 -10 years at a time. There have been distinct trends from 1985 to 1995 … 1995 to 2000 … 2000 to 2010 … and then 2010 to 2020. Once the dollar turns, it goes in that direction for several years.
That’s why I feel we’re going to see a collapse in the U S dollar lasting potentially to 2025 or beyond.
This is a lagging chart and so it’s not quite showing that USDI has already turned lower.
However, the weekly chart displays what that lagging 43-year chart does not:
This weekly chart goes back about six years, but that’s enough to show the double top that’s visible on the 43-year chart.
We can also see a bearish head and shoulders pattern. Note that the right shoulder is lower than the left. This creates a sloping neckline, which implies that not only has USDI reversed from that 10-year bull market but also that the fall could be quicker and harsher than what we would expect from a conventional head and shoulders with a horizontal neckline.
So that’s the most probable future for USDI.
What will rally in response? Well, I really favor the risk/reward prospects of AUDUSD (the Australian dollar versus the US dollar).
AUDUSD has been in a profound 10-year downtrend consistent with the 10-year uptrend we saw earlier in USDI.
However, that downtrend appears to be finished. AUDUSD has traced out an inverted head and shoulders pattern which is both a reversal pattern and very bullish. Especially when there’s a sloping neckline on this pattern as with USDI!
That sloping neckline makes this a very bullish price pattern with the implication that prices could shoot up very, very quickly.
I expect AUDUSD will surge over the next few days, weeks, months, and years. For those of you so inclined, I would tuck away a small position for quite some time.
In the meantime, we should see AUDUSD continue to climb to the next major resistance about 400 – 500 pips higher around the 0.81 level. That's where I see the first “stopping point” in this rally.
But for now it seems there are only blue skies ahead for AUDUSD.
In fact, I’m so bullish on AUD that I favor it against most major currencies.
Here’s AUDCAD (the Australian dollar versus the Canadian dollar):
This weekly chart also features an inverted head and shoulders with a very bullish sloping neckline, which implies that prices are going to shoot higher perhaps very quickly. Are you seeing a theme here?
And another AUD chart worth reviewing is GBPAUD (the British pound versus the Australian dollar):
With the apparent AUD strength at hand, I feel GBPAUD is once again vulnerable to the downside.
The triple bottom price pattern has been dictating prices for the last couple of years with a rather choppy rise eventually culminated with a very volatile top. That spiky top is now the head of a bearish head and shoulders pattern.
I feel the head and shoulders is the new governing pattern, especially when you look at it in conjunction with a historic double top that preceded the triple bottom.
This combination of very bearish price patterns suggests GBPAUD’s new trajectory is going to be lower. Any violation of the neckline below current levels should open up a path for a significant amount of pips to the downside.
Now here’s AUDCHF (the Australian dollar versus the Swiss Franc) which like AUDCAD and AUDUSD has also been in a profound downtrend for quite some time.
But you can see the beginnings of a turnaround with an inverted head and shoulders forming right now.
However, of all the AUD currency pairs I’ve reviewed here, I would take this last. That’s because it looks less bullish than the others. Now of course it might surprise everyone and rise very, very quickly. But at the moment AUDCAD and AUDUSD look the most likely to levitate faster, and GBPAUD the most likely to plummet.
With the Brexit discussions in the background, the importance of the movements of the British pound is of great interest to us as traders.
Here’s GBPUSD (the pound versus the US dollar) which looks just like everything else against the dollar in that it's starting to build strength:
First of all, GBPUSD has traced out what’s called an Eve and Adam double bottom. The Eve bottom is more rounded with multiple attempts to break through support. The Adam bottom is just a single attempt.
This forms the basis for what looks like a huge base which when confirmed, implies GBPUSD is going to skyrocket in 2021.
For now, GBPUSD has closed over the critical 1.35 resistance level. This has been resistance for quite some time, but last week's price action closed a hair above it.
This is yet more evidence that the US dollar will fall and most currencies will rise against it. (Note that I feel AUD is even stronger than GBP, hence it’s the better buy against USD.)
Next on my hit parade of currency pairs to take advantage of the impending US dollar collapse is USDJPY (the dollar versus the Japanese yen):
I can see most every bear price pattern under the sun in just one chart here.
There’s a double top acting as the head of a head and shoulders pattern, a descending triangle, and an H-top within that triangle.
What’s more, there’s nothing but air below the neckline of that descending triangle at 104. Since USDJPY closed below that major support, there should be nothing but further weakness in USDJPY going forward.
One word of caution: as we get into the latter part of December, we will see lower liquidity and lower volume in the markets. Prices can be pushed all over the place during such times.
So it's quite possible USDJPY could go lower, go higher, and then finally collapse on thin volume.
I would look at any rise as an invitation to go short here.
Now here’s a pair I haven’t reviewed for awhile: EURCHF (the Euro versus the Swiss franc) …
The dominant trend is still down, but EURCHF has caught some support at the lower level of this chart pattern.
It’s now trading within the confines of an ascending triangle. This pattern is not necessarily indicative of future direction in and of itself. This could be a continuation pattern, meaning that EURCHF will break out to the downside. It could also be a reversal, in which case it could be setting up for a healthy pop to the upside.
My bias is to the upside because buried within the ascending triangle is a small double bottom price pattern which is quite bullish.
And so I think it's worth putting on a trade when you don’t have to risk a lot to find out if you’re right or wrong. Consider putting a buy stop above the recent highs with a stop loss below recent lows.
That gives you a great risk/reward opportunity if EURCHF does move up. It also doesn’t cost us much if we’re wrong.
In the past few weeks, I've expressed my ambiguity about EURJPY (the Euro versus the Japanese yen) so I'm going to take a deeper look at this pair on the monthly chart:
Whenever I have some hesitation about the direction of a given pair, I find that peeling back to a higher timeframe gives me a more global view of what's happening.
Now we can see that EURJPY has been traversing along a long-term downtrend, even though short-term momentum has been to the upside since a bullish key reversal several months ago.
That key reversal looks to be part of a double bottom and there could still be some upside momentum left until 130.
But should EURJPY get to that level, I’d be very hesitant to stay long as I think the long-term downtrend is likely to kick in.
The down trend is governed by a head and shoulders and a double top. I feel these patterns should ultimately dictate the future price trajectory here. Again, the potential turning point to watch is 130.
My ambivalence about anticipating future prices also goes for GBPJPY (the British pound versus the Japanese yen):
This too is a monthly chart. The governing patterns are the two head and shoulders patterns beginning over a decade earlier.
More recently, GBPJPY has been hovering within the boundaries of a symmetrical triangle and is rapidly approaching the business end. That means prices are going to pick a direction very soon.
For now, I'm anticipating that GBPJPY may stage a false breakout to the upside before snapping back into the long-term downtrend. The conclusion of the Brexit discussions could be a catalyst for sending this pair higher, for example. But I would be cautious once GBPJPY escapes the triangle, as I think it's likely to revert in its prior historical downtrend.
In any event, the charts will tell the story over time.
That’s why I think there's a great opportunity ahead in 2021 in this yen pair and other JPY pairs, for that matter.
Now let’s take a look at the monthly price chart of US light crude oil:
The pandemic sent prices crashing below zero in May. But by now, that looks like a giant bear trap where if you were inclined to chase prices below $20, you’re now trapped after prices surged above the breakout area.
This has set the stage for what looks to be a huge short squeeze. Plus the Fed is inflating all asset groups as it appears the monetary authorities in the US and elsewhere are trying to get out of this deflationary trap via gargantuan stimulus.
This policy is generating huge upward momentum in just about all asset categories, whether they be real estate, stocks, gold, silver, and of course oil.
I feel we’re seeing the underpinnings of an inflationary spiral as the Fed said just last week that they were committed to keeping interest rates near zero through 2023 -- despite the fact that assets are surging.
This going to cause a huge disruption in the markets down the road. We usually view this negatively, but to me it implies there's going to be all kinds of opportunities going forward in all these asset categories.
So let’s take a look at silver now.
Here’s XAGUSD (spot silver):
Following the peak of the pandemic (which set a bear trap low in silver) silver finally broke out from its seven-year downtrend while also breaking out from an inverted head and shoulders price pattern.
That pattern has popped up a lot in the charts this week! It’s appeared across all. kinds of instruments including currency pairs, metals, and so on. This is why it's so valuable to look at price patterns and price action because these patterns recur in all timeframes across all trading instruments.
And they typically have the same implications too.
In this case, those implications include the near-certainty that a bottom has been put in. That leaves prices free to head north.
There’s also the fact that silver has broken out of a descending triangle with last week’s action after establishing a double bottom at $22.
Now it looks like prices will keep going higher. There could be a lot of volatility because there's a lot of price history nearby, but I would not rule out a further surge in the price of silver in the near future.
XAUUSD (spot gold) is also looking more bullish now:
In recent weeks we've seen gold trade within the confines of a channel (or flag) pattern. A breach above $1,920 would represent a breakout above this channel.
This could also be an area of resistance where gold snaps back and retests some lows. Recently I pointed out that gold has been trading within the bounds of an ascending broadening formation with the implications that it could retest $1,700 before resuming its bullish ascent.
However, we’ve now seen a couple of bullish key reversal bars including the one that completed last week. A bullish key reversal is when the price makes a new low and then closes at the high of the week. This indicates the buyers are in control of the market.
I’m thinking the bearish scenario is now less likely and the $1,920 level on the upside is now the more important level to watch. The trajectory of prices looks to be higher and possibly much higher in the near future.
The last set of charts for this report will once again focus upon the NASDAQ stock index.
Since March, we've witnessed a relentless surge in this index within the confines of an ascending broadening triangle, at which we hit the exact support level in March. You can see that it dropped exactly to the support line that was created several years ago.
Now the NASDAQ is hovering well above the resistance area of the same pattern and has even broken out above it. This suggests there's nothing but blue skies above.
However, I would caution you about chasing this due to the wedge/pennant pattern I’m also seeing here. This pattern implies the NASDAQ could break out to the downside after a further price surge -- it tends to be a reversal pattern.
So be on the lookout for any announcement or price action that pushes this index higher (such as a stimulus announcement) and then takes out the lower bound of the wedge. That would open up a pathway to lower prices.
I’m now thinking this scenario is the most likely going into the first part of next year.
To drill down a bit and explore that thesis more closely, here's a daily chart of the NASDAQ:
Here we can see that what set the NASDAQ upon its most recent trajectory higher was a double bottom couple with bullish key reversals at each bottom.
This chart also shows that ascending wedge in more detail. Price continues to traverse along the trendlines of this pattern and so it does look like the NASDAQ is going to keep going higher.
However, watch for any kind of turn that challenges the lower support line. That’s what could signal a sizable move lower.
For now, the path of least resistance is higher. It looks like there's nothing in the way, especially considering there's going to be another round of Fed stimulus coming very soon. That’s why I’m staying on the sidelines to watch for that turn after the stimulus boost, if it happens.
And that’s it for the week!
To summarize: I’m very bearish on the US dollar and bullish on AUD. My favorite AUD trades are long AUDUSD and AUDCAD and short GBPAUD. I’m bearish on the JPY pairs (USDJPY, EURJPY and GBPJPY but they could all rally before a major leg down). I think EURCHF is worth a speculative, low-risk buy. I’m also bullish on all the commodities and precious metals too.
So with that said, I want to thank you once again for choosing The Pattern Trader as your destination for higher learning in trading. It's been an absolute pleasure and I look forward to hanging out with you guys in 2021.
In the meantime, I wish you a healthy, prosperous holiday period and happy new year.
Mark "FinancialMarketsDisruption" Shawzin