How This Interest Rate Could Affect Everything
Here’s a 10-year US Treasury Note chart:
During the depth of the pandemic, the 10-year yield dropped to about 0.4% but recently rallied above 1%. At this point, it’s now about 1.09%.
Why? It seems Treasury yields have increased as the economy is perceived to be recovering faster than the monetary authorities thought it would.
However, this upward creep in the risk-free rate of return is going to impact stocks, the dollar, and gold. The better the return in risk-free Treasuries, the less appealing those higher-risk assets become.
That’s why it’s important to keep an eye on this. The level most people are watching is 1.5%. If yields were to rise to that level, it could start putting a dent in US stocks.
So how has the US dollar fared as this has been happening?
In this chart, I'm looking at the USDI (US Dollar Index) which tracks the dollar against a half dozen of the most liquid currencies.
Commensurate with the rise in treasury yields, USDI has gained support over the last couple of weeks.
That's not surprising because USDI reached a major support area. The price of anything will typically rebound the first time it hits such a zone.
However, I remain bearish on USDI and look at this rise as an opportunity to get short -- especially if it can rise as high as the breakdown level I’ve highlighted above.
That’s because of the very bearish head and shoulders on this chart. This particular pattern has the right shoulder lower than the left, which gives a sloping neckline. Such a neckline implies the market will drop very quickly.
So I don't expect support in USDI to last very long.
What’s best positioned to move in response? Here’s AUDUSD (the Australian dollar versus the US dollar).
Since the depth of the pandemic, I've maintained AUD is the strongest currency against most other currencies around the world.
The technical picture is the opposite of USDI with an inverted head and shoulders with the right shoulder higher than the left. The sloping neckline here is very bullish and so I expect AUDUSD to move higher very soon.
Any pullback here is an opportunity to establish a long position in anticipation of that climb.
AUDUSD could hover here for awhile or it could bounce very sharply. The market has run from 0.55 to 0.77, after all. So it could consolidate around this level for now. But the longer it does so, the bigger the blastoff at some point in the future.
Now here’s GBPUSD (the British pound versus the US dollar):
GBPUSD has made what I call and Eve and Adam bottom as part of long-term bottoming action. This suggests the pair is due to rise over time, probably very strongly.
An Eve bottom is one where there are multiple attempts at a low, whereas an Adam is just a single spike.
What’s more, the shoulders on either side of that Adam bottom suggest what could be considered a complex inverted head and shoulders. That’s like a regular head and shoulders, but with extra shoulders on one or both sides.
The shared neckline for this pattern is right around current prices at the 1.35 level.
Prices have been unable to push through that major resistance, which is not a surprise. I would not be surprised to see some kind of retrenchment of the current GBPUSD rally as USDI rises.
As with AUDUSD, this is an opportunity to being building a long position in anticipation of a major rally in the future.
Now here’s USDJPY (the US dollar versus the Japanese yen):
USDJPY has been jammed up at the 102 – 104 level but ultimately I expect this pair to go lower. It's just a question of “not if but when” thanks to the litany of bear price patterns here.
Those patterns include the head and shoulders and double top combo from a few years back plus the more recent long-term descending triangle.
USDJPY is presently at the bottom of the triangle. Each time it reaches the lower line of the triangle it catches some support. That suggests we might get some kind of surprise rally from current levels. Although having said that, the more times price challenges a low (as USDJPY has done yet again around 104), it's just a matter of time before it breaks through and goes lower still.
Last week was a miniature bearish key reversal and it's possible this could be the signal that sends USDJPY lower again. But considering recent dollar strength, we might see a small rally.
I wouldn’t expect any such rally to last very long and at most, it should reach no higher than the long-term upper trendline of the triangle. If so, that would be the ideal place to go short as I expect USDJPY to eventually drop well below 104 at some point.
Sticking with the yen pairs for a moment, here’s EURJPY (the Euro versus the Japanese yen):
EURJPY has been trading on both sides of 125 over the last few years, so it becomes a question of where this pair is going if it’s going anywhere at all.
When a chart looks ambivalent at first glance, determine the governing price patterns to learn more. These are the patterns that dictate the future trajectory of the market.
The governing patterns here include a head and shoulders and then a double top which have defined the long-term downtrend. EURJPY has therefore been in a stealth bear market for many years.
This suggests EURJPY’s next major direction will be lower, especially when another interim double top is forming at 128. That level has been a significant barrier for EURJPY to get through. And last week's price action pushed back from this level once again.
This could be the beginning of the new trend lower. I would start taking a poke at the short side of EURJPY now.
For comparison, here’s GBPJPY (the British pound versus the Japanese yen):
Recently this pair has enjoyed strong upward momentum, but will it keep going and reverse the long-term downtrend? Or will it roll over and maintain that downtrend instead?
By virtue of prior price action, the governing patterns suggest GBPJPY will eventually rollover. Those patterns include a double top as part of a head and shoulders.
I don’t think there’s enough of a bullish foundation to reverse the bearishness. That’s because the interim double top as part of a complex head and shoulders (multiple shoulders on each side of the head) has effectively killed any rallies so far.
GBPJPY could rally back to the neckline of that pattern once again, but ultimately the bear forces will kick in and send prices lower in the direction of that primary downtrend.
Last week was a small bearish key reversal that could prompt lower prices. Any breach of recent lows would suggest the decline is ready to commence.
If you prefer to wait for more certainty, then look for a breach of the recent support line that’s been guiding GBJPY for the last few months. Once GBPJPY breaks that, it would open a path to significantly lower prices.
In the meantime, GBPAUD (the British pound versus Australian dollar) has also seen back and forth price action with the median somewhere around the current 1.80 price level.
As with earlier pairs, we can resolve this apparent sideways action by identifying the governing patterns.
Those include the large double top and then a head and shoulders price pattern. GBPAUD is sitting right at the neckline of that pattern.
There are a couple of levels of support here, but the path of least resistance is going to be lower over time even if there’s a short-term rally. Last week’s inside bar suggests a building store of energy that’s soon to be released explosively at some point.
I think that release will be to the downside due to the strength of the governing patterns.
(By the way, unlike a key reversal where I look at how a market closes relative to the high and low, I don't really pay any attention to where an inside bar closes. I put the weight on the overall direction of the trend.)
As for this particular situation in GBPAUD, the easiest and safest way to enter this is with a sell stop around the 1.75 area. Enter your stop and let the market do all the work for you.
If the market rises next week then no harm, no foul. But if the market suddenly drops, then you might just wake up one day and find yourself in a good trade.
So I don't think there's any harm done by putting a sell stop under recent GBPAUD lows in anticipation of much lower prices over time.
Now let’s take a look at US light crude oil:
Oil has had a huge bounce from zero all the way above $50.
Now the question is where does crude oil go from here? There are some significant downtrend levels about to come into play between $55 and $60 which represent significant resistance.
We saw some weakening momentum last week with a brief pullback. However, it doesn’t look like a significant reversal yet. So I feel oil’s path of least resistance, for now, is still higher.
But I would certainly start watching the $55 - $60 area for major resistance.
Here’s XAGUSD (spot silver) now.
I want to peel back and look at the long-term price trend to put everything in perspective here:
This chart goes all the way back to 2010. In this timeframe, we have a historical double top and an accompanying descending triangle.
Once the neckline of that pattern was breached, a long downtrend commenced where prices went from $26 all the way to $11 at the height of the pandemic.
After that, there was a massive turnaround and bear trap with an inverted head and shoulders which propelled silver to around $30 in just three short weeks.
But that was then and this is now. Right now silver is facing some serious resistance and looks to be ready to turn lower.
Particularly bearish was the substantial key reversal where silver made a new high couple of weeks ago, then closed right on the low. This was a very large key reversal and very often bars like that point in the direction the market wants to go.
Just last week XAGUSD traced out a small inside bar and any breach below the low is likely to give way to lower prices in the near term.
Again, considering the bond yield chart I reviewed earlier, it’s important to understand that when interest rates start to rise, this is a negative for the precious metals group.
Right now silver still has a double bottom at $22 that could act as a floor for any drop, but price action since that double bottom has been quite lackluster. If silver were truly bullish we would have seen a stronger response since the double bottom.
At best I see silver range-bound and at worst retreating to the initial breakout at $18 in the foreseeable future.
XAUUSD (spot gold) looks even more bearish:
There are two key reversals at the $1,950 area. In fact, gold ended $100 lower on its most recent attempt to breach that level.
Any incursion below last week's low around $1,850 will likely give way to lower prices, perhaps as low as $1,700.
I’m getting that price from the trendline of the ascending broadening formation gold is tracing out right now. This is typically a bearish reversal pattern and it’s apparent in the NASDAQ too (as you’ll see in a moment).
The NASDAQ hit the lower edge of its ascending broadening formation before rocketing higher and we could very well see the same phenomenon with XAUUSD. I think gold could test the lower end of its ascending broadening price pattern at $1,700. Then we'll see what it does from there.
But for now, the short-term momentum is definitely looking bearish.
As I just mentioned, the NASDAQ stock index has some similarities to gold:
The ascending broadening price pattern is evident here, although the NASDAQ is already much farther into the price history for that setup than gold.
I’m assuming for now that gold will drop to the lower edge of the pattern before bouncing up as the NASDAQ has done, but time will tell.
Very often the market points to how it wants to come out of these price patterns by virtue of the price action within the pattern. The NASDAQ kept making bullish key reversals at key support points over and over again (see the red arrows on the chart). That means the market kept closing at the highs, which led to rebounds and eventually a series of all-time highs in the market.
But last week the price failed to follow through and the NASDAQ traced out an inside bar. These inside bars often look innocent, but they can be reversal bars under the right circumstances.
Those circumstances could be here now thanks to the extended run the NASDAQ has had. I would not be surprised to see some kind of setback from the current level.
Perhaps such a setback will establish a new trading range because this market does need to consolidate. The long-term trajectory of stocks is still higher, but we could be at a meaningful inflection point here.
A further indication of this potential rollover in the NASDAQ comes from the prized FAANG stocks: Facebook, Amazon, Apple, Google, and Netflix. We're starting to see signs that these tech stocks that have been leading the surge higher are starting to run out of steam.
Here’s Facebook (ticker symbol FB) with a double top above the 300 level.
Since then, FB has traced out a rounding top which could also be described as the cup portion of an inverted cup and handle. FB is trading right at the neckline and the price action here will be very telling.
I feel we could see follow through to the downside here and FB could fall as low as 220 if the NASDAQ does in fact drop and trade sideways.
Now here’s Amazon (AMZN):
AMZN has formed a double top at the 3,500 level although I don’t foresee a long-term decline. There are some bullish key reversals that indicate strong support at 2,950.
And so I would be looking for some kind of incursion down to that area in the potential worst-case scenario. Not a crash, but a drop to what looks like strong support at just under 3,000.
Now here’s Apple (AAPL):
There’s resistance at the 138 level and the possibility of a pullback here too. There looks to be very solid support under 110, however.
These aren’t necessarily short selling recommendations, but I’m just making you aware of what I see as the most likely trajectory going forward in these bellwether tech stocks.
And that’s it for the week!
I feel there will be short-term strength in USD at the expense of other currencies including AUD, but this isn’t likely to last for long. I’m bearish on precious metals and a couple of the yen pairs. I’m also neutral to bearish on the NASDAQ and tech stocks.
I wish you a very healthy and prosperous trading week.
Mark "GoldBroadeningCollapse" Shawzin