It’s Not Good News for the US Economy, But It’s Good News for Traders with a Strong Stomach …
Last week saw numerous weekly price reversals in several asset classes including the US dollar, silver, and the US stock market too. Some could have long-term implications, others could be just temporary.
Let’s start with the dollar.
Here’s the US Dollar Index (USDI) which measures the US dollar against a half dozen of the most liquid currency pairs:
USDI made a key reversal last week. Prices fell to a low, but by the end of the week, the index reversed to close at the high end of the bar. You can see USDI did the same thing earlier in the chart. Note how key reversals tend to hold up prices and even point to where prices are going next.
This suggests that USDI’s latest key reversal means there will be some interim support. That’s consistent with the longer-term support level for the last year. When prices met this level before, they bounced off and even rallied at times.
While I expect USDI to ultimately continue lower thanks to the double top pattern that’s forming now, in the meantime it may track higher or sideways for a while. While USDI sometimes does get jammed up in long-term congestion ranges, I don't expect a sustainable rally in USDI at this time.
To unpack this a bit more, let’s review a number of dollar-correlated trading pairs and see what we can learn from the USD reversal.
If you read my last report, you’ll know I predicted the 0.70 price level was going to be a barrier for AUDUSD (the Australian dollar versus the US dollar):
That’s because AUDUSD had risen from 0.55 to 0.70 with the coronavirus as an apparent catalyst. It went very far, very fast all the way to previous highs at 0.70 that suggested AUDUSD would hit a stumbling block.
That's exactly what we saw with a small key reversal that took AUDUSD back down to its downtrend line.
I think this correction isn’t over yet. AUDUSD is likely to drop back under that long-term resistance line and consolidate at lower levels. Yes, this pair has put in its ultimate low at the 0.55 level which means that over time, it's going higher. But the key phrase is “over-time” and we could see some sideways action or even another dip first.
To have a sustainable uptrend in AUDUSD, the price action needs to put some distance between the long-term downtrend and the new uptrend. V-bottoms (and V-tops, for that matter) rarely work. The market typically needs more time to adapt to a change in trend.
That’s why we’ll likely see some backing and filling before there’s another breakout.
So I don’t feel this is a good place to start chasing this nascent AUDUSD rally. Let’s see where prices hold first.
Now here’s EURUSD, (the Euro versus the US dollar):
One of the things I look for in the charts is the follow-through. How does a market follow-through from a given chart pattern?
Until very recently, EURUSD was rightfully headed down after each of its head & shoulder patterns shown here.
But now, we're starting to see what I call a busted pattern. Prices are jumping to higher levels than should be “allowed” by a head & shoulders.
EURUSD is digging in and has even broken out above its downtrend channel twice now. Sometimes we get false breakouts and the price drops back into the trend. I’m not ruling out that possibility. And typically two key reversals alert me to major opportunities, especially when they occur near 1.15 which is a key resistance level in EURUSD.
However, I don't think we’re necessarily seeing a double top here and that we should short EURUSD.
That’s because this is an opportunity to see how well the price digs in and consolidates while being alert to any move to the upside. Remember these are weekly charts and therefore it could be several weeks before we see another upside breakout.
So there’s no urgency at this point. Just wait and watch market behavior. We can always pounce upon the best opportunities with the best risk/reward profiles as they arise.
Now here’s USDJPY (the US dollar versus Japanese yen):
For anyone who’s been following me for any length of time, you know exactly where I stand with regard to USDJPY rallies. I’m pretty much a long-term bear on this pair.
There are many reasons for this. For one thing, I can’t see anything that’s going to lead to a sustainable rally in USDJPY. And therefore every attempted rally should be shorted by virtue of the multiple long- and short-term governing chart patterns.
There's every possibility that USDJPY can continue to go sideways, but ultimately this pair is going down thanks to the 2015 double top and head & shoulders combination. This is what set the stage for a long-term declining market – it’s still the bearish governing pattern.
That governing pattern was followed by a long-term descending triangle. And while there have been several rallies within this triangle, they’ve only reached lower highs. That includes the 400-pip rally over the last couple of weeks.
So if you're not short already, attempt to get short on any future USDJPY rally using a limit order. A limit order is arbitrary because you're trying to anticipate how much a market will rise before it falls once again. That can be a tricky thing, of course. One of the problems is that the price could almost hit your limit, but then fall before you get filled.
But however, you decide to do it, look at shorting USDJPY for the foreseeable future. Establish very small positions and build them over time.
That’s because I strongly feel that short USDJPY is your best risk/reward bet over the long term.
So how about GBPJPY (the British pound against the yen)?
I'm on record as saying it would be folly to chase this rally in GBPJPY because it was a fakeout rally within a long-term secular primary downtrend.
That puts GBPJPY in the same category as USDJPY were all the way back in 2015 there was a double top with a head & shoulders. GBPJPY has featured a rounding top after that, not a triangle, but the overall bearishness is still in place.
All this price action suggests that ultimately GBPJPY is going lower, but not without some tricky support areas that ignite short-term rallies like the one we saw in the last couple weeks.
But don’t be fooled by these rallies. I believe GBPJPY is a house of cards and it's eventually coming down. To mind, it’s a question of not “if” but “when” we see new lows in this pair.
As with USDJPY, I would look at any rallies to get short here. Just understand you need a strong stomach to hold GBPJPY since there are 300 – 400 pip counter-rallies. So keep your stops wide and take much smaller positions than you ordinarily would.
Build a position over the summer and wait. I feel eventually we’ll see lower levels in GBPJPY.
Now for the precious metals, starting with XAGUSD (spot silver).
This chart goes back almost seven years and you can see that silver’s been trading within the boundaries of a long-term descending triangle for a long time now. Most recently silver was rising toward the trendline (again) but stopped short with some reversal price action.
In fact, last week was a key reversal. In combination with historical price action, this suggests the rally has failed or at least stalled. Now we need to wait and see how prices behave from here. Will silver retreat as it has with previous key reversals? Or will it dig in and build a base before making another leg higher?
If silver falls back, it will confirm the long-term bearish trend isn’t over yet. If it can hold up, then there’s a chance it could still rally and bust the trendline pattern.
So keep an eye on silver’s next move to get an idea of where it’s likely to go for the rest of the summer.
In this chart, I'm looking at XAUUSD (spot gold):
For the past nine weeks, gold has been digging in between $1,680 - $1,750.
We’re left to evaluate whether this is a healthy consolidation that will set the stage for another leg up, or if it’s a precursor to a reversal.
I will defer to the market for now, but it seems the path of least resistance is still higher in gold. After all, gold has continued making stair-step progress within the boundaries of a reverse triangle. All that can be said is that the longer gold consolidates without meaningfully selling off, the healthier that consolidation becomes for a future run to the upside.
Now I'll quickly cover all three major US stock indexes, starting with the NASDAQ:
Any time a market tests meaningful previous resistance, it never slices through like a knife through butter. I’ve learned from long experience that it typically takes a long time to retake key resistance areas like the one the NASDAQ just broke to set a new high.
Especially when that market carves out a key reversal at it makes that high. That key reversal’s size and proximity to previous resistance should lead to some kind of selloff from current levels. Not necessarily a big selloff, but something more than a blip.
The best-case scenario is that the NASDAQ consolidates for a couple of weeks and digs in before the next leg.
For comparison, here’s the S&P500:
The S&P came nowhere near new highs, yet still suffered a major reversal anyway. Despite a new weekly high earlier in the week, the sellers were in control by the end. The outlook is the same as for the NASDAQ: sideways at best, and a significant drop at worst.
Now here’s the Dow Jones Industrial Average, which is similar to the S&P in that it didn’t make a new high but reversed hard:
That means two of the major indexes failed to make a new high.
I think that for now the upside in the indexes has been exploited and they’re likely to have difficulty sustaining a rally in the short term. That doesn’t mean a crash is imminent. Just that the meteoric rise we’ve seen in these indexes is likely stalled for a while.
Now let’s take a look at Facebook (FB) by way of comparison:
FB is showing what looks like a double top price pattern.
Sometimes these prove to be just a false alarm, but I want to alert you to what’s shaping up here. This pattern definitely looks like a top, and FB has been a dominant bellwether stock on the US markets.
It will likely take some time before we see a dramatic move lower, but this could be an ominous sign for Facebook. So I don’t think this is a good time to be buying FB shares.
In the meantime, I’m watching the yen, silver, and the dollar very closely for opportunities as they arise.
I wish you a very healthy and prosperous trading week.
Mark "Yen Biased" Shawzin