What A Strong USD Means For FX Trading PLUS Why TSLA’s Still A Great Short
For the last several months, the U.S. Dollar Index (USDI) has been trapped in a narrow trading band within a much large primary uptrend.
Things got a bit more interesting in the last week. In last week's trading action, USDI soared and closed at an important resistance level on the weekly chart.
I expect the strong dollar trend to continue, and that has implications for all USD-related FX pairs including spot gold (XAUUSD).
Let’s start with AUDUSD (the Australian dollar against its U.S. counterpart). As you can see, this pair has been in a prolonged downtrend since mid-2015.
Toward the end of 2017 and early 2018, AUDUSD made a double top and neckline. When the price broke that neckline, the next leg of the downtrend commenced.
More recently, lower highs created a descending triangle and then just last week AUD went began a major free-fall against most major currencies, especially USD.
That’s why I believe AUDUSD should be re-testing its multi-year lows soon. That includes the large spike low made last December. While there might be some support at that spike low, the powerful downtrend strongly suggests that even that price should be taken out at some point later this year even.
There might be some sideways action at that level along the way, but I don’t see any kind of rally being sustainable. That means selling any rallies would be good entry points in AUDUSD.
GBPUSD (the British pound against the dollar) is also looking bearish.
Historically it’s dropped from 1.70 to 1.27 since mid 2015. Any rallies are short and then the primary trend resumes.
In early 2018 you can see the double top at the 1.45 area. Then the price fell after crashing through the neckline.
Right now there are a series of shoulders adding together to form a huge bear pattern. Plus the price fell user an important weekly support level. I feel GBPUSD is vulnerable to a big move lower.
There’s also a mini head & shoulders apparent in this pair, as you can see below.
Last week’s price drop broke below the neckline of that mini-pattern to add to the bearishness.
Despite all this I’m not short GBPUSD yet.
I’m waiting for some retracement behavior before positioning myself to go short in this pair. That’s because there’s some fairly extensive price support at this level and it might take some time to work through.
However, I do expect GBPUSD to continue its primary downtrend over time.
USDJPY (the dollar against the Japanese yen) is another potential short I like. This is the only pair bucking the strong USD uptrend overall.
I expect this pair to continue dropping on balance based on the historic price patterns. Those include the patterns very familiar to my regular readers: a head and shoulders with a double top followed by a descending triangle.
In recent weeks I’ve also noted a bearish double top within the descending triangle.
However, last week’s bullish key reversal could spark a short-term rally in the next few weeks. That doesn’t mean I’m bullish now.
After its descent from the 112 level, I continue to believe USDJPY’s future path in USD vs yen will be lower. I still expect USDJPY to ultimately re-test the 104 – 106 price level in the not too distant future
But the timing isn’t right just yet. Let’s see how big a rally the bullish key reversal can trigger and then go short from there.
Spot gold (XAUUSD) looks to be another victim of the strong USD.
You wouldn’t know it from listening to the media, though. Escalation in the trade/tariff wars between the U.S. and China, plus some sabre-rattling over Iran, would have you believing that the yellow metal is destined for new highs any day now.
But despite all that, gold hasn’t rallied – the reality is in the price action and it’s been dismal for gold bulls. In fact, as a consequence of the strengthening dollar XAUUSD has had trouble sustaining a move over the $1300 level.
There are three major weekly key reversals in the past seven weeks in XAUUSD. Together with the current downtrend, they suggest there could be an imminent huge move…. to the downside.
(If you’re not familiar with a key reversal, key reversals — the bearish ones, in this case — are where the price makes a new high that exceeds the previous week but then retreats to close at or near the low. I’ve pointed out the three key reversals on the chart above.
And below I’m providing a price target for where I think gold is going next.
I see XAUUSD going to 1200 in the near term and possibly lower than that. The first target is that support line. Gold will likely pause or even reverse off that line once it gets there.
Now here’s another pair for you to consider as a short: NZDCAD (the New Zealand dollar against its Canadian counterpart).
I like this pair on the short side thanks to the Adam and Eve double top and a series of shoulders before and after that double top.
An Adam and Eve double top is where one top is rounded and wide and the other is narrow and spiky. In this example, the Adam top happened first and then the Eve followed it.
More recently, NZDCAD made a more conventional double top at the 0.93 area. In the last couple of weeks the price crossed that neckline and should keep dropping to recent lows at the 0.83 area.
Therefore I think there’s another 400 pips of opportunity on the short side in NZDCAD at this time. Consider shorting any rallies here.
As for the stock market, I’m using NASDAQ100 as a proxy for all the U.S. markets.
As you can see, NASDAQ broke through to all-time highs. When it did so, I said previous resistance would drag it back down into a trading range.
We’re seeing that now. I’ve drawn what I consider to be the limits of a fairly wide range which should persist for some time. The most interesting action will occur at the extremes of that range, of course.
One more short I should mention …
For the past several months I’ve maintained that shorting Tesla (TSLA) was a sure bet. I advocated getting short TSLA around $305, and again around the $291 price level. The basis for this analysis was the quadruple top at the $380 level.
TSLA subsequently crashed through a major support area at $250, and then last week it hit $210.
I don’t think it’s done yet. In fact, I believe this stock still has room to go a lot lower.
You see, you can measure a potential drop after a major level is breached by looking at the magnitude of the top of the trading range to the support level. In this case, it’s $380 – $250 = a $130 drop from $250. This would give $120. I don’t think it will go that low, but projecting even $100 (not $130) less than $250 gives us $150 and that’s very possible.
That’s why I think there’s still lots of room for a profitable short on the downside TSLA.
In the meantime, I’ve also advised being positioned short AUDUSD (since Mar 5,), short NZDUSD (since April 2), short USDJPY (since April 25), and short XAUUSD (spot gold) since Mar 27.
Due to the extended gains in open positions, and in consideration of the recent freefall in AUD, NZD, XAU and GBP, I’m inclined to back off and wait for better risk:reward opportunities at this time.
I’ll try to re-enter the short side of these currencies as they “snap-back” from their established downtrends. To that end, I am not recommending any new trades at this moment.
It pays to be patient! Remember, over the past few months, the cumulative gains and profits on these and other open positions have exceeded 2,000 pips. We’ll make more soon when the retracements run their course.
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Mark “HugePIPGrab” Shawzin