What is Bubbling Away Under The Surface? The Big Opportunities That Are In Plain Sight
One of my favorite quotes of all time is “the only thing new is the history you don't know.”
I love that quotation because when you think about it, anything we're seeing today is something we've already seen in the past. I feel we’re living through exactly that situation with regard to the US dollar.
By way of illustration, this is a 45-year chart of the USDI (the US Dollar Index) which measures the US dollar against a half dozen other major currencies:
USDI has enjoyed a 10-year bull run, one powerful enough that we saw the Euro drop from 1.60 to the dollar all the way to 1.03. But as I've been saying over the past few weeks, the legs under this bull rally are being chopped out incrementally. There’s mounting evidence that USDI has made a major top.
Despite that 10-year run, USDI has reached a much lower level than the top in 2000 and certainly the one in 1985. That’s created a long-term downtrend in USDI, one where the Index is now rubbing up against the long-term downtrend line created by those lower peaks. There’s also a double top reversal price pattern. These two things together suggest a lower dollar is on the way.
Meanwhile the horizontal lows of this triangle act as a support area. Looking at the price history, it’s very likely we’ll see the dollar return there in due course.
Now here’s the USDI again, this time on a weekly chart going back just five or six years.
The same double top from that long-term chart is visible here. The second, spiky top is what happened during the height of the pandemic when there was a panic into US dollar assets.
But now everybody who chased that peak has now been trapped in what looks like a classic bull trap. Any of those stubborn bulls who don't get out are likely to pay a heavy price soon.
I also see a bearish head and shoulders forming on this chart – that’s where a higher, central head flanked by a shoulder on each side. USDI is trading right at the neckline of that pattern while also touching its long-term trendline.
That suggests that any penetration below current prices should yield a waterfall effect to the downside in USDI and therefore the US dollar against most major currencies. To me, it’s not a question of if this is going to occur, but when. Even if USDI slides sideways for awhile before giving way to the waterfall effect, it’s likely to happen in the not too distant future.
But of course we need more supporting evidence for such an important prediction.
Here’s EURUSD (the Euro versus the US dollar). This chart is quite informative in terms of what EURUSD didn't do as much as what it actually is doing.
That’s because when I look at a chart and see certain patterns, I expect specific, confirming price action to support that pattern.
EURUSD has been in a long-term downtrend and although it’s not visible in this chart, the drop started from 1.60 all the way to the 1.03. Then in 2018 to 2019, EURUSD bounced a little to trace out a bearish head and shoulders continuation pattern. Once EURUSD went through the neckline of that pattern, it continued dropping lower to 1.06.
Yet that trend has stopped.
This mirrors the stopped trend we’re seeing in USDI, which isn’t too surprising since the Euro comprises a bit more than 60% of that Index. So if USDI is set to move on a trajectory lower, then EURUSD should rise commensurately.
How can that be? Well, the market doesn’t know or care about my analysis. And so ultimately I always defer to the market. My analysis says EURUSD should keep dropping. But by not doing so, EURUSD has shown me that it’s ready to go the other way.
This is being confirmed by some major bottoming price action with three components: the current support is at the same level as support from several years earlier, there’s an emerging inverse head and shoulders and finally a price rise to a major resistance level. All these things are bullish.
I consider the current resistance level significant because there were several key reversals at this 1.15 – 1.16 level before.
That means that if (or when) EURUSD were to break above that area, it would mark a definite turnaround from the long-term downtrend. In anticipation of this happening, aggressive traders can start accumulating long positions in EURUSD based on the collective evidence of these price patterns and the fact that what doesn't go down, will inevitably go the other way.
If you prefer to be more conservative, wait until EURUSD starts penetrating above that major resistance area. Once this happens, it will open up a lot of blue sky above.
In this chart, I'm looking at USDJPY (the US dollar versus the Japanese yen).
Since my expectations are that the dollar is going lower, it follows that USDJPY will drop since it measures the dollar against the yen.
(Long-time readers may feel that I’m boring you with this analysis week after week, but to me there's nothing boring about sitting in a position that will eventually make you a lot of money. So I’ll quickly run through my thinking again, especially for newer readers.)
What we’re seeing in USDJPY price patterns and price action suggests there’s nowhere for this pair to go but lower over time. “Over time” is the key phrase here. That’s why even though USDJPY has been sliding sideways for the last several weeks, I’ve continued holding my positions. My expectations of a move lower, perhaps a move much lower than most traders would currently anticipate, are as strong as ever.
My bearishness starts with the double top price pattern all the way back in 2015 which formed the head of a bearish head and shoulders. Once USDJPY cracked through the neckline of that pattern, it’s remained bearish in fits and starts ever since.
The price action over the last few years has been contained within a bearish descending triangle. Note that this descending triangle looks a lot like the 45-year chart for USDI. There periodic rallies with lower highs each time, and a common low which will eventually be reached (and perhaps even broken) on the next descent.
USDJPY’s common low is at 104 with a ‘pandemic low’ of 102.
I expect these prices to be revisited. It may not happen in the next couple of weeks, but if you’re patient and hold your short positions, I believe you’ll be handsomely rewarded.
If USDJPY does manage one last rally within the triangle, this would be an excellent opportunity to add to your shorts at higher levels.
Now let’s take a look at AUDCAD (the Australian dollar versus the Canadian dollar) which offers another example of what doesn't go lower must go higher.
This pair has been in a long-term bear market with a descending triangle and then a breakdown below that triangle’s neckline during the height (or is it depths?) of the pandemic panic.
Note that once AUDCAD broke that neckline it dropped from 0.96 to 0.81 , a 1,500 pip move.
But that was then, and this is now. Anybody who chased those lower prices got trapped. This set the stage for a bear trap where all the traders who were bearish are now caught on the wrong side of the market.
To add to the bullishness, an inverted head and shoulders is being established. This one is a bit quirky, though. That’s because the right shoulder is sitting well above the left shoulder to create a sloping neckline rather than a normal flat one.
But the implications of a sloping neckline are very bullish, with the potential for a rapid move. AUDCAD appears to be on the cusp of a potentially very explosive emerging bull market.
Those are the major currency pairs I wanted to cover this week.
Now let’s look at XAGUSD (spot silver) which has a lot of similarities to EURUSD and AUDCAD in that a bear trap formed for traders who sold the breakdown below the neckline during the March pandemic hysteria.
Just like with EURUSD and AUDCAD, that was then and this is now. Today silver prices are going the other way.
This is highly significant because silver has been in an extended six-year bear market with lower highs within a descending triangle.
That bear market appears to be finished now. In fact, silver is ready to explode. Not only has it broken above the long-term downtrend line, it’s also traced out an inverted head and shoulders price pattern. Both developments are very bullish.
And taken together, they’re pretty much a green light that we're seeing an emerging bull market in XAGUSD.
Any penetration above current levels will open up a lot of blue sky. The next hurdle is the 2016 high of $21.20 and once broken, we’ll see a liftoff toward much higher silver prices.
Note that during the silver bear market, the price fell for many, many years from $50 all the way to $11. This bull market could potentially trend all the way in the other direction.
Once that $20-$21 level is broken, use any dips to add to long positions in preparation for a major move higher.
Silver is a sleeping giant about to awaken.
So how is gold doing in comparison? Here’s XAUUSD (spot gold):
All the way back in 2015, gold traced out a massive bottoming price pattern. This started with a double bottom, which was eventually recognizable as the head of a complex inverted head and shoulders pattern. (A head and shoulders becomes “complex” when it has more than one shoulder on each side of the head.)
Once gold pierced through the neckline of that massive pattern, it was a green light for a major breakout. “The bigger the base, the more into space” is an easy to remember and highly relevant catchphrase here.
Gold has moved up significantly. However, right now the yellow metal is sitting at multi-year highs near a resistance level last seen in 2011. Because of that resistance, I foresee some turbulence before a further breakout.
But the more gold consolidates at this level, the more likely it can bust through and set new highs.
Right now I feel silver is much more poised to break out in the near term. Take a long position in gold only if you’re looking to diversify. However, both precious metals look to have bright futures ahead. Being long gold and silver over the long run should be winning trades.
Let’s wrap things up by reviewing the US stock markets, starting with the NASDAQ stock index.
For the past several months, we've observed the NASDAQ race higher on the basis of enormous fiscal and monetary stimulus within the United States.
It’s been quite a run, but before that run began, notice how the NASDAQ bottomed out at the long-term uptrend line. It can still surprise me how effective trendlines and patterns can be as turning points, even during such macro events as coronavirus panics.
Since hitting that long-term trendline, the NASDAQ has been up, up and away. It even broke through the January highs recently.
Yet not everything remains bullish. As a cautionary development, the NASDAQ has traced out a bearish key reversal last week. The market made new highs but by the end of the week, the sellers were in control.
There’s also been a substantial expansion of volatility as shown by the much longer price bars week by week. (This often happens at major turning points in markets.)
That’s why I believe we could be seeing some consolidation and/or a peak in the NASDAQ in the near future. Especially when you consider that the S&P and the Dow Jones Industrial Average (DJIA) didn’t make new highs together with the tech index.
That makes this NASDAQ thrust something of a non-confirmation.
Some would call it a bearish divergence. When one index soars to a new high and it's not confirmed by the others, that suggests there’s a move to lower NASDAQ levels on the way.
On the other hand, maybe the other two indexes are just taking their sweet time to catch up.
Time will tell, but I do believe that last week’s NASDAQ price action suggests the upside momentum will be stalled for now. If you're not long already, it’s not time to go long now. In other words, if you weren't there for the wedding, I wouldn't want to be there for the funeral.
I don’t see prices coming off hard. But I don't see any need to step in here on the long side, either.
Here I'm looking at the S & P 500 and you can see this index has clearly not made a new high.
While the January high was around 3,400, the S&P is trading at about 3,200 at a minor resistance area.
Could it stall out here? Yes. However, this index has recently traced out several bullish key reversals. (That’s when that week’s bar made a new low and then closed on the high.) A series of these bars indicates there’s still a lot of support despite the lack of new highs.
And that suggests the S&P’s path of least resistance looks to be higher. However, do be cautious here, especially when it’s pretty much the same scenario with the DJIA:
The old highs around 29,800 have not been exceeded in the recent run as the DJIA has only reached about 27,800 so far. It’s now hovering at resistance at current levels. I don't see a lot of room for these markets to come off hard, but neither do I see an imminent breakout to the upside either.
The most likely outcome is some kind of consolidation.
And that’s it for this week!
I remain bearish on the US dollar and favor going short USDJPY and long EURUSD as a consequence.
I’m very bullish on silver – we could be in for an epic run here. I’m less bullish on gold, but I believe it could represent some diversity if you’re already overweight silver.
And I’m very cautious about the US stock markets at current levels.
I wish you a very healthy and prosperous trading week.
Mark "DollarSpiral" Shawzin