Why The Election Hasn’t Affected The Dollar’s Long-Term Decline
Following a tumultuous week of US election drama, it appears a record number of voters have elected Joe Biden to the US presidency in a squeaker. Donald Trump is going to court to contest the outcome in several states, but it seemly highly likely that Joe Biden will be the next President of the United States.
What’s most interesting here is that, notwithstanding the election outcome or the pandemic or any other outlier event, chart patterns foretold the price action. Patterns really do indicate market direction independently of outlier events and their outcomes.
To help you understand this, I’m peeling back the chart patterns and price action of the main asset categories this week.
You’ll not only see what’s going on and what’s most likely to happen, it also crystallizes my philosophy on price patterns and price actions.
Understand that the markets are a discounting mechanism and are way ahead of events. For example, six or eight months ago, we didn't know about a pandemic. We didn't know who was going to win the US elections either.
But the markets were already indicating where they wanted to go independent of these outliers.
And that to me is the beauty of price action.
There’s no better example of that than USDI (the US Dollar Index). In this chart I'm looking at a 43 year chart history of USDI (which measures the dollar against a half dozen of the major most liquid currencies).
USDI has been descending in stair-step fashion during this 43 year interval. The succession of lower highs against a common low suggests that the next leg will be down.
Note that each major rally over the last 43 years ended in a lower high. The 2000 high was lower than the one in 1985 and it looks like the 2020 high is lower than the one in 2000.
So even though USDI has been in a major rally over the last 10 years, it remains within the confines of a long-term descending triangle.
A couple of months ago, USDI hit a peak along its major downtrend line and formed a double top (this will be more obvious in the weekly chart in just a moment). This should herald the end of the USDI rally.
Notice that once USDI picks a direction, it tends to go in that direction for 5 – 10 years. This suggests USDI is only at the beginning of a major multi-year downtrend likely to last as long as 10 years.
Here’s a closer look at USDI with a weekly chart — each price bar represents one week in time:
Now the double top that’s visible in the 43-year chart is more obvious.
During the pandemic, global investors sold their assets and rushed to safety. That panic created a bull trap (the second of the two tops) where anybody who rushed to buy the dollar was caught at that historical 43-year downtrend line.
USDI has dropped significantly since setting that trap, and this price action has created a bearish head and shoulders along the way.
A head and shoulders is a reversal price pattern and suggests a much more substantial price decline. Already USDI broke below the neckline, then retested it.
But just last week USDI traced out a bearish key reversal (this is when the price makes a new high and then closes at or near the low of the week). The sellers were firmly in control and this price action strongly suggests USDI is most likely to drop.
Now here’s AUDUSD (the Australian dollar versus the US dollar).
With USDI being in a 10-year uptrend, it only stands to reason that AUDUSD has been in a 10 year downtrend. And if the US dollar is going to decline, it only stands to reason that the Australian dollar is going higher.
In fact, the setup in AUDUSD looks like one of the best risk-reward plays available. Prices look ready to break out of the long-term downtrend pattern thanks to the recent formation of an inverted head and shoulders.
This is a bullish pattern and a reversal pattern too. And with the right shoulder higher than the left shoulder, a sloping neckline has been created. This is even more bullish than an inverted head and shoulders with a flat neckline.
If AUDUSD can pierce that neckline once again at the 0.75 – 0.76 level, AUDUSD could gain increasing traction and generate a huge breakout to the upside.
Meanwhile, another of the biggest no-brainer plays on the short side of the US dollar is USDJPY (the US dollar versus the Japanese yen).
I’ve been boring regular readers to tears as for the last few months and years because I’ve been an advocate of the short side USDJPY for so long.
But my continued bearishness has a very strong foundation because of the preponderance of bear price patterns. If you flip open a textbook on chart analysis, you’ll find just about every bear pattern under the sun in USDJPY.
Starting in 2015, a double top price pattern has been governing USDJPY price action. This subsequently proved to be the head of a bearish head and shoulders which has been hanging like a dark cloud over this pair ever since.
USDJPY has been in a stealth bear market marked by lower highs within a descending triangle (yes, just like USDI). Price is getting closer and closer to the business end of this descending triangle. USDJPY is now hitting the 104 level for the seventh time.
In fact, USDJPY is now almost at 103 and to my mind there’s nothing in this chart to indicate any kind of rally could occur in this pair.
There could be some turbulence, but there’s nothing to stop USDJPY’s descent. To add more fuel to the downside, there’s even a recent double top/head and shoulders pattern.
USDJPY is bound to go a lot lower over the course of the next few weeks, months and probably years.
For comparison, here’s GBPJPY (the British pound versus the Japanese yen) where we’ve seen a coil forming from a series of inside week bars:
This coil has been building for the last several weeks. It represents stored energy which will eventually uncork explosively. So which way is it most likely to go?
That’s where patterns can help. In GBPJPY’s case, the litany of bear price patterns starting with the double top/head and shoulders in 2015 set this pair on a course for lower prices. It’s why I call this a governing price pattern. Once you see these patterns emerge, they govern prices going forward.
Since that head and shoulders, we've seen nothing but lower GBPJPY prices bounded by a rounding top.
So it’s more likely that GBPJPY is going to break down from its highly pressurized coil, not up.
Now it’s time to take a look at XAGUSD (spot silver) which could be offering a major opportunity right now:
Earlier this year, silver broke out above a seven year downtrend around the $18-$19 price level. Coinciding with that break, we also saw the emergence of an inverted head and shoulders.
Silver raced all the way to $30 and after several weeks of consolidation, it appears a new mini double bottom has formed at $22.
Silver just peeked above the neckline of that double bottom, which suggests the upcoming price trajectory will be either a stair-step higher or a rocket (much like the initial breakout).
Be aware of the volatility in this metal and be sure to use a smaller trade position and/or wider stops accordingly.
Now let’s see if XAUUSD (spot gold) offers similar possibilities:
Five years ago, a double bottom price pattern emerged, which formed the head of a complex inverted head and shoulders (complex refers to the fact there’s more than one shoulder on each side of the head).
Gold broke out from the $1,380 level and once that fuse was lit, gold enjoyed a long-term uptrend.
Most recently, gold was consolidating in a descending triangle price pattern and I was open to whether prices were going to reverse out of this to the downside and retest the $1,750 price level.
Instead gold broke out to the upside, making the descending triangle a continuation pattern in this case.
The uptrend has been re-established and any pullbacks in XAUUSD should be bought. The fuse has been lit with the lower dollar scenario and now the fundamental picture and the technical picture are coinciding.
We could see another extension of what looks to be a long-term bull market in the precious metal asset class.
Now I want to take a look at the NASDAQ, the stock Index that best approximates the tech sector in the United States.
Several weeks ago, I observed the NASDAQ appeared to be tracing out a double top price pattern. Ordinarily this would have looked very promising and I would have jumped all over it thinking it was the beginning of a big, bad bear market.
Yet the overall price action suggested this could be just a trap … for now.
That’s because of the parabolic rise marked with massive bullish key reversals all the way up. It’s going to take a lot to reverse that extreme bullishness.
So I waited for price action to confirm it by falling through the neckline of that apparent double top.
Instead the NASDAQ did exactly the opposite. Those earlier key reversals were more powerful than the emerging double-top-that-wasn’t.
So prices are likely to head higher once again. The only caveat I would introduce here is that prices have starting to get very volatile in this area. Volatility has been increasing (the average length of each bar has been getting bigger and bigger).
Whenever I see expanding volatility, it's a warning sign that more speculation and more emotion has come into the market. So while I expect the NASDAQ to have some legs to the upside, we may see a correction in the not too distant future.
How does this compare with the S&P500?
The S&P500 has been trading within the confines of a reverse symmetrical triangle, also known as a megaphone top.
As with all price patterns, we need the market to confirm what we think we’re seeing with appropriate price action. And in this case, it certainly looks like the S&P is ready to pierce the upside of the triangle and negate the “top” implications of a megaphone top pattern.
The price dug in with a mini double bottom at the 3200 area and has since smartly rebounded.
The S&P500 could be make new highs relatively soon, and I feel the path of least resistance in both this index and the NASDAQ is higher potentially much higher.
While anything is possible (especially when you take into account the increased volatility), I wouldn't get in front of the S&P500 or the NASDAQ right now. I wouldn't short either until we see appropriate bearish price action that confirms a known bearish reversal pattern.
And that’s it for the week!
I’m bearish on the dollar and therefore bullish on AUDUSD and bearish on USDJPY. I’m bullish on the precious metals once again too.
I wish you a very healthy and prosperous trading week.
Mark "DollarPermaFrost" Shawzin