Are the US Stock Markets in Trouble? Plus Other Asset Classes to Watch Closely
Before I dive into this week’s analysis of the markets, I’d like to remind you that it’s likely to be a highly aberrant trading week by virtue of the upcoming US elections.
Price action could be quite chaotic due to COVID-inspired mail-in balloting and other turbulence, including recent spikes in new coronavirus cases both in the United States and overseas.
As an illustration, let me show you what happened with gold during the November 2016 US election. This is XAUUSD with that election week highlighted:
Prior to that evening, it was generally accepted that Hillary Clinton was well ahead in voter preferences. When the polls did open, it appeared she was pulling ahead. Then around midnight, it was determined that Trump was going to prevail.
Gold shot up on the night of the election and then very quickly plummeted $80 thereafter. This might seem completely random, but governing price patterns always determine price trajectory regardless of the news.
With gold, those governing patterns included a giant double top that could also be viewed as a large descending triangle. Both are bearish and were overhanging the gold price.
Going into that 2016 election, a smaller descending triangle had formed due to the back and forth price action.
Descending triangles are almost always bearish because price touches the support line so many times. Any horizontal line that keeps getting touched will get breached sooner or later. So it was no great surprise that gold fell during the election, albeit with a head fake to the upside before the plunge.
What’s more, this could also happen for the 2020 election.
Here’s the current XAUUSD chart, now on a daily basis:
There’s a new descending triangle here, one showing multiple touches at $1,850 and therefore looking likely to break to the downside.
Prices tend to retreat to where they broke out. In this case, that’s $1,750. So $1,750 is my target for gold once the yellow metal breaks down from its triangle.
So how do you play this anticipated move while keeping in mind any election week volatility?
Since we saw gold jump out of the triangle in 2016 to trap speculative longs with a head face before dropping lower, I’m surmising this could happen again.
So what I would look for is any kind of spike in gold this week and short into that. If gold can jump out of the triangle, that’s likely to be an excellent place to short in anticipation it will drop back into its earlier sawtooth pattern before an even bigger drop to $1,750.
Any such move in gold should affect USDI (the US Dollar Index) too, right?
USDI tracks the dollar against a half dozen of the major most liquid currencies on the planet.
I feel USDI has peaked after a 10-year bull run. This run was marked by a final spike during the height of the pandemic where there was a rush to safety by global investors who crammed into the dollar. After that, the dollar basically collapsed.
I’m still bearish on the dollar for the long term. However, I wouldn't be surprised by another rush into the dollar. That’s due to the bullish key reversal a few weeks back where USDI hit a new low before closing on the high.
That price action seems to have put a floor under USDI for now. I think we're likely to see some short-term strength here over the course of the next few days or weeks.
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Here’s what else you’ll find in my latest analysis:
- What gold did during the 2016 election, and how this knowledge can help you for the 2020 election week
- Should you buy or short the dollar's next rally?
- What price level EURUSD needs to break and where it's headed next
- Which level this key yen pair needs to break for a real downtrend to begin (starts at 12:54)
- What price level you should be looking at if you want to trade GBPAUD (find out at 19:39)
- Which repeating pattern is appearing in silver and what it means for the next few weeks
- Is the NASDAQ's double top for real? Or is it too early? (starts at 23:32)
- What pattern’s in place for the S&P500 and what price is the key trigger level?
- Plus much more!
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