Lets get right into the charts tonight as last weeks price action showed a possible inflection point in the US dollar, precious metals complex and the stock market indices which I pointed out in the Wednesday Report I did last Tuesday. While the US dollar was strongly testing the bottom of its 14 month trading range gold had been consolidating in an almost four month rising flag formation. These two were at critical support areas on their daily charts which suggested one support area was going to hold while the other would most likely give way. As it turned out gold was the one breaking support while the US dollar, with a false breakout through the bottom of its big trading range, reversed direction and rallied strongly telling us the false breakout was indeed a bear trap.
I know some of you are wondering, how could I change my mind so fast. Inflection points are just that which is a place on a chart where the price action can break either way signaling a continuation of the prior move or a reversal. Up until the inflection point shows its hand the prevailing trend has to be respected which was up on gold and down for the US dollar. Once an inflection point shows its hand I’ve learned not to fight it and go with the new trend regardless of how bullish or bearish I might have been. The charts are always right but It’s the interpretation of the charts which can be hard to understand sometimes so when they change I have to change as well.
Lets start with the daily chart for gold which I’ve been showing has been building out a rising flag formation over the last four months or so. The rising flag was actually pretty symmetrical except of the small false breakouts of the top and bottom trendlines. The last time we looked at this chart I pointed out that it had completed five reversal points so far which makes it a reversal pattern to the downside. I also said that a possible sixth reversal point could form at the bottom trendline which would then put the rising flag back into the consolidation pattern camp if it could rally back up to the top rail.
A rising flag or wedge, that slopes in the same direction as the current trend, can be one of the most powerful formation in Chartology. Looking at gold’s rising flag you can see each reversal point made a higher high and higher low which is bullish. I can almost guarantee that most folks seen something different than a rising flag formation as the possible consolidation pattern or even a reversal pattern for that matter. How the price action interacts with an important trendline is very important to understand as it lets you know if the trendline is hot and to be respected.
I’ve added a red circle around the breakout area through the bottom rail of the five point, now I can call it, a bearish rising flag. Note the last touch of the bottom trendline just before the breakout which shows gold got a small one day bounce which told me the bottom trendline was properly placed. That one day pop then led to the drop and breakout which occurred four trading days ago, last Tuesday with a big long daily bar. Up until that point the rising flag was still in play as a possible consolidation pattern. The breakout through the bottom rail now confirms a the rising flag as reversal pattern that has five reversal points. A backtest to the underside of the rising flag would take place around the 1250 area if we get one. Also one more important point to make on this daily chart is that gold closed below the 50 day ema which had been doing a great job of holding support during this strong move up in gold. As you can see it’s now starting to roll over to the downside. The next area of possible support will be the previous high at the 1190 area.
Now lets look at the daily chart for the US dollar we’ve been following which shows it had a false breakout through the bottom rail of its 14 month trading range only to close back above the bottom rail negating the breakout. The US dollar has continued to rally and broke out above its next area of resistance, the top rail of the blue downtrend channel. What is important to note here is that the US dollar hasn’t completed its fourth reversal point yet. It’s on its way but until the top rail is hit around the 100 area we can’t confirm the 14 month trading range is in fact a rectangle consolidation pattern. This daily chart for the US dollar is another reason I decided to go to cash in the precious metals complex. Note the blue bullish rising wedge which formed roughly at the halfway point of the big impulse move up that started in the middle of 2014. That’s a similar pattern to what I had hoped gold would complete.
As we know, how the US dollar generally behaves, has a direct impact on the precious metals complex and how other currencies trade has direct impact on the US dollar. Lets look at several of the more important currencies of the world and see what has been developing on their respective charts starting with the $XEU.
As the XEU has the biggest weighting in the US dollar index it will have the closest look to the greenback of any other currency. If the US dollar is building out a consolidation pattern the XEU will generally have an inverse looking pattern. The weekly chart below shows the XEU building out a sideways trading range similar but inversely to the US dollar. Like the US dollar, it’s working on its all important fourth reversal point to the downside which won’t become complete until the bottom trendline is hit.
Next I would like to show you several long term monthly chart for the XEU, we’ve been following for several years, which shows two different bearish setups. This first monthly chart shows the massive double H&S top with a ping pong move taking place between neckline #1 and neckine #2 which is building out the 14 month trading range. Since the red trading range is forming in a downtrend, the odds favors the breakout will be to the downside. The upper H&S top has a price objective down to the 84.90 area which is close to it previous major low which formed the inverse H&S bottom back in 2001.
This next long term monthly chart for the XEU shows a different look but with bearish implications if the blue horizontal trading range gives way to the downside. As you can see the XEU topped out in late 2008 and has been trading in a well defined downtrend channel. If the blue trading range is going to be a halfway pattern to the downside then the current bottom rail of the downtrend channel will give way and many times a lower channel will develop of equal size to the upper channel as shown by the black rectangles labeled measuring sticks.
Below is an example of how a doubling of a channel can take place. Most probably won’t remember this chart for the US dollar but I showed how the lower channel may double in size when the US dollar was building out the blue bullish rising wedge right on the top rail of what was the lower uptrend channel at the time. With the blue bullish rising wedge forming where it was it became clear to me that if the rising wedge broke out to the topside there was a good chance the bottom channel would double as shown by the blue rectangle measuring sticks. The price objective for the top rail of the upper trend channel was 98.60. An interesting side note. Notice how the top rail of the original uptrend channel, blue dashed trendline, held support for the US dollar at its most recent low.
This last chart for the XEU is a daily line chart in which I overlaid gold on top of the XEU. It’s not a perfect correlation as sometimes they can invert but on the whole if the XEU is declining or rallying so is gold. If the trading range on the XEU does indeed break down there is a good chance that gold may follow. No guarantees though just probabilities.
Another very important currency that can affect gold is the $XJY, Japaneses Yen. Below is another very long term weekly chart for the XJY we’ve been following for years now which shows the massive H&S top which reversed its bull market. Again, some of the longer term members may remember when the yen was interacting with the big neckline after forming the second red triangle which was building an even bigger bearish falling wedge. The two green circles shows what I called at the time, reverse symmetry gaps, one on the way up and one on the way down. The one on the way down was the breakout gap below the massive H&S top neckline.
Late last year and earlier this year the yen formed what I called a seven point inverted roof reversal pattern. Measuring the width of the inverted roof pattern gave me a percentage move at a minimum of 8.7% from the breakout point. As you can see the price objective came right in line with the big neckline which is labeled as the NECKLINE EXTENSION RAIL. So far the neckline has done its job of holding resistance which is an important line in the sand. If the yen can trade back above the big neckline that would be a bullish development but until that point is reached the neckline is resistance.
This next chart for the yen is a 35 year monthly look which has some nice Chartology on it. The main feature on this long term chart is the ten year five point triangle reversal pattern. Since the triangle formed below the previous high it had to have an odd number of reversal points to reverse the downtrend at the time. Over that long term time span the yen built out two red bullish rising wedges and one red bearish falling wedge. The very top of that bull market was marked by the multi year H&S top. Note the backtest to the bottom rail of the five point triangle reversal pattern that occurred last month.
Below is a daily line chart in which I overlaid gold on top of the $XJY. Again, it’s not a perfect correlation but close enough that one needs to pay attention. I’ve added two support and resistance lines. The brown one shows gold breaking below its S&R line and the black one which shows the $XJY breaking below its S&R line.
This next chart is a long term weekly chart in which I overlaid the $XJY on top of the HUI so you can see how these two tend to preform together. This chart looks a little busy but the HUI is in red and the XJY is in black and shows how they both built out massive H&S tops to reverse their bull markets back in 2011.
This next currency I would like to show you is the $XSF, Swiss Franc, which has been doing a laborious backtest to the neckline and has formed a red six point rising flag. A break below the bottom rail will complete the consolidation pattern and will usher in the next move lower if the breakout takes place.
Below is a daily line chart in which I overlaid gold on top of the Swiss Franc which shows a similar correlation to the other currencies we looked at. What got my attention last week was when gold, on the daily line chart, broke below its support and resistance line while the XSF declined in a similar fashion.
The weekly chart for the CAD, Canadian Dollar, shows its massive H&S top which reached its price objective down at the .72 area. The CAD threw me a curve ball as it initially broke below the bottom rail of its blue bearish falling wedge only to reverse direction with a strong rally. Since the price objective has been hit it’s now time to see what develops as far as a reversal pattern or another consolidation pattern.
The Canadian Dollar has been one of the stronger currencies since the January low. Initially it bounced off the multi year support and resistance line as the pop and then the drop through that very important trendline with a clean backtest about four months later. It then, what looked like the start of its next impulse move down, failed to deliver. The CAD bottomed about the same time as gold in January of this year and had a very strong rally that took the price action back above that mulit year S&R line which looked like it was failing. As you can see the CAD is now trading back below that very important horizontal S&R line which is negating the previous months move. Again we have a very important line in the sand to keep a close eye on.
The long term look for the $XAD, Australian Dollar, shows it too completed its massive H&S top price objective down to the 66.75 area. It then formed what looked like a double bottom and broke out above the double bottom trendline only to decline once more below that small but important line in the sand. So now we wait and watch to see what develops.
The very long term monthly chart for the XAD shows its massive H&S top and a series of lower highs and lower lows.
Lets look at one last currency which is the $NZD, New Zealand Dollar. This long term weekly chart shows it has been building out a blue rising wedge and if broken to the downside will create a bearish rising wedge which may bring the 2008 crash low back into the picture.
The monthly chart for the NZD shows some nice symmetry taking place which is forming a possible big H&S top. The head is a double top with the left shoulder forming a bull flag while the right shoulder may be forming a bearish rising wedge. Note how the neckline symmetry line came pretty close to showing us the height of the right shoulder. As this is a monthly chart there is still a lot of work to be done yet but the basic H&S top is beginning to show itself. One to keep a close eye on.
The first chart I posted tonight was a daily bar chart for gold which showed it breaking down form the five point bearish rising flag formation. Below is a daily line chart which shows a clearer picture of the bottom of the four month trading range. Until gold broke below that bottom rail it was still all systems go. Now we have a broken S&R line in place which is not what you want to see happen in a strong move up. The S&R line is now our line in the sand, below is bearish and above is bullish. It’s possible we could see a bigger consolidation pattern start building out once we see what happens at the brown shaded support and resistance zone between 1170 and 1180. If that area gives way we’ll have a bigger correction on our hands to deal with.
It’s been about six months since I last posted this long term monthly chart for gold which we followed since I first built it back in 2013. This chart is based on the H&S consolidation pattern neckline which formed at the 2008 crash low. After the major top was put in in 2011 I extended the neckline to the far right hand side of the chart labeled, neckline extension rail. Even tho I’ve been bullish on the PM complex since February of this year, this chart always caught my attention when I would go through all my gold charts. As hard as gold tried it couldn’t break out above the neckline extension rail and ended up forming the five point bearish rising flag instead on the daily chart. Is gold throwing us a massive curve ball completing the second back test to the massive H&S neckline? Is the capitulation move I was looking for finally going to take place? I’ve shown the price objective down to the 685 area as measured by the potential H&S top. Again we have a very clear line in the sand at the 1300 area, below is bearish and above is bullish.
With the way many of the more important currencies of the world are trading I can’t rule out a strong move down for the PM complex. It’s the charts that are speaking and not my opinion because if it was up to me I would much rather see a bull market to trade than a bear market. We have our lines in the sand which should keep us on the right side of the PM complex going forward. When the lines change so do I. There are still some important trendlines that have been offering support that I’ll be watching very closely for more clues. Have a great Memorial Day and all the best…Rambus
PS: Below is a daily chart for the GDXJ which shows it closed right on its possible neckline last Friday after putting in a small double top.