In the weekend report on H&S patterns I showed these two stocks that had a nice H&S top in place but hadn’t broken the neckline yet. With the dollar breaking it’s own neckline today, on the upside, the CCI and CDNX have broken their own necklines, to the downside, this morning.

CDXN  daily H&S breakout.

The CCI commodities index broke it’s H&S neckline yesterday. That is telling you commodities are going to under pressure going forward.

Folks I can’t stress enough how important it is right now to protect your self from what I see coming down the road. All these H&S patterns are shouting loud and clear to protect your hard earned capital. There will be few if any stocks that will be able to go against the liquidation in a deleveraging spiral that seems close at hand. We are just at the very beginning stages of this process. There is an old adage on wall street that says  “he looses the least amount of money in a bear market is the winner” to that I say “bah humbug”. There are many ETF’s that make it easy to short these markets. This is not a time to be thinking of buying your favorite little junior precious metals stocks because they may have good drill results or some other positive new. As 2008 showed the baby WILL get thrown out with the bath water. Having cash available at the end of what lies ahead will be the best way to pick up bargains but if you don’t raise cash now it will be too late and you will end up selling in a panic when the pain gets to much to bear. You can look at it this way. If I’m wrong the worst that could happen to you is that you still have all your capital to work with. Its a no brainier IMHO. The markets are going to be around alot longer than we will so there will be plenty of more opportunities, down the road, to put your hard earned capital to work.

I know alot of precious metals stock investors are holding this stock as it has been a start performer. The daily chart is showing a 5 point triangle reversal pattern that broke the bottom rail, on a big gap, this morning. I’ve labeled the reversal points with red numbers. Remember an odd number of reversal points equals a reversal pattern and an even number of reversal points equals a continuation pattern. In this case it looks like EXK will be heading lower. Preservation of capital is most important at this stage of the game.

EXK daily 5 point triangle reversal pattern.

The dollar is testing the neckline of it’s major H&S base today. A clean breakout from this big base is going to create a paradime shift for the precious metals complex, commodities and the stock markets. The dollar chart is the most important chart to focus on to get a feel for the direction of the many markets that it affects.

UUP daily testing the neckline.

In this weekend report I’d like to catch everyone up on the many H&S patterns I’ve been showing for several weeks now. So far none have been completed yet as most of the work, right now, has been on the developing right shoulders. I’ve been showing these H&S patterns in their early development so you can follow along, in real time, to see how the net results turn out. Just remember the actual buy or sell signal won’t come until the neckline is broken. Once that happens we will then be able to measure a possible price objective base on the height of the H&S pattern. That price objective  would be a minimum. As H&S patterns, are for the most part reversal patterns, the price may go much further than just the minimum price objective.

The first chart I want to show is the all important US dollar. Everything from my perspective has to do with which way the dollar is going to move as that should affect the precious metals complex, commodities and the stock markets in an inverse manner. The weekly line chart shows several buy signals. The first buy signal is just a simple 10 week move average. It works good as a trending tool. When it turns up or down you get your buy or sell signal that you follow until it reverses at some point. Our latest buy signal came at the very end of August. You can see it is starting to flatten out a bit so the dollar needs to start showing some strength in here to keep the 10 wma rising. The indicators at the bottom of the chart, MACD  and the slow stochastics are still on a buy signal. The ROC indicator just above the dollar chart is also on a buy signal. I’ve added some green dashed vertical rails so you can see how the 10 wma and the ROC, rate of change indicator, working together to show the buy signals. When the 10 wma turns up and the ROC passes up through the zero line together, that is your buy signal. One last note. Notice how the line chart is showing the dollar already breaking the neckline and if you look real close you can see we did some backtesting last week from above. Getting interesting.

US Dollar weekly H&S bottom.

Now we must look at the Euro as it should have an inverse look to the US dollar. I did this chart originally as a bar chart but switched it over to a line chart to see if we had the same breakout and backtest as the US dollar, only inversely. Its diffidently there. Now we need to start seeing some follow through to the downside to confirm the H&S top is in place. Notice the RSI at the top of the chart. It appears to also be building a H&S pattern.

XEU…Euro H&S top line chart.

Here is a ratio chart showing gold to the US dollar. This H&S pattern has a very ominous look to it. If gold is outperforming the dollar the chart will show a rising trend and if the dollar is outperforming gold then the trend is down. As you can see the rally off the 2008 low has been in a very nice uptrend. What is so ominous about this H&S pattern is that it is coming after a nearly 3 year rally phase. Note the big H&S base at the bottom left side of the chart. That H&S base was built to reverse the 2008 crash. You can see how important these patterns are and what the implications are if we break the current neckline. Food for thought.

Gold to the US dollar ratio chart, H&S top.

Next is a weekly chart of the CDNX which is a Canadian small cap index that was our only proxy for the small cap precious metals stocks until they came out with the GDXJ. There are other small cap stocks such as oil stocks in this index. So its a good index to look at to get a feel for the speculative feel for the precious metals complex as a whole. We know if the little juniors are rising, money is coming into the sector as the appetite for the speculative investor is good for the overall precious metals sector. When the juniors are falling that is not a good sign. The CDNX actually led the 2008 crash by starting their decline much sooner than the big caps. Note the H&S base that was made at the end on the big crash in 2008 and the straight line decline from the breakout of the big top pattern.

Next up is the CCI commodities index. This chart shows how precarious the situation is for commodities. We are sitting right on the neckline. Notice the other 2 H&S patterns. One was made at the top in 2008 that foresaw the panic crash that ensued. The other H&S pattern was made after the crash was over and reversed that vertical drop of the 2008 high. As you can see the 2008 H&S top and the 2008 H&S bottom went much further than the H&S measured price objective. For the most part think of a H&S pattern as a reversal pattern, reversing a trend that has been in play for a period of time. There can also be a H&S consolidation pattern but they are much more rare.

CCI commodity index weekly H&S top.

Next lets look at a precious metal that most don’t follow real close but is important nonetheless. Platinum is trading for less than gold which is kind of anomaly. It happens from time to time as is the case right now. Again lets take a weekly look at it’s H&S top that has been in place for almost 2 years now. If this H&S top plays out can the other precious metals be far behind? Time will tell.

Platinum weekly H&S top.

Lets look at one more chart that has a H&S consolidation pattern instead of the reversal pattern. I’ve been showing the Silver H&S consolidation pattern for sometime now, on the daily chart. You can see how this H&S pattern is forming in the middle of the downtrend and not at a top or bottom, thus a consolidation pattern. The 50 dma is governing SLV right now.

SLV H&S consolidation pattern on the daily look.

All these H&S patterns are painting a very bearish picture. I think once the dollar finally shows it’s hand and breakouts out, all these H&S patterns will follow suit which will lead to a cascading effect that will be in progress for some time as most of the charts above are on the weekly look. Make sure you keep this in mind, we haven’t broken any of the necklines yet. The dollar is very close but no cigar. So watch the necklines very closely and act accordingly. We are very close but not quite there yet.

All the best ….Rambus

Below is the 30 minute chart for SLV that I showed earlier this morning. I just wanted to show you in real time how a breakout and backtest work. I’ve put on a green circle so you can zero in on this mornings breakout of the right shoulder bear flag and then the backtest to the underside of the rail. Once an important rail is broken it will reverse it’s role. In this case the bottom rail of the bear flag held support during it’s formation and then this morning when we broke thru, it reversed it’s role and acted as resistance. This is a fundamental function of support and resistance. Its all based on psychology.

SLV breakout of the bear flag rt shoulder with backtest.

In the weekend report I showed a chart of the SPX with a H&S top that had broken down. The massive one day rally last week took the SPX all the way back up to the underside of the neckline. I said 1260 was critical resistance and the backtest to the neckline. This week we have been hanging around the bottom side of the neckline waiting for something to happen. Usually after about 3 or 4 days of little movement the price action will make some kind of move. As you can see on the chart below, today’s action maybe suggesting that the 1260 neckline resistance is hot so a sell/stop can be placed above the 1260 area if one decides to go short. There is also a neckline from the  big H&S top that should also offer resistance.

SPX daily backtest to the neckline at 1260.

Below is the US dollar chart on top and the SPX chart on the bottom. This is the chart I showed in the weekend report. The red circles shows the inverse setup between the two. You can see how the US dollar is backtesting it’s neckline while the SPX is backtesting it’s own neckline. Just a side note. Until the dollar can break through the neckline don’t expect alot of action. Once the breakout and backtest are finished is when the next impulse leg up will start. So watch those two necklines very carefully. If your an aggressive trade you can start a small position as close to 1260 as possible and can then add as the dollar breaks out and backtests.

US dollar chart on top and the SPX on the bottom. Red circles shows inverse look.

UUP is a US dollar index that tracks the dollar with volume and trades real time unlike the dollar it’s self that you have to wait until the end of the day to see what the price action and volume looks like. You can see the possible, big, one year H&S pattern developing. You can also see the right shoulder has a small H&S bottom. If that small, right H&S bottom plays out, the price objective is well north of the neckline which would be the breakout I’ve been looking for. Until the big 1 year neckline is broken to the upside we are marking time. This is the frustrating part of trading. You see the huge potential for this pattern but until the neckline is broken no confirmation is given. What we don’t want to see is a break below the thick dashed black neckline that has been offering support for the last couple of weeks.

UUP daily possible H&S bottom.

On the weekly look you can see how the UUP is forming our potential H&S bottom right on the bottom rail of the downtrend channel. If there was ever a place to form such a pattern that is the place. Something to keep in mind is that this is a very large pattern that is over one year in the making. Each bar you see is one weeks worth of trading so keep in mind the time factor involved. We will have plenty of time to take advantage of the breakout if and when it occurs.

UUP weekly H&S forming on bottom rail of downtrend channel.

This week I want to focus on the US dollar and the Euro charts as they are both sitting on their respective necklines of a very large H&S bottom for the dollar and a very large H&S top for the euro. Understanding the consequences of these two large H&S patterns should keep us on the right side of the markets. The H&S patterns still haven’t completed the breakout yet but are precariously on the verge of confirming the H&S patterns. Keep in mind these are very large patterns and it will probably take sometime to complete the breakout and the backtest before the real move gets underway. If these two patterns play out the way they should the Euro is in big trouble at the moment. Regardless of all the news coming out of Euro land their currency looks like its in for a pretty good correction at the very least.

Lets start with an eight month chart of the dollar that shows about 2/3’s of the big H&S base. Notice the small H&S bottom that is forming the right shoulder of the much bigger H&S bottom. You will see a big neckline that runs across the top of the chart that is the neckline of the much bigger H&S top. The H’s are the head of the big H&S bottom. I just wanted to zero in on this latest price action to show how bigger patterns can be made up of smaller patterns. You can see we have backtested the neckline several times. Also the 50 dma comes in just under the recent price action.

US dollar 8 month daily look showing right shoulder of big H&S bottom.

Next, lets step out two years so you can see the big H&S bottom and how it fits into the bigger picture. Note the right shoulder. That is the H&S bottom on the chart above that is creating the right shoulder of the big H&S base. Special note. For those that have the capability of measuring price, either with a Fib tool or can draw a box, you can measure each impulse leg down starting with point A, in red, at the top of the chart. Measure down to the lower A and that is the distance for the red A impulse leg down. Without changing your measurement take your fib tool or box and put it on the B top. You should see that the A measurement is equal to the B impulse leg down. Again without changing your fib tool or box you can move it down to the top of the C impulse leg down. You will see that each of the impulse legs down are almost exactly the same distance which played an important role in finding the low for the dollar. The C wave impulse leg down has created a bottom for the big H&S base which has multiple heads.

US dollar 2 year look showing big H&S base with equal impulse legs down

Next lets look at a weekly 7 year chart that shows a possible trading range and our big H&S base. The yellow areas on the chart below shows how the dollar failed to reach the top in 2006 using the yellow squares for 2009 and 2010. Now look at the 2009 low that failed to reach the bottom black dashed rail from the 2008 low. It also failed by the exact same distance that the two top yellow boxes failed. This is a symmetry thing. You can see the big H&S price objective to 87.34. I wouldn’t be surprised once the impulse leg up gets started that we don’t make it all the way up to the top black dashed rail, the 2005 high. At any rate the big H&S base should push the dollar up to 87.34 at a minimum. I also put a chart of Gold under the dollar chart so you can see they are both up against a resistance rail. The dollar neckline and gold the blue downtrend rail.

US dollar weekly look symmetry yellow squares.

The next chart is a monthly look going back to the US dollar top in 2000. This chart shows the roughly 3 year cycle bottoms, purple vertical lines. Note where our current 3 year cycle low comes in, right at the head of our H&S base. Knowing when to look for some kind of reversal pattern is always helpful. There is also a 10 month moving average that shows, when you are below it things are bearish and when you are above it its bullish. You can see we are well above the 10 mma right now which is a strong positive. One more thing about this monthly chart of the US dollar is the S&R rail, support and resistance rail, that shows the possibility that the dollar could be carving out a huge base. Thats only speculation at this time as we will have to see how we interact with S&R rail if the dollar can ever make it up that high.

US dollar monthly look using the 10 month moving average.

I want to do a comparison chart of the US dollar and the S&P 500. This chart could be very telling for the stock markets if the dollar breaks out it’s small H&S, right shoulder of the big H&S base, red circles. You can see the S&P 500 is also close to completing a H&S top. Last weeks huge rally in the S&P 500 took the index up to backtest the neckline. As you can see from looking at the chart below everything is hinging on the dollar breakout to get the ball rolling in the next important move in many markets.

US dollar H&S comparison chart ,red circles, with the S&P 500.

Next lets look at the XEU, euro chart that is showing a H&S top formation that is equal in size to the dollars H&S bottom. This line chart shows a nice H&S base that was made in 2010 that had a big backtest that created a double bottom on the neckline. The price objective for the H&S base was finally achieved at 147 in May of this year. You can see the multiple heads that equate to the multiple heads on the dollars big H&S base. Also note the height of both left and right shoulders on the H&S top. Pretty nice symmetry going on there.

XEU daily H&S top.

The weekly look at the XEU shows how close we are to completing the big H&S top.

The next chart shows all the trading patterns the euro has made over the last 8 years or so. Note the blue bearish rising wedge on the right side of the chart. You can see how the bottom blue rail of the rising wedge has played a key role in the development of the H&S top. The big backtest to the underside of the bottom blue rail created the right shoulder of the big H&S top. Again you can see how precariously we are sitting on the neckline. At a bare minimum, between the H&S top and the bearish rising wedge, the price objective should be down to the bottom of the chart. The euro looks to be in trouble if this chart plays out.

XEU bearish rising wedge with H&S top. Not looking good for the Euro.

Lets look at one more long term monthly chart that is showing a downtrend channel forming off the bull market top at 160 in 2008. You can see there is a clear picture of lower lows and lower highs. Also you can see the red bearish rising wedge and our H&S top from the chart above. I extended the neckline, that may come into play further down the road, that may act as support.

XEU monthly downtrend channel with H&S top and bearish rising wedge.

So the bottom line is if the US dollar and the Euro H&S patterns play out as expected there should be some pressure on the stock markets and the precious metals complex unless this time is different. We will be able to monitor the change if things are going to be different but for right now it is what it is until proven otherwise.   All the best …Rambus

This morning GLD gaped above all four moving averages. That’s one way to take out overhead resistance. As you can see we are approaching the blue downward slopping rail. That should be a good test of resistance. Watch how we interact with that blue rail for more clues. Also note the big gaps that have formed on this last little rally.  There is a good chance those gaps will get filled at some point. When is the only question.

GLD gap over 4 moving averages.