In a shining example of how the financial markets are full of surprises even for those (ourselves included) who claim to understand them, the US dollar is now extremely bullish after having endured a very bearish outlook. To be fair, a bullish or bearish outlook hinges on which time-span a trader chooses, since different themes influence an asset over different time frames.
The dollar is set to drop 5 percent by the end of the year, as investor focus returns to deteriorating US twin deficits—fiscal and current account. Today is also the second day of declines for US 10-year yields, though as of this writing they're once again pointing a bit higher, leading traders to believe that bond yields could be running out of steam. This would be an appropriate time to remind readers that we have been bullish on yields even after they stalled between April 26-May 14, for 12 sessions. Thus a two-day stall has very little predictive value.
Another point on which to be pessimistic is the growing perception that US has become an unreliable trading partner with an unpredictable president at the helm. This view may incentivize countries to begin importing from more predictable countries, steering demand away from the dollar.
Dollar Rising; Euro, Pound Struggling
However, at least for the moment, the dollar is the currency to have in hand, after the trade war—which has been its biggest headwind—is seen to be lifting, at least for the time being. This has been compounded by the fact that the euro and pound are struggling with their own problems.
The pound is pressured ahead of UK data including CPI and a second reading of GDP on the backdrop of political instability. The euro is taking a hit from the Italian government's path to a coalition that would seek to follow Britain’s example and depart from the EU. The added Italian risk would lead Italian bond holders to sell off, adding pressure to the euro, whereas US Treasuries are an oasis of calm.
All this provides a bullish outlook for the dollar in the near to mid-term and therefore a bearish outlook for gold over the same period.
The price of gold completed a double-top last Tuesday. After a three day pause, today’s dollar jump led to a selloff in gold.
When the price crossed below the neckline, it also cut through the 200 DMA (red). At the same time, the 50 DMA (green) crossed below the 100 DMA (blue). Both events demonstrate that prices are falling, relative to different periods, increasing the probability that the downtrend, established with the double-top completion, will continue for now.
Trading Strategies – Short Position Setup
Conservative traders would wait for a 3 percent neckline penetration to $1,263, to avoid a bear-trap. However, that makes the risk-reward trend ratio untenable. Therefore, they would need to wait for a return move toward the neckline. Since that would require a considerable rally, they may require evidence that the pattern is still in play, when at least one long red candle would engulf a preceding green candle, after the rally.
Moderate traders may be content with just a 2 percent penetration to $1,267. They may wait for a return move for a better entry, but not necessarily for proof of the pattern’s integrity.
Aggressive traders may short now, providing they can afford a stop-loss above the $1,303 neckline or accept the risk of a losing position.
Trade Example
- Stop-Loss: $1,303
- Entry: $1,295
- Risk: $8
- Target: $1,250
- Reward: $35
- Risk-Reward Ratio: 1:4