4 Doomed Stocks, 1 Doomed Currency, and 2 Bullish Metals
Before I get into my analysis of the charts and the price action that occurred last week, I want to share a little anecdote with you.
Last week I was interviewed by Nicholas in the UK who runs a podcast called ‘A Trader's Life’.
He had heard about me and wanted to interview me for his podcast. So we did an extensive interview together. Hopefully, the link to that interview will be available in about a week. I’ll share it with you when it’s available.
But right now I want to highlight one of Nick’s questions. He observed that I spend a lot of time shorting stocks while the stock market is ripping to all time new highs.
That got me thinking because yes, the US stock indexes have been rising day after day, week after week, and month over month to all-time new highs. In fact, last week the Dow Jones Industrials (DJIA) ripped to an all-time new high, the S&P500 ripped to an all-time new high, and the NASDAQ stopped just short of its own all-time high.
But a few months ago, I began emphasizing a theme I’m still harping on: second tier stocks in the NASDAQ topped out as early as six or eight months ago.
It's this area that I’ve been focusing my trading on: second tier stocks offer such great opportunities – especially during the last three months – while so many countervailing trends have been happening in the economy. Things like: are we going to see a spike in inflation? Is the economy going to grow? What's going to be the long-term result of all this government stimulus?
Plus there’s been enormous rotation. One day it's growth stocks, the next day it’s value. The next day, it's cyclical issues. And then the following day, it's momentum. Then the dollar has been up. It's been down. Gold's been up, it's been down.
This is confusing and makes it hard to focus. Yet as traders, we always have to choose where and how to focus our time.
My solution? The second tier of the NASDAQ has the best risk/reward opportunities right now.
These are not the biggest or most stable companies.
Microsoft Netflix, Apple, Amazon, and Google make up 20% of the S&P and the NASDAQ. These are real companies with real revenues and real prospects that are trading at realistic multiples. Apple is trading at around 30 times earnings, for example.
The second-tier companies are different.
These are names like Peloton, Zoom, Quantum Scape, FCL and Plug Power. They don't even have earnings. And during the time the NASDAQ has been heading up to all-time new highs, these stocks are anywhere from 30% - 50% (even 80%) off their highs from just six or eight months ago.
And they’re still extremely vulnerable.
An email I sent out just one week ago on May 2nd used the title “NASDAQ On A Bicycle, Poised To Go Over A Cliff”.
Now that’s a crazy title, isn’t it?
But I used the bicycle metaphor because I thought Peloton (PTON, the exercise bike company) was going to head over a cliff and plunge much lower.
That’s despite the fact that Peloton was already off 50% from its all-time high.
I said just last Sunday that Peloton was poised to go over a cliff and plunge much lower. At the time PTON was trading at about $105.
Based on a recall of their treadmills announced last Wednesday, Peloton crashed about 15% and the stock dropped under $80.
So how did I know about this? How did I know that the company was going to do a recall? How did I know Peloton was going to crash?
Well, I certainly didn't know anything about the recall.
But I did know how to read the price action. The price is the news. The price is the discounting effect. Price was telling me that PTON, ZM, BYND, and QS have crashed and are destined to crash even lower.
That’s why I’ve been focusing all my recent time and energy on these second-tier NASDAQ stocks despite the fact they’re 30%, 50%, 80% off their highs.
I think they're just getting started.
Let’s take a closer look starting with Peloton (PTON):
All the way back at the top at $170, PTON started to indicate a huge reversal of fortune starting with a double top price pattern.
A double top is a reversal pattern. You can see how the market was going higher until the double top, and then after the reversal price pattern it began going lower.
In addition to the double top price pattern, there was also a head and shoulders pattern (the double top is the head, in this case). This is also a reversal pattern:
Once price broke through the neckline, PTON was destined to go lower.
We can also go out one step further and see there’s a much larger head and shoulders too:
The implications are the same as with the smaller version. The real decline is just about to begin. PTON just crashed through the neckline of this larger pattern and should go much lower over time.
How much lower is usually dictated by the size of the price pattern. If we measure from the neckline to the top, that’s about $80. Let's take 75% of that.
In that case, PTON goes to sub $50, sub $40, maybe even $30 where its price rise started in the first place. So despite the fact that PTON has already dropped precipitously, I think there’s still a lot of room left to fall.
Zoom Communications (ZM) is another stock I’ve been steadfastly bearish on.
It has a lot of the same attributes as PTON including a double top and a head and shoulders.
This is actually a complex head and shoulders because there are a number of shoulders on each side of the head. But whatever way you want to look at it, once ZM cruised through the neckline, the stock had nowhere to go but lower.
Just like PTON, it looks like ZM is just getting started despite having fallen 40% - 50% from its highs:
That’s because there’s also a long-term descending triangle price pattern. You can see that when we connect the highs and the lows, ZM formed a descending sawtooth triangle.
This is a huge bear price pattern and ZM has just started to violate the neckline.
I don't see that there’s anything underneath that neckline to support the current price. So ZM could see another 50% drop from current levels … or even more.
Next up on my hit parade of zombie NASDAQ companies that I feel are going to get whacked is Beyond Meat (BYND), the alternative meat company:
I've been saying since $200 that I thought the stock was going to $60 and based on current price action I won't back off that prediction at all.
If you've been following my videos and emails for the last several weeks and several months, I’ve been very bearish on this company. Even though this is an asymmetric double top, I predicted that once it crashed through the neckline that it was over for this stock and much lower prices were on the way.
If we look at a more global view of BYND, it looks even more ominous:
There’s an enormous double top and right now BYND is sitting right on the neckline for that pattern.
Just like ZM, there’s no cushion of support, which indicates BYND could get cut in half in the weeks and months going forward.
Quantumscape (QS) has represented the best risk/reward opportunity based on price patterns:
This company went public through a reverse merger via a SPAC. It started out at $10 and soared to $130, but the chart soon formed a giant head and shoulders.
The magnitude of this pattern told me this stock was doomed and destined to go much lower. The head and shoulders has been the governing price pattern going forward.
I felt strongly enough about the strength of this pattern that I shorted every rally and profited immensely.
If you understand the cards you're holding, it’s a lot easier to predict the future trajectory of any instrument.
There are other bear price patterns in QS too: three double tops in a row.
It was on a webinar on April 14th, before a streaming audience of over 500 people, that I said there was essentially no risk in being short QS around $41.
Since then QS has crashed about 30%.
Yet just like the other three stocks I’ve shown you, I think QS is just getting started. There’s huge downside here once you see the large descending triangle that QS has been tracing out:
This is a very bearish pattern. Once price fell through the neckline QS was doomed to fall to much lower prices.
We even saw a retest of that neckline, and lower prices should come in due course.
I’ve been taking monster profits on the short side of QS all the way down from $70, $60, $50, $40, and now even $30. Even here I’d feel comfortable adding to short positions because I feel the stock could still get cut in half from current levels.
Let me demonstrate that I eat my own cooking:
Everything that I share in these reports I'm doing in spades in my own account.
For example, last week I was long put options on QS and also another NASDAQ stock with a large head and shoulders pattern (JMIA).
I started buying puts on JMIA when the stock was $31, including 29.5 puts last week. The stock crashed to $24 and I made around 350% as I had bought my puts around a dollar. I got out of most of them at $3.50.
You can also see I was short 45,000 shares of QS from $33.
This is a screenshot one day later, where I also took a bet on the downside in the NASDAQ.
I took some quick profits on some open put options and took some profits on some of my short QS shares too. By then I was also short ZM.
So I’ve been doing exactly what I've been recommending in these reports: I've been shorting ZM, QS, BYND, and PTON at various times.
This is a screenshot of my positions as of last Friday.
I doubled my position size from 30,000 shares short in QS to over 67,000 shares, so I had a $2 million+ position short the stock.
As it closed around the $31 area last week, I had open profits of $172,000, which doesn’t reflect the basis from where I started shorting the stock in the mid-$50’s.
These shots just show the first in, first out. So as I close out positions, those enormous amounts aren’t reflected in the existing shot.
However, the size of my gains dwarf the size of my losses. This is how I'm able to make substantial profits in the market over time.
I hope that all makes sense.
Now let’s take a look at FX …
Here’s USDCAD (the US dollar versus the Canadian dollar):
I and all my members who followed my trades have been making huge amounts of money on the short side here.
There’s a huge head and shoulders price pattern. So this just looks like the same patterns in PTON, ZM and many other instruments. It doesn't matter where these price patterns occur. They have the same implications.
Once USDCAD cracked through the neckline, this was the green light for a monster move lower from 1.30. And that's exactly what we've seen as prices have fallen to almost 1.20.
I've taken a number of short positions along the way, but now USDCAD is at a major support area. So I wouldn't be surprised to find some level of support in the short term.
However, I do expect prices to go a lot lower over time.
Note that USDCAD has seen an expansion in volatility. Price ranges from high to low have expanded. Typically when I see this expansion, it usually signifies a short-term end to the trade.
But frankly, I still think there's a lot of room on the downside. If you’ve made some money by taking my signals, then perhaps you can take off 30% - 50% of your profits and look to re-enter later.
However, just because we're at the support level doesn't mean that prices are destined to go higher from here. USDCAD could just go sideways instead.
And because I believe the US dollar is destined to go much lower over time, another way to play this lower dollar move is to be long AUDUSD (the Australian dollar versus the US dollar).
Here we see just the reverse of USDCAD meaning that we have an inverted head and shoulders. The differentiating characteristics of this inverted head and shoulders is the sloping neckline of this pattern.
That's because the right shoulder is sitting above the left shoulder, and so this is an especially bullish price pattern. Prices could go higher and significantly higher very quickly.
Last week AUDUSD had a bullish key reversal where earlier in the week, it made a new law but then closed at the high of the week. That too is bullish and I think the price rise is likely to continue.
There could be some headwinds at the indicated resistance level and perhaps we’ll see sideways action before the next serious leg up. But if you're a long-term player that you need to be positioned long AUDUSD.
Now let’s look at XAUUSD (spot gold).
For the last few months, I've advised shorting XAUUSD as I felt it was going to come down to the $1,650 - $1,700 level, based on my analysis of the ascending broadening price pattern.
I advised exiting gold at the apex of that pattern and then suggested going short around the $1,850 - $1,900 level. I thought prices would drop to the base of the pattern and that’s pretty much what happened.
Gold put in a double bottom that was solidified by very formidable price action in the form of key reversals for each of the bottoms.
Now it feels like it's going to be tricky. I'm trying to envisage how prices can cut through all the prior resistance that’s lying overhead in gold.
But I think gold prices are poised to ultimately go higher. It's going to be volatile. But the overall direction is likely to be more up than down.
Here’s the daily chart:
Boundaries can help you whenever prices are going back and forth in what seems to be an arbitrary fashion.
It's been quite a challenge in gold because there are a number of ways you can look at it.
On one hand, you can draw a nice, neat channel for gold as I’ve shown you just above.
But I feel the most helpful way to look at XAUUSD is from the standpoint of a descending triangle as I’ve drawn here:
Certainly when we looked at QS this particular pattern had very bearish implications. QS came out of this pattern on the lower side.
However, gold looks ready to do the opposite.
That’s due to the double bottom which now appears to be a bear trap, meaning that all the bears who chased the price lower are going to be feeling more and more pain as prices keep moving up.
If and when gold comes out of the other side of the triangle, it’s going to be a formidable buying opportunity.
However, there’s a lot of headwinds between the current price and $1,880 thanks to all the earlier price action at those levels.
That’s why you shouldn’t rush into this trade too quickly. Look at consolidation as an accumulation opportunity and be patient. The trapped bears should capitulate sooner or later. It’s a matter of time.
This is not as clear a trade as shorting QS right now. QS has a whole lot less obstruction to the downside than gold does to the upside.
But I’ll definitely be keeping an eye on how the patterns and price action develops in the next few days and weeks.
XAGUSD (spot silver) is also looking more bullish now:
The prevailing patterns include an inverted head and shoulders, similar to AUDUSD.
There’s also an interim double bottom and around $22, which has held up well as silver has chugged its way through a huge consolidation. Recent bullish price action feel like silver is going to resolve this consolidation to the upside.
The next big hurdle to cross is the $29 - $30 area, but it does feel that the path of least resistance is higher.
Having said that, there’s likely to be a lot of volatility. So if you're inclined to start taking a poke at the long side of silver (or gold), step in with smaller positions and wide stops. A 50 cent or $1 stop in silver isn’t going to help you. You’ll likely be taken out.
I would look at getting long here with a stop under the $24 area with the near-term resistance around $30.
And that’s it for the week!
The dollar looks to be heading lower again, and that’s very bearish for USDCAD and bullish for AUDUSD.
There are four second-tier NASDAQ stocks I feel could be cut in half from here: PTON, ZM, BYND, and QS.
And the precious metals are now looking cautiously bullish – be patient.
I wish you a very healthy and prosperous trading week.
Mark "DollarTorpedo" Shawzin