7 Figure Profits and Counting … More Blood To Come in Tech Stocks and Gold
Before I dive into this week's market analysis, I want to remind readers how my trading methodology and my approach to the markets works. What do I seek to do?
My objective is to take a large piece out of the middle of big moves in the market, up or down.
It doesn't matter if it's a stock index. It doesn't matter if it’s a currency pair. It doesn't matter if it’s a metal. I look for high value setups that should lead to large moves in either direction. Then I try to take a piece out of the middle.
That’s the plan. But over the past couple of weeks, I've done even better than that.
Regular readers will know that a few weeks ago, I was pointing to what I thought was a large bearish flag on the NASDAQ. I started aggressively shorting the QQQs (the ETF proxy for the NASDAQ) at around 334. I started heavily buying put options to bet on the downside.
I also started to buy inverse ETFs to bet on a decline in the NASDAQ.
When I saw the NASDAQ’s bearish pattern, form, my financial objective was to make seven figures on that trade. I basically achieved that since we've seen a 10% decline in the index.
With some of my trades, I was able to pick the exact top of the move and the bottom too.
Here’s a quick breakdown on what I did…
I sent out a Weekly Advisory email two weeks ago on February 21st where I first stated we were on the verge of a stock market rollover.
I should have been a little bit more specific and said “NASDAQ rollover” because the tech sector was especially vulnerable to a big move lower.
And that's exactly what we've seen. I said the NASDAQ’s key reversal -- at the apex of an ascending broadening price pattern, no less -- could be a signal for a big decline.
This is what I was looking at:
I saw a key reversal at the peak of an ascending broadening price pattern. This suggested a lower trajectory could be imminent.
I also pointed to a profit target: the bottom of that ascending broadening formation.
A quick side note here …
Perhaps you’ve heard the saying “those who can, do. And those who can't, teach.” That implies there's a bunch of educators out there who claiming to have all these whizzbang systems and EAs and things like that. They show you all kinds of “performance” data … then you try it out and you discover it's all nonsense.
In contrast, I show complete transparency in my trading methodology, including the logic behind what I do. Then I show you the outcome.
So I love doing educating people, but I also trade. I can do both.
In fact, I love educating and enlightening people about the markets and my way of looking at them. The Pattern Trader is a good business, but I make most of my money from my own personal trading.
What I'm saying is this: when I recommend trades to readers like you, I eat my own cooking. I don't just say a bunch of hypothetical things and then go about my business. Whatever I tell you here, I promise you I'm doing in spades in my own account.
So going back to my email on Sunday February 21st, I pointed out the key reversal at the top of an ascending, broadening pattern. It was on that Friday when I saw the market close on the low of the day that I first took action.
As I finished my Friday Master Pattern Trader session around 1:00 PM EST, I started loading up on put options set to expire the following week. I got very aggressive because in the end I bought about $100,000 worth of these put options. Yes, they’re financial grenades. Yes, they're weapons of financial destruction and you can lose most or all of your money very quickly. But as you’ll soon see, it was a good bet.
I’ll take you through the sequence of what I did.
On Friday, February 19th, when the QQQ was trading at 334 it was well above the strike price of my options (strike price 320). Remember that the QQQ is an ETF that mirrors the NASDAQ one for one.
So, if you want to buy the NASDAQ, this is a great ETF to hop aboard. If you want to short it, then short QQQ or buy a put as a very leveraged bet on a NASDAQ decline. I bet that the QQQs would fall to or through 320 by the following week.
I got 350 contracts at around $1 each as you can see below:
Even if I was right about the decline, but QQQ fell to only 321, I would have lost all my money. But as it turned out, by the following Tuesday, QQQ fell to 310 and my options were suddenly well into the money.
I paid around a dollar a contract, with each contract based on a hundred shares. Multiply the 200 contracts x $1.04 x 100 = $20,901.04.
All told, I bet about $35,000 on these financial grenades (a.k.a. put options) as I felt very strongly about a decline in the following week.
If I was wrong, I would have lost my entire $35,000 just one week later. Instead, I sold those options for multiples of my purchase prices the following Tuesday.
I got out at a variety of prices: $5.85, $5.75, $6.31, and $8.10.
And I made $195,800 in just a couple of days.
I reloaded on the following Monday. And as you can see, I reloaded pretty early. This is a Tuesday snapshot, so you can see the 307 puts I bought and for which I paid about $1.50.
At the time of this snapshot, I was losing about $30,000 after risking $61,500 and if I was incorrect, I would have kissed that entire sum goodbye. I was already down half my money in just one day following the initial purchase and these puts dropped as low as 0.40.
However, that wasn’t the end of the story …
They eventually went to about $8 (which I’ll show you in a moment).
I also bought SQQQ, a 3x leveraged ETF which is the inverse of the QQQ. If QQQ drops, then SQQQ goes higher by 3 times the amount of QQQ.
I was also in another 100 contracts of 308 puts plus I was short 1,000 shares of BYND (Beyond Meat) as yet another way to play the short side of the market.
Altogether, I was down almost $25,000 at that moment in time.
But here’s how things looked just one day later:
Things went from a $24,000 deficit to a $142,000 profit. It's very tough to hold on to these things when you've got such a tremendous profit, but since I thought the market still had further to go, I held on.
The 307 puts which were priced at 70 cents one day earlier were now more than 300% higher at $2.66. Instead of losing nearly $30,000, I was now making nearly $60,000.
(By the way, I continuously adjusted my options positions in the market, which is why you see some of the strike prices change between snapshots.)
Here’s another snapshot another 24 hours later:
I was losing $24,000 on Tuesday but by Thursday my positions went to $348,594.
I had already reduced my 450 contracts of the 307 puts to just 150 contracts. So this snapshot doesn't reflect the closed out positions. However, amongst the still open positions you can see BYND was now trading $16 lower.
I ended up taking profits on all these positions on Friday.
The result was that over two weeks, I made my objective of profiting in seven figures by shorting the NASDAQ plunge using a variety of instruments.
Now I'm going to show you exactly how and why I did what I did.
When I see something I really like in the markets, I’m like a dog with a bone. By that I mean I don't like to chase too many different cars around the street. Once I see a setup that’s primed to move and I fully understand the risk/reward, then I want to focus on that and wrestle it to the ground.
That’s why I’ve been predominantly focused on being short the NASDAQ and also short gold (more on that later).
Ironically, both share the same chart pattern. That made it easy to understand what was going on within the context of each market.
I explained this last week while hosting a series of webinars with thousands of attendees. Each day we met at 4:00 PM EST.I showed attendees each day what I was looking at on the NASDAQ. They saw my positions move just as you saw from Tuesday to Wednesday to Thursday, going from a $24,000 deficit to over a half million dollar windfall in just a few days.
While it looked very risky (some of the bets I was doing looked like a lot of kamikaze trading) there was a method to the madness.
So here’s the NASDAQ stock index.
A key reversal is a bar where the market made a new high (an all-time high in this case) and then closed on the low. By the end of the week, the sellers were in control.
But what made this important was the pattern in which this reversal occurred. It happened right at the top of an ascending broadening formation -- an inherently bearish pattern.
The NASDAQ dropped within that pattern before breaking the lower trendline. That’s very significant. It suggests that the next stop is the base of that pattern.
We’re not there yet. And it’s why I expect the NASDAQ to reach that level before it will find some kind of a bottom.
Here’s another look at the NASDAQ on a daily basis:
The ascending broadening price formation is more obvious here as well as the breakdown below its lower trendline.
The NASDAQ broke through the trendline, retested it, and then failed. Then on Friday there was what I feel is a head fake in the form of a bullish key reversal where the market made a new low, then closed on the high.
Typically these point in the direction they want to go, but I think the ascending broadening price pattern, as well as a head and shoulders (both bearish) inform us that there’s another down leg coming in the NASDAQ.
So expect a rally to the breakdown area before another failure and descent in the direction indicated by the head and shoulders.
Another thing I want to point out is that very often the market presents us with a series of conflicts.
This market is no exception. On one hand, there’s a very strong uptrend line where every time the market hits that line it makes a key reversal and powers on to new highs later.
I’m highlighting that on this daily chart of the NASDAQ (same chart as above, just with different annotations):
Last week we had the same thing. So are we going to see an other all-time high proving me wrong here?
It’s certainly feasible, but I think the combined weight of the recent bearish patterns is going to win out here.
At “worst”, we’ll see a double top where the NASDAQ rises as high as the head of the head and shoulders. But I’m not optimistic the NASDAQ will make it that high. That head and shoulders is very bearish pattern. And I firmly believe the tug of war that's going on between the bulls and bears should be won by the bears.
In the meantime, we can sit on the sidelines and let the market tell us how high it wants to go before rolling over again.
Being patient means we can make a more informed decision and create a good risk/reward opportunity where we can sensibly measure our risk in proportion to the potential reward.
There’s one more thing I want to point out on that second daily chart that I didn’t have room for on the first chart…
Within the head of the head and shoulders, there’s a very slight but perceptible double top. When you couple that with key reversal price action, it becomes very bearish and that’s where I first started loading up on the QQQ puts.
Two days later, I made about a half million dollars. Then the market went higher, I reloaded and made another half million dollars and got out at exactly the low on Friday.
So I took every piece out of last week’s move. Typically I try to take a piece out of the middle but this time around I ended up getting in at the top and out at the bottom.
There was certainly some luck involved but the better your analysis, the luckier you get!
In the bigger picture, what's happening here is a rotation. The NASDAQ has gone down a little over 10% but the S&P500 and the Dow are still very close to their highs.
The market is dumping out of tech stocks and moving more into value stocks.
Here’s the S&P500:
This index is much stronger than the NASDAQ. It’s hovering just under its all-time high. But it too is trading within the cadence of another ascending broadening price pattern.
It's an open question whether the S&P500 retests the upper side of that pattern before it rolls over …
… or whether it starts rolling over right now.
There’s a subtle double top here too. Friday's action took the price back to the neckline of that patter.
There was a COVID bill passed over the weekend, and that could be fodder for one last rise in the S&P and the Dow Jones, but I'm looking for a potential bull trap here and another opportunity to reload on the downside.
For comparison, here’s the DJIA (Dow Jones industrials Average):
Again, the rotation is very stark. The Dow is hovering just a hair under its all-time high.
Yet there’s another ascending broadening price pattern here too. We may see a retest of the upper trendline before we get a drop, or perhaps the DJIA just catapult to all time new highs first.
I’m on the sidelines until I have a better idea of the trajectory.
One of the best indicators of the stock market’s most probable future is the interest rate market. I’m looking at the corporate bond market in particular via HYG (an ETF that tracks the corporate bond/high yield sector).
All the free money in recent times has been papering over a litany of sins in the corporate sector. There are surely a lot of companies which should have been left to go bankrupt, but instead were held up by their ability to raise money despite their subpar business models.
On this HYG chart, it looks like there’s a double top in place and the price is right at the neckline:
If this starts coming apart, like it did a year ago, I anticipate there will be a similar dislocation in the stock market. Especially in the NASDAQ and the tech sector, which I feel is especially vulnerable.
It’s well worth keeping an eye on HYG to see what happens going forward.
Meanwhile, another market I’ve just been feasting on lately is XAUUSD (spot gold).
In fact, I've been telling members since late July -- right at the peak -- I thought gold’s momentum would peter out. For a while, I was unsure whether gold would go into a lengthy consolidation or descend instead.
But I did advise that members start exiting positions based on my observation of the greatly expanded volatility we saw in gold. Multiple price bars had expanded well beyond their normal constraints. Prior to that near-vertical ascent, it was a very orderly rise and then everything went parabolic.
Once markets go parabolic, it's time to step aside, let everybody else have a turn and see what happens.
Since then, I’ve highlighted that gold too is trading within an ascending broadening price pattern very similar to the one in the NASDAQ.
It’s why I’ve been short gold for several weeks from the mid $1,800 level and higher $1,800’s with a target of $1,650 within that ascending broadening formation.
Gold is getting very close to that key inflection point at the lower trendline of the pattern. Once it hits that level, one of two things will happen.
Either gold will catch a bid and surge to new highs (as the NASDAQ did several months earlier), or gold will break down to where the pattern started around the $1,200 level.
That might sound shocking when you think back to what the media was saying about $2,500 gold or $3,000 gold last year. But this is why you have to look at objective price information.
One other thing: while gold has been going down the US dollar has also been going down. Traditionally, we've been taught that if the dollar goes down, then gold is supposed to move the other way. Yet that’s not happening at all. Correlations work sometimes, but not always.
That’s why you have to look at each market on its own merits.
This is why I was short gold even when it wasn’t “fashionable” to be short.
And frankly, gold looks like it could go lower, even much lower. That’s because the enemy of gold is higher interest rates. The yield on the 10-Year Treasury Notes has gone from less than 0.5% last year to 1.6% last week. If we get a continuing rise in interest rates, this will be kryptonite to the gold bulls.
While silver has been stronger than gold, it too has been subject to the gravitational pull of the gold market lately.
Here’s XAGUSD (spot silver) where we see a tug of war between two opposing price patterns:
One is bullish: the inverted head and shoulders that led to a 40% move in just a few weeks.
There’s also a bearish double top which will be confirmed only when silver breaches the $22 price level. But prices feel heavy right now and I’m more inclined to be bearish than bullish.
In the meantime, silver has reached a key support level and prices have been coiling for the last several weeks.
That coil is going to release in one direction or another. And by virtue of this double top price pattern, it feels that prices are going to unwind to the downside.
My predominant focus has been in the NASDAQ with a secondary focus on the gold market (both short positions).
That’s because they share the ascending broadening price pattern.
However, I’ve also been nibbling at the long side of GBPNZD (the British pound versus New Zealand dollar) based on my observation of the long-term bullish price patterns going all the way back to late 2016, early 2017.
GBPNZD is in a stealth bull market, which looks especially promising right now thanks to the recent double bottom.
GBPNZD is taking its sweet time to get moving again, but the more this builds energy at current levels, the more likely it’s going to uncork violently to the upside. Right now I feel this is a pair where you can set up a very advantageous risk/reward position.
Take your time and get into multiple positions.
We’ve seen a pattern of key reversals lately. That’s especially bullish and over time I expect GBPNZD to start picking up steam to the upside.
Another emerging opportunity is in EURJPY (the Euro versus the Japanese yen):
EURJPY has been moving higher off what looks a double bottom and inverted head and shoulders combination. Yet prices stalled out last week and EURJPY couldn't make a new high.
Instead we saw what's called an inside week bar where the range of last week (the high and low) was entirely contained within the previous week.
This isn’t so remarkable in itself, but EURJPY is now at a formidable resistance level and therefore the pair is hovering at a notable inflection point.
Now I’m waiting to see how prices behave next week. These inside bars look benign, but they can also herald the start of something big, especially when they happen at key price levels like this one.
The least likely scenario is a breakout to the upside with a long-term uptrend.
EURJPY is more likely to surge temporarily to create a bull trap before dropping, or simply dropping lower within an initial rise at all.
This is the kind of visualization I do around key price areas: I draw out scenarios so I'm not surprised when the market shows me something. I'm always prepared for unusual outcomes, especially strange, low probability ones that run up a major red flag on my reading of the market.
So I'm not looking at news. I'm not looking at Bollinger Bands or similar indicators. I look at trends, patterns and price action and forget the rest.
I've shown you that I literally make hundreds of thousands of dollars from simple analysis like this and believe it or not, there's nothing more I need to do this.
What you’ve seen in this report is what I base my trading decisions on. And you’ve seen the results for yourself.
This week I spent more time on the NASDAQ than I normally do, but that’s because there are enormous opportunities remaining out there and it’s important for you to see them.
I remain bearish on the NASDAQ and tech stocks and don’t feel especially bullish on the rest of the US stock market either. I’m bearish on corporate bonds and the precious metals. I’m bullish on GBPNZD and waiting for EURJPY to tip its hand at a key inflection point.
I wish you a very healthy and prosperous trading week.
Mark "TechWreck" Shawzin