Are Precious Metals (and Tech Stocks) On The Precipice?
Precious metals are looking very interesting right now and I think both gold and silver are great shorts. There are also some ominous signs in NASDAQ tech stocks right now too.
But before I delve into that part of my analysis, let’s start with the U.S. Dollar Index (USDI) because of the dollar’s overwhelming influence over most everything else.
USDI tracks the U.S. dollar against a handful of major currencies and as you can see over the last five years, the dollar’s been rallying smartly to multi-year highs. Despite struggling for quite some time at a major resistance area, it now looks like the dollar will have no trouble cutting through it, perhaps very shortly.
If we look at the inverted head and shoulders continuation pattern, this is just a resting stop.
Normally an inverted head and shoulders pattern is a reversal pattern but in this case, it’s a continuation because this is an uptrend. That’s because the right shoulder is higher than the left to create an upward sloping neckline. It indicates that not only is this market going higher but when it cuts through it will cut through very quickly and we're likely to see a very robust follow through.
This suggests a buying opportunity in any USD pair when USD shows temporary weakness, as with EURUSD (the Euro against the dollar).
Since the Euro comprises 60% of USDI, EURUSD is effectively an upside-down version of USDI where we see a normal head and shoulders instead of an inverted one, sloping neckline and all.
To my mind, it's virtually baked in the cake that we're going to drop to the 1.04 – 1.05 support area and then ultimately 1:1 parity with the dollar as the dollar heads much higher over the next few weeks.
NZDUSD (the New Zealand dollar against its U.S. counterpart) is another example of a good potential short based on the strong-dollar idea. Here’s the monthly chart:
For the past year and a half, I've maintained that the New Zealand dollar is one of the weakest currencies on the board versus all other major currencies and certainly versus the U.S dollar. It certainly looks like there’s no other direction for this currency pair to go but lower. There’s a double top that occurred between 2011 and 2015 and after it cut through the neckline, this bearish pattern was confirmed.
Since then we re-tested the neckline, then seen a small head and shoulders and a rounding top to add to the bearishness. Right now the price is hanging in there at the 0.62 – 0.63 level but I don’t expect that to last for long.
That’s why the main risk in NZDUSD right now is NOT being short.
Before I turn to silver and gold, a quick look at light crude oil because this weekly chart is quite instructive as to the power of pattern trading.
A couple of weeks ago there was a bombing attack on the oil fields in Saudi Arabia that took out 5% of the world's production. Oil soared but not for long. That’s because the long-term downtrend all the way down from $105 was still in place. We also had had an intermediate bearish double top right here to my mind that set oil on a course for lower prices.
And then more recently this descending pattern formed, for which I said the price could spike through the trendline but no hold above it. That’s what happened, even with the drone strike on the Saudi oil fields.
To my mind, this emphasizes the importance of keeping an objective eye on price and not listening to emotions or hype from the media. If you listened to the financial media, you’d think the market was inevitably going higher.
Yet this chart says no. The bearish patterns were well established already and even a major news event had little more than a temporary effect. This is why I advocate only looking at the price and seeing the big picture without worrying about the news.
Now for the main attraction of this week’s report: precious metals!
in this chart, I'm looking at the monthly chart of XAGUSD (spot silver). As you can see, the price has rallied over the last three months against the backdrop of rising tensions between the U.S and China plus crashing – and even negative — interest rates around the world.
The question has been whether or not this rise is sustainable. Is this going to lead to a paradigm shift in the metals markets? That’s why a monthly chart is useful for giving us that big-picture perspective.
We have an ominous monthly bearish reversal bar in silver, as you can see. So it looks like the silver rally is NOT sustainable at this time. (A bearish key reversal is where the price makes a new high and then closes at or near the low.)
XAGUSD went all the way to almost $20, consistent with a long-term resistance area that has been a formidable resistance area in silver. That adds weight to the key reversal bar and makes it more likely that the historical double top remains the dominant force in the spot silver market right now.
(The dominant pattern is the one that governs the primary direction and trend.)
This means we’re most likely to see a benign period where a silver just backs and fills and mostly drifts lower over time. This is borne out in the weekly chart too:
Again, we see formidable key reversals pointing in the direction this market wants to go.
Now for the daily chart of silver:
This reinforces my analysis on the monthly and the weekly because here we see a double top where we would expect the price to follow through to the downside. That doesn’t mean silver will go straight down of course. After the initial drop, expect a retest of the neckline before the price resumes falling in earnest.
Let’s take a look at XAUUSD (spot gold) at the weekly level:
Here we see some of the same bearish behavior as with silver. There’s an emerging double top here wit the first top at $1,555 and the next one (still not complete) forming just a few dollars below that.
For the first double top, there were two bearish key reversals in a row, which tells us the sellers were firmly in control at the end of each week.
But just like silver, gold won’t be going down in a straight line. There could easily be a false move lower and some backing and filling before a more significant drop.
So if you’re short already, don’t be afraid to take some initial profits. And if you’re not short yet, be on the lookout for any rallying opportunity to take a short position.
Here’s how gold looks on the daily timeframe:
The two weekly key reversals at $1,555 are now a double top here. And it looks like we have a head and shoulders pattern forming too. The confirmation of this bear pattern will come when we see penetration of the $1,480 price level. Expect a retest of the initial breakdown but eventually, I think we’re going much lower.
In a members’ email, I suggested getting short at the $1,511 area, and then again at $1,500. We’re holding some nice profits already and I expect there will be more to come.
One more note on the precious metals: I always keep one eye on the gold-silver relationship. Here’s a chart that divides the price of gold by the price of silver to give us a gold-silver ratio of about 85 right now. This ratio recently hit 93, which was one of the highest levels ever seen.
While it’s backed off in recent weeks, we're now sitting on an important trend line which would give us an indication on whether we should be focused on silver over gold (or vice versa).
If the trendline holds, then shorting silver will yield a better result than shorting gold. If we start crashing through the trendline, it would indicate that gold is likely to fall faster than silver.
Now to wrap up with some final comments on the U.S. stock markets.
For the past couple weeks, I've been pointing out the double top pattern that’s emerging in the indexes with this particular example being the NASDAQ. You can see we're trading at or near all-time highs, but we seem to be rolling over at this resistance area.
Last week we had an inside narrow range bar. This suggests the rally has stalled and now with last week’s momentum, it looks like we're turning. And so while I was somewhat ambivalent as to whether this was just the pause that refreshes or something that rolls over from a double top a, it's looking more and more like this could be rather ominous if you’re a stock market bull.
Last October through December featured a major market crash and we could be possibly lining up for something similar this year too.
I’ll be keeping an eye on this support area as we're not too far from trading off the support line.
Certainly, some bellwether tech stocks are looking bearish, such as Amazon (AMZN).
Amazon started looking bearish as early as a year ago with a double top. And once that cracked, it yielded a huge move lower. Then we saw a retracement before another double top, this one emerging as part of a larger head and shoulders price pattern.
AMZN is trading at the neckline of that pattern right now. If it breaks down, that’s quite bearish for Amazon and tech stocks in general.
Here’s another example: Netflix (NFLX) with its own double top and subsequent bearish price action …
At the time we saw that original double top, I suggested that would call the all time high for this stock. I’m not backing off that observation now. You can see we did retest this area and then put on another double top. NFLX then cut through that neckline as well.
Now the stock is at the long-term neckline starting from the original double top. If you measure the distance between the top and the bottom of that pattern ($400 to $240) that’s about $160. There’s typically a move equal to the height of the original pattern once the neckline is broken. So if we shave another $160 off Netflix, we have a $100 stock.
And frankly, this is where I see this stock trading at some point in the future.
So that’s it for this week. In summary, you want to be long the dollar, short the precious metals (and probably crude oil too), and thinking about shorting some of the high-flying NASDAQ stocks on weakness.
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I wish you a very healthy and prosperous trading week.
Mark “SilverDagger” Shawzin