Bear Traps Galore: Is a Multi-Asset Crash on the Way?
The past trading week has revealed some ominous developments in multiple markets and asset classes.
Are we headed for a widespread crash?
Let’s take a look at the action, starting with the U.S. Dollar Index (USDI). In last week's trading, USDI briefly broke out above multi-year highs before reversing and closing on the low of the week.
That’s a key reversal bar and suggests prices are headed lower. USDI itself doesn’t look to be headed for a crash at this time, unlike several other charts we’re going to look at today.
USDI might very continue to chop around within the trading range of the past year without any notable price action.
At any rate, the recent breakout and reversal is a mild example of something we’ll see several times in this report: a bull trap.
A bull trap is a false signal. It refers to a stock, index or other security reversing course after a convincing rally that shatters a prior resistance level. The bulls get excited and buy the breakout. But action on this apparent buy signal ultimately generates losses as the security sinks back into its earlier trading range or even heads for subsequent new lows.
I’m not predicting new lows in USDI at this time. We’ll most likely stay in a trading range for the foreseeable future.
However, even a slightly weaker dollar offers opportunistic trades with USDJPY (the U.S. dollar against the Japanese yen) the most vulnerable to a slide. Let’s look at it now …
For the past two months, I’ve maintained being short USDJPY represented the best risk/reward trade on the board. That’s primarily due to the multiple bear patterns in the weekly chart I’ve highlighted here.
Those patterns include a head and shoulders with a double top plus a more recent descending triangle.
In its most recent rally within that triangle, a couple of narrow range bars indicated that the bullish momentum in USDJPY was running out of momentum.
And since then USDJPY has given us some profitable short trades. One of our current shorts is up about 240 pips with more to come.
I’m still bearish because the most recent weekly bar featured a failed rally with the price closing on the low of the week (another key reversal). I think we’ll see 104 in USDJPY sooner or later with the pair trading all the way down to the neckline of the descending triangle.
That’s why I’m looking to add to my short position should we take out the low of last week’s key reversal bar.
Should you wish to join me on the trade, short USDJPY with a sell stop at 109.11, a stop loss at just over 110 and a profit target below 106. Don’t risk more than 1% of your account on this trade.
GBPUSD (the British pound against the dollar) looks poised for a fall, although this one looks less imminent at the moment.
As we can see, this pair has been in a primary downtrend with a pronounced double top along the way.
And now GBPUSD has fallen under an important weekly support level and seems vulnerable to a much larger move lower. Having said that, I wouldn’t rule out some sideways action before the next move down. For now it’s one to keep an eye on.
Meanwhile the GBPNZD pair (the pound against the New Zealand dollar) is another one that looks very bearish right now.
Historically I’ve been bullish on this pair due to the double bottom, rounding bottom and subsequent price rise. The ascending triangle pattern (both of them, actually) was also bullish.
However, a few days ago GBPNZD broke below its latest ascending triangle pattern.
This sets up the possibility of a bull trap here and a potential decline in prices. Remember that a
bull trap is a false signal that’s convincing enough to get bullish traders buying in expectation of a serious breakout or rally. But the move is false and “traps” traders into losing trades.
There’s an excellent example of this on the GBPNZD chart with the earlier ascending triangle.
We see a bull trap in action where the price broke out spectacularly, stopped with a narrow range bar, and then swooned soon after. It fell hard enough to break the trendline of the original triangle.
Right now it looks like history is about to repeat wit the most recent triangle as the price is about to break beneath the new trendline. That would open up GBPNZD for another precipitous decline in prices. I’m not short yet but I’m watching this pair very closely.
Now here’s something I haven’t analyzed in awhile: crude oil.
Oil is looking very interesting right now. There seems to be an emerging (bearish) opportunity here.
As you’ll soon see, the big picture that’s taking form across multiple assets is well represented in oil: a huge reversal appears to be on the way.
Oil has been in a downtrend for the last four years with a lot of back and forth movement for the past while. Then the double top heralded a steep decline which retraced all the way to the neckline of that pattern before key reversal bars appeared.
The latest key reversal last week looks very ominous and oil looks likely to head much lower soon. If you trade oil a short position could pay off very well.
Now onto precious metals, starting with spot silver (XAGUSD).
There’s nothing bullish I can say about this monthly. It’s entirely bearish.
Historically, silver has formed a major double top from which the price has completely failed to recover.
In fact, the most recent bearish descending triangle suggests silver might go even lower from here to below $14 an ounce and perhaps even $12 or $10.
That has major implications for spot gold (XAUUSD).
Because on the monthly chart, gold looks poised to go one way or the other at the edge of its symmetrical triangle. Gold is certainly at an inflection point.
However, the bearishness of silver strongly suggests gold is more likely to drop than rise.
I think gold will drop to the lower line of the symmetrical triangle at 1200 and possibly even lower over time.
You can see the bearishness on this XAUUSD daily chart:
There’s a succession of lower highs since February to create a descending triangle. I’m not putting on a new short just yet, though.
The triangle pattern indicates we could see a bounce to the trendline at 1290 or so before the next leg down. That would be a good opportunity to take a renewed short position in the yellow metal.
Stocks are also looking bearish right now.
Let’s start with the NASDAQ 100, the proxy for the tech sector in the U.S. stock markets
Two weeks ago, the NASDAQ 100 index made an all-time high. It’s now has fallen below the breakout area, also setting up what could be yet another “bull trap” for long tech stock investors.
There could be another sell-off like the one last October on the way. I’m inclined to think we’ll slide sideways at these levels for awhile first. But a sustained move lower is looking more likely than I expected.
I’m getting cautiously bearish due to the fact the DJIA (Dow Jones Industrial Average, or Dow 30) failed to make a new high along with the NASDAQ.
This is a non-confirmation of the NASDAQ’s new high and a possible “bearish divergence” similar to what we saw before last year’s panicked plunge.
There’s support for a bearish view with bellwether stocks such as Berkshire Hathaway and Apple. Both these stocks are flashing major warning signs.
First, Berkshire Hathaway (BRK.A) …
In earlier years BRK.A was in a huge uptrend. Not the small size of the bars during that uptrend – volatility was relatively low.
Berkshire Hathaway then formed a double top that was busted by the subsequent rally. Then another double top formed, and finally we’ve just formed a new top in the last few weeks. See how much longer the bars are during this time? The volatility rose dramatically.
This overall pattern – including rising volatility — is very suggestive of a large head and shoulders pattern with the right shoulder still forming and to be confirmed.
BRK.A needs to penetrate the neckline at the 280000 level to confirm the pattern. If and when that happens then look out below.
A monthly chart of Apple (AAPL) shows a similar idea in play except with a double top instead of a head and shoulders.
Volatility was low during the bull run, but now we’re seeing highly volatile key reversals to create tops. Rising volatility is symptomatic of a changing trend in the markets and that’s not good for the bulls.
In fact, the latest key reversal is the worst key reversal we’ve seen in 40 years of AAPL trading. This chart looks even more ominously bearish than BRK.A.
Tesla (TSLA) is another stock I expect to drop significantly even though it’s already descended significantly from its highs.
For the record, I’ve maintained that shorting Tesla (TSLA) was a sure bet over the last several months. You can see why: TSLA has formed a significant top with the rounding top and double top on the monthly chart
I advocated getting short TSLA around $305, and again around the $291 price level. Last week TSLA hit $185.
Despite the sharp drop, I think this stock still has room to go a lot lower and should fall under $150. If real bearish momentum takes hold, then TSLA could see the wrong side of $100.
So let’s sum up what I’ve seen over the past week: there are ominous pattern across many asset classes including oil, precious metals and stocks. Even the U.S. dollar is looking bearish and should fall.
In response, I expect relative strength in JPY and weakness in GBP, oil, gold and the stock market. My best bet right now is to short USDJPY but I think we’ll be making a lot of short trades in the next few weeks.
Interesting times are ahead!
Mark “BullTrap” Shawzin