How I Made $195,800 When the NASDAQ Crashed
In previous reports, I said the one event that could rattle the stock markets and the gold markets too would be the 10-Year Treasury Note yield crossing over 1.5%.
In this chart, here’s that 10-Year Treasury Note yield:
It did indeed cross 1.5%, and that’s significant.
That’s because right now, the average yield on theS&P500 is also 1.5%. Risk-free Treasuries are now competing with the dividend yield on the S&P. Therefore it’s a natural thing for stock investors to evaluate whether they need to take the risk to get the yield.
It’s not just the rate that’s significant. These Notes were trading under 0.5% just a year ago at the height of the pandemic. The rate of change has been dramatic, especially when it conflicts with the uber-dovish stance of US Fed Chairman Powell who wants to keep rates at 0% through 2023.
However, the markets are saying something else. Will Powell stick to his guns? Or will he be forced to alter his stance at some point?
That’s what’s creating havoc in the markets.
The subject of last week's report was a potential stock market rollover.
I was anticipating that the key reversal at the height of an ascending broadening price formation in the NASDAQ could be very significant and the beginning of a huge fall.
An ascending broadening price pattern starts out very narrow and then broadens at the top while climbing to higher prices. It’s an inherently bearish pattern. And together with the bearish key reversal (the price made a new high and then closed on the low), I felt the NASDAQ could crash.
(In a moment, I'll show you some of my trading results from last week, based on that observation.)
But first, let’s finish this analysis. Last week I examined ascending broadening price patterns in GBPAUD, XAUUSD (spot gold) and of course the NASDAQ.
All these instruments were (or still are) trading within such a formation but at different point in the process. I’ll revisit those comparisons and how they performed to help us make conclusions about where we go from here.
But for now, the fact the NASDAQ breached the lower end of its ascending broadening price pattern indicates that it’s still going lower. And the nice thing about this price pattern is that we can assign a price target: the beginning of the pattern.
That’s not far away from current levels, but after a bounceI feel the NASDAQ could go even lower because this monumental bull run has started to crack. It’s been almost parabolic in a similar fashion to Bitcoin and other speculative markets.
In fact, we've seen huge IPOs come out with enormous valuations like AirBnb and DoorDash and Snowflake. We've seen the run-up inGameStop. We've seen SPACs (Special Purpose Acquisition Corporations) become very popular too; they’re yet another form of rampant speculation.
There’s been a tremendous amount of liquidity and a huge amount of excess in the markets.
At some point the chickens will come home to roost and this froth and excess will unwind in the opposite direction. The timing looks to be“now”. I think the stock market, certainly the US stock markets, are poised to continue going lower.
You may have heard the old saying that those who can, do. And those who can't, teach.
But although I started The Pattern Trader to teach member show to make money in the financial markets, I'm still a trader. And I do verywell at my core job here, which is trading.
Here’s a screenshot from my personal account from about eight days ago.
That’s right around the time of that key reversal in theNASDAQ at the top of that ascending broadening price pattern. I had a gut feeling that the index was going to fall hard. So I put on a fairly leveraged bet by buying put options in QQQ (the ETF that mirrors the NASDAQ).
If you think the NASDAQ is going higher, you want to buy theQQQ. And if you think it's going lower one way to take advantage of this is to buy a put option. At the time that I was buying these put options, the QQQs were trading at 334.
I bought the 320 strikes that expired on Friday, February26.
So I had literally one week for this to work out. Since they were ‘out of the money’ I was able to buy these put options at a massive discount to where the market was trading. The market had to fall in at least 7%for me to make money.
I started buying 200 QQQ puts at $1.04, with each one based on a hundred shares. So 200 x $1.04 x 100 means this was more than a $20,000investment for me.
I also bought another hundred at $1.02 And then I bought another 50 at $0.91. So that makes my average price about a dollar.
Because options contracts are based on 100 shares each (andI bought 350 of them), I paid about $35,000 for options about to expire one week after I bought them.
If the NASDAQ didn’t hit that 320 strike price, all my options would have expired worthless and I would have lost my entire $35,000.
Fortunately that didn’t happen.
After I bought them, the NASDAQ crashed and QQQ dropped from324 to 310. Since the strike price was 310, I was well in profit.
In fact, I ended up selling at $5.85, $5,72 and $6.31meaning that I made about 572%, 585% and 631% on these trades. My $35,000investment became $195,800.
I placed these bets across multiple accounts and ended up making a huge bonanza in just two days by anticipating that turn in the NASDAQ.
While I took profit on those trades, I anticipate this market is going to continue to correct. So I will continue to make similar leveraged bets on an ongoing basis.
I hope you see I really do put my money where my mouth is.
If you're not inclined to make a kamikaze bet as I did last week, then a much safer way to play an anticipated decline in the NASDAQ is to buy the SQQQ ETF.
SQQQ is an inverse ETF, meaning its price moves inversely to the NASDAQ. So if the NASDAQ is moving up (as it has been until very recently), then the SQQQ is going down.
But if we anticipate the NASDAQ is going to turn lower then this is a great play to buy, especially since SQQQ is leveraged three times. That means that if the NASDAQ moves 3% in a day, SQQQ will move 9% in a day.
So this is a leveraged way to play the NASDAQ and right now it’s trading at $14.48. This represents a great risk/reward trade:
On this chart, SQQQ has traced out a reverse ascending broadening pattern where instead of starting out narrow and broadening at the top, it starts out broad at the top and becomes narrow at the bottom. What’s more, prices have started to break out of the pattern.
There’s also an inverted head and shoulders here, which is also bullish. The neckline for this pattern is where prices are right now.
So I'm advising members to put a buy stop above Friday's highs around $14.85 while risk a dollar on the downside. This is a great risk/reward opportunity where SQQQ could run from $15 to $20-$22 to even $25 if the NASDAQ really falls hard.
Remember that if the NASDAQ drops 15%, SQQQ will rise 45% due to its 3x leverage.
Now onto the FX markets …
A currency trading pair that’s always on my radar is GBNZD (the British pound versus the New Zealand dollar). I’ve believed for a long time that GBPNZD is in a stealth bull trend, so I'm always looking for opportunities to get in sync with that trend.
Last week's key reversal price action was exactly one of those opportunities.
In this case, the weekly bar closed on the high after making a significant low earlier in the week. At the beginning of the week, GBPNZD was cratering but by the end of the week, the bulls were in control.
Of course, it’s very important not to look at this (or any) key reversal bar in a vacuum. You have to consider it in context with what's going on over the long term in terms of trend and patterns.
GBPNZD’s bullish trajectory began with a double bottom in late 2016/early 2017. The reversal of the earlier downtrend when price broke through that pattern’s neckline.
Since then, GBPNZD has moved up in fits and starts, with the most recent significant pattern being a new double bottom.
GBPNZD dropped fast until that pattern was traced out, which suggests it's not likely to go up that fast and is simply creating some space for a future advance. However, the key reversal suggests that ascent is ready to begin. It’s taken a lot of the risk out of a long position in GBPNZD.
That’s why I like to think of key reversals as “insurance bars”. They greatly reduce the risk at hand. So I feel there’s now a good risk/reward opportunity emerging once again on the long side of GBPNZD.
The EURJPY (Euro against the Japanese yen) trading pair is another one I've had my eye on for a while. That’s because I think it’s very close to an inflection point.
The monthly chart shows you what's going on.
If we connect the lows and the highs on the monthly chart, EURJPY is forming a perfect symmetrical triangle. The price is now bumping up against the upper trendline here, and so EURJPY could in theory go either way from this point.
However, I continue to believe EURJPY is more likely to drop back into the triangle rather than break out. That’s due to the governing price patterns within this symmetrical triangle: the head and shoulders and the double top which are both bearish.
EURJPY will have a lot of trouble pushing through all that resistance. It’s much easier for it to turn over and go lower instead.
So I’m now on alert for some kind of turn at or near current prices in EURJPY.
Now here’s USDI (the US Dollar Index):
For the last year or so, I've been saying the dollar is in a significant downtrend and likely to keep going lower because of a very prominent head and shoulders price pattern.
Of course, nothing moves in a straight line in the markets. USDI did hit a significant support level. One important enough that’s been holding the dollar in check for over five years. Commensurate with hitting such major support, USDI traced out a bullish key reversal and even a rather subtle double bottom.
That suggests we’ll see continued support and even a rally back to the breakout level in USDI.
With the 10-Year Treasury Note rate hitting 1.5%, investors are rattled an fleeing to safety in dollars.
In this chart, I'm looking at XAUUSD (spot gold) and there are several things that we can take away from the recent price action in gold:
First off, there was a lot of hype in the market with the thinking being that the Fed’s quantitative easing and money printing would inflate the dollar out of existence and therefore a safe haven was needed in the form of gold.
Yet gold has been anything but a safe haven as it dropped from $2,100 to $1,700 over the last six months. This happened while the US dollar also dropped.
And that’s why I don't follow correlations in the market. Historically you would have said that if the dollar is plummeting then gold should be going higher. Yet that hasn’t been the case at all.
Anyway, I advised members to start exiting any long gold positions at $2,100 due to the very high volatility we were seeing at that price level. On the way up, gold was relatively controlled and measured until it suddenly became very volatile with $100 weekly ranges.
When I see volatility start to expand like that, it often signifies a stall or even a turn in the market. It’s one of the two reasons why I’ve been bearish on gold for the last six months now.
The other is the ascending broadening price pattern (the same thing we saw in the NASDAQ) which is bearish too.
While the NASDAQ stopped and reversed higher within (and then above) its long-term ascending broadening patter, XAUUSD is still falling within its own pattern. I anticipate gold will hit the bottom support line of its price pattern around $1,650.
This will be an inflection point: will gold bounce or break down?
If gold breaks down, the price target would be $1,200, which is the beginning of the ascending broadening pattern. So I’m watching that $1,650 area as I stay short gold.
Two weeks ago. I sent out a signal to sell gold right under the inside bar at $1,797. Gold closed 630 pips lower as it broke out of the coil formed by a series of inside bars.
A coil is like spring loaded to release in the direction of the strongest momentum (down, in this case). So I feel gold still has room to fall.
Remember, gold is now fighting higher interest rates in the 10-Year Treasury Note. High interest rates are kryptonite to gold traders because the yellow metal doesn’t offer investors a dividend yield. With yields rising on risk-free Treasuries, they’re now competing with gold and long gold traders are going to lose that battle every time.
Now let’s look at XAGUSD (spot silver) at the monthly level:
After initially rising to $30, silver closed badly near the low of the month. This price reversal also coincides with an emerging double top. That double top won't be confirmed until silver pierces $22, but it does look fairly ominous.
And of course this price action is the antithesis of everything we've been hearing for the last six months about how silver is going north of $50 because of quantitative easing and so on.
That’s why you have to concentrate objectively on what's happening in the market, not the emotions that are happening on forums or elsewhere.
And that’s it for the week!
To summarize, I’m bearish on the NASDAQ and the precious metals. I’m bullish on GBPNZD again. And I expect EURPY to roll over soon. Please manage your risks carefully and don’t get carried away.
I wish you a very healthy and prosperous trading week.
Mark "FlightToSafety" Shawzin