How Our Traders are Growing Their Accounts While Most Trades are in Ruins (And Where This Week’s Big Opportunities Are Hiding)
In my weekly e-mail a couple of weeks ago, I said the markets were at a historic inflection point. However, even I couldn't imagine what would unfold so quickly in just the last couple of weeks.
We’re living through some historic times, indeed!
By way of example, here’s the crude oil market:
In the month of March alone, oil dropped from over $45 to $20. Since the oil drop began several years ago, it’s gone from $125 to just $20 today. I don’t think the bottom is here yet, either.
Here’s GBPUSD (the British pound versus the U.S. dollar). The pound dropped 7% to lows it hasn’t seen since 1985:
It touched 1.15 this week and that’s a price it hasn’t seen for 35 years.
Now here’s XAGUSD (spot silver):
It went under $12, a very long drop from $50 a decade ago.
Stock markets have also been getting hammered, as you’ve probably noticed. To give you some perspective on the enormity of the damage, here’s the U.K. FTSE index:
In just a month and a half, the market took back 10 years of gains as it touched a low it hasn’t seen since 2010.
For comparison here’s the DJIA (the Dow Jones Industrials) the major stock index in the United States.
In just one month the DJIA has taken back 10,000 points by dropping from 29,000 to 19,000.
It took the DJIA 128 years to reach 10,000 in the first place. Then just three weeks to shave 10,000 points off. This is how quickly and ferociously this correction has arrived.
And yet many investors didn’t expect this.
They’ve been raised on the idea that the market only goes up. It’s hardly surprising they’ve been die-hard believers. After all, when you look at the stock market over the last 10 years you can understand why buy and hold worked so well. Most people just kept averaging into the market month after month.
Those investors were well rewarded over the decade. But now the markets have crushed those 10 years of steady investment gains in just a couple of weeks.
This was not a huge surprise to me, however.
I’m not one to follow the herd. I was very cautious about this market because I felt we were at historic levels of complacency. It was too easy. We were getting everything we wanted at no apparent cost. Everyone was living the high life and drinking champagne and thinking this was standard behavior.
Except it isn’t. We used to have business cycles. We used to have recessions. (I can't remember the last normal recession in America.)
Of course, we did have a crash in 2008. But that wasn’t a normal business cycle or a normal recession. It was bailed out like every other downturn since 2000 has been bailed out by the Federal Reserve and the U.S. government.
And now we're seeing the same thing all over again. The U.S. Federal Reserve dropped interest rates to zero and they're doing unprecedented daily interventions in the repo and other money markets to assure liquidity to prop up the banks. Plus there’s a $2 trillion package in the works that’s intended to be a fiscal stimulus measure.
Yet despite all this helicopter money, the index closed right on the low. That’s not a good sign and suggests we’ll see even lower prices going forward.
That’s not a great prospect for most investors who were long stocks, bonds, and real estate and thinking they had a diversified portfolio. Yet everything including gold crashed.
Everything? Well, not quite.
If you’d been following my calls over the course of the last three or four weeks, you’d have made money. In fact, you probably aggregated several thousand pips to the upside if you took the trades I suggested.
Here’s a collection of my latest trades. We netted over 3,000 pips while everything else was crashing:
A few weeks ago, I was long GBPNZD (the British pound against the New Zealand dollar) and in one night it shot up 1,200 pips. Combined with another similar trade I was up 1,800 pips in this pair.
I was also short USDJPY (the dollar against the Japanese yen) and got out at the very bottom for another 1,200 pips in gains.
And that’s how we made 3,031 pips while everything else was crashing.
But that’s not all.
Let me show you an email that I sent out to members of my Elite program on March 5th to go ahead and buy EURGBP (the Euro versus the British pound) at 0.8681:
This pair rose as predicted and we took 600 pips on the upside which is a huge move for this pair.
Here’s another Elite email sent on Tuesday, March 17th to buy USDJPY (yes, buy it – normally I like to short this pair):
I've talked a lot about USDJPY going down, as regular readers are well aware. That short was part of the 3,031 pip gain I mentioned earlier.
But this time the opportunity was on the upside and I instructed Elite members to get long at 107.87 with the take profit 400 pips higher.
That’s how we bagged another 400 pips to the upside.
Here’s yet another winner I’m particularly proud of, this time a call to short XAUUSD (spot gold):
I was determined to short gold despite the background hysteria of the coronavirus and all the rampant emotional calls for a higher price.
That’s because I felt the bearish divergence between silver and gold, plus gold’s double top formation, foretold that gold was going to roll over from current levels.
That was a very prescient call and we made excellent profits on the short side while everyone else was expecting the yellow metal to hit new highs.
So how do I do it? It’s not magic.
I make my calls based on price action, not emotions or fundamentals or news. Price is ahead of the news. Price is a discounting mechanism. The markets are ahead of what the news will be telling us a week from now, a month from now, or nine months from now.
That’s why I was confident shorting gold even when people were asking me how I could possibly short the yellow metal in the current price environment.
Of course, the knee jerk emotional reaction would have been to buy gold as a safe haven. But price action was telling me exactly the opposite.
That’s how my Elite traders have bagged thousands and thousands of pips.
And that’s why I say this is a great environment for making a lot of profit if you understand how to study price action. With the right set of tools, you can see where the best opportunities are going forward.
So let’s start this week’s analysis now.
I want to focus on the main asset groups: the U.S. stock market, the U.S. Dollar Index (USDI) and gold.
The stock market is a proxy for the economy as a whole and an indicator for either asset creation or asset destruction.
And to my mind, we’re seeing some very ominous signs in the U.S. stock market. Here’s the Dow Jones Industrial Average (DJIA) again:
I’m reviewing the monthly chart because of the unprecedented size of the moves we’re seeing.
Right now the DJIA is forming a reverse symmetrical triangle and the price is at the very bottom of that triangle. This pattern is also called a broadening top because the swings get wider and wider to create the triangle. It also looks like a megaphone (what coaches used to yell at their players from the sidelines). That’s why it’s also known as a megaphone top.
While this pattern can sometimes be a continuation pattern, it’s more often a reversal pattern. That suggests the next major move is still down, even after the DJIA has already seen a 30% decline from the top to the bottom to create the pattern in the first place.
You see, once this pattern is confirmed by a breakout, that typically means much lower prices than we’re seeing right now. Another 30% drop would take the DJIA down to about 13,000.
So what we thought was impossible just a few weeks ago -- when the market was making an all time historic high of 29,000 – now looks probable to drop to 13,000 in a very short while based on simple pattern formation and price action.
If that seems absolutely crazy to you, let me put this into a historical perspective by showing you the chart that preceded the Great Depression. The same reverse triangle pattern appears on this chart:
The crash in 1929 was one of the biggest crashes in history.
Because the same 1929 pattern is repeating in modern times, I believe we could get a much bigger DJIA drop than what we've already seen.
But that doesn’t mean the market will go straight down. Note the head fake in 1929 (where it bounced off the lower edge of the triangle) before the remainder of the drop. It’s entirely possible we could get a similar rally today before the bottom falls out and the decline resumes in earnest.
This is why we look at charts and the value of history. In fact, the only thing new is the history you don't know.
So be very careful in this market right now. We might get a rally as in 1929 or maybe the DJIA will simply collapse straight down. Either way, the outcome isn’t good if you’re long stocks and wondering if the bottom is in yet. (I don’t think it is.)
I took some artistic license by redrawing this chart as “the jaws of death” because of the ominous pattern and its parallel to 1929:
That’s because when I originally drew the triangle pattern it reminded me of a scene from the movie “Jaws” all the way back in 1975. I’m sure you’ve heard of it because was the very first blockbuster movie and Steven Spielberg’s first mega-hit.
There’s a scene where Roy Scheider as Captain Brody is throwing out chum to attract the shark. He turns around, sees the enormous size of the shark they're tracking, and he's literally frozen in horror. Eventually, he says to his shipmates, “We're going to need a bigger boat.”
For me, that's a metaphor for all this helicopter money that’s being dropped right now to try and rescue the economy and the markets.
The “boat” just isn’t big enough. Goldman Sachs just came out with a projection that the coronavirus-related second-quarter contraction will be in the neighborhood of 24%. Yes, that means GDP could decline 24% in just one quarter.
That’s completely unprecedented. We’ve never had a contraction of that magnitude at any time in the history of the U.S. economy. Even after the 1929 crash.
To put it in historical perspective, the biggest down quarter we've ever had in U.S. history was the first quarter in 1958 where there was a 10% GDP correction. In the 2008 sell off and massacre, the GDP contracted 8%. So 8% and 10% were the biggest contraction in U.S. economic history … until this year.
If Goldman Sachs is right about projecting a 24% U.S. economy contraction, then it’s not just possible but highly probable the DJIA can retreat to 2007 lows at the 13,000 level.
In fact, we’re already seeing those lows being hit in the Australian stock market and the European stock market too. I don't think there's any reason to believe the U.S. stock market is somehow immune to the same sell off.
That means being forewarned is being forearmed. You don't have to stand and stare and watch this devastation. You can actually take advantage of it and profit from it.
Now here’s 45-year historical chart of the U.S. Dollar Index (USDI).
USDI measures the U.S. dollar against the basket of half a dozen major currency pairs. This chart doesn’t reflect the most recent rally we've had in the dollar, but nonetheless it offers us a historical perspective on the overall price structure (I’ll show the most recent rally in just a moment).
The key point here is that despite its massive 10-year rally, the USDI is still making a series of lower highs to create a bearish descending triangle pattern over time. Lower highs are bearish.
And this is not a triple bottom, by the way. Lower highs are not what you see when there’s a genuine triple bottom.
So is it time to short the dollar? Not yet. There’s probably more life in this dollar rally yet.
But at some point, I think this dollar rally will exhaust itself.
Here’s how USDI looks at the weekly level:
USDI has shown extraordinary explosiveness in the last two weeks and there’s no sign of a bearish reversal yet.
This makes sense because we’re in a liquidation phase. Everybody is selling stocks, selling gold, and selling bitcoin. Where are they going? Into U.S. Treasuries denominated in the U.S. dollar. That’s why this trend looks likely to continue in the short term.
However, it likely can’t last much longer. I've always had a philosophy that when volatility starts expanding, it usually precedes a change in the direction of the market. In this case, the change would mean turning down.
You can see the volatility in the vast expansion of the trading ranges (the length/size of the individual bars) in the last two weeks as compared to the much lower volatility we’ve seen historically.
But there’s no sign of a turn yet. That’s why I’m on the sidelines here. USDI is likely to continue
testing decade-long highs for now and I’m not ready to step in front of that freight train until I see definite signs of a top.
To close out this week’s report, let’s take a look at XAUUSD (spot gold) at the monthly level.
The yellow metal hit a pocket of resistance, just as I was calling for very early in the month when I saw the divergence between gold and silver. Silver was not able to make a new high while gold was running up.
That divergence suggested that one of two things could happen: either silver was going to catch up with the price of gold or the bearish price action in silver was going to drag the price of gold lower.
Now the question is where does gold go from here?
XAUUSD is at a key resistance area and there’s a giant reversal where the market made a new high and then dropped to the low. We still have a week or so to go to close out the month (remember this is a monthly chart) so that’s not set in stone yet.
And that means that wherever gold closes is going to be very important this month. There’s a reverse triangle forming and there could be a breakdown to the $1,400 area before gold sees some kind of snapback.
However, I’m not trading gold just yet.
That’s because it’s not enough to assess the opportunity. You also have to assess the risk. And when gold is swinging in hundred-dollar daily ranges like now, the risk is very hard to stomach.
So even though I think XAUUSD is going lower, I'm waiting for a clearer opportunity than what we see on the monthly chart.
And that’s it for this week!
The bottom line is that we’re at a critical inflection point in the U.S. stock market and gold too. I think they’re both going lower but we’re likely to see huge, huge ranges before the decisive moves happen.
Meanwhile, the dollar is likely to continue rocketing for now and with much the same level of huge volatility.
In all cases, it's just not possible to properly assess risk. Keep your powder dry and wait for the opportunities as they occur.
So with that said I wish you a healthy and prosperous trading week. The “healthy” part is the most important. Hopefully, you’re all in some kind of self-contained environment as we’re all connected by the global nature of this contagion.
I wish you and your family and friends continued good health.
Mark "WeAreGoingToNeedABiggerBoat" Shawzin