How To Profit From The Next Big NASDAQ Crash
This is a lifetime chart of Bitcoin (BTC), the cryptocurrency that's been all the rage for the last several months in particular:
This is what I call a hockey stick curve. There’s a parabolic rise from nothing to $65,000. Then BTC crashed to the low $30,000’s level just as quickly.
This is nothing new. These kinds of parabolic rises usually end the way they began: with a huge swoosh and then a collapse.
What you want to see instead is a healthy market. Such a market starts off slowly, consolidates at certain levels, and moves up in a sustainable way.
I'm not going to pretend I know where Bitcoin’s going in the future, but hockey stick (or power parabolic) moves are always unsustainable and end in tears.
The reason I'm looking at Bitcoin right now is that it could be a metaphor and even a preview of coming attractions for other asset classes.
That’s because I think what’s been driving Bitcoin, NFTs (non-fungible tokens), NASDAQ growth stocks, certain ETFs, SPACs, IPOs and so on is excess liquidity. There’s simply too much money swishing around in the system with nowhere to go and it’s driving up all these speculative assets.
That’s why I believe the stock market is also on the cusp of rolling over.
There’s not really a catalyst, but instead a condition of excess liquidity where you've had the Federal Reserve and the US government dumping so much money to replace unemployment and wages and other money lost in the pandemic.
But by this point, I think they’ve possibly gone too far.
Let’s look at the evidence by starting with the Dow Jones Industrials Average (DJIA):
The DJIA is comprised of 30 industrial stocks, so it's an extremely limited batch of stocks.
A couple weeks ago, there was a key reversal at the all-time high. In and of itself, that’s not particularly ominous. In fact, the DJIA still looks somewhat constructive. There’s possibly a double bottom and what looks like some underlying support.
But when you look at recent movements in the context of an ascending broadening price pattern, this price action is potentially quite bearish.
Gold has had this pattern. After gold soared to $2,100, it dropped to the lower end of the ascending broadening price pattern.
I'm surmising that’s what could happen here too.
Of course, there could still be another push to new highs before the setback. But when I look at the S&P and certainly the NASDAQ, it appears they’re all on the precipice of rolling over.
The DJIA is the strongest of these indexes and it could still hold. In fact, pullback to the 32,000 level (only about 10% from current levels) isn’t out of the ordinary.
The S&P500 is a bit different.
Here’s the S&P500. Note how the ascending, broadening price pattern played out in the fairly recent past:
When the S&P reached the apex of the ascending broadening price pattern, it triggered a pullback to the lower edge of that pattern.
We’re now seeing what looks like a repeat in the making, but with one potentially significant difference:
Key reversals have formed at what could be a mini double top. This could very well be the catalyst for a pullback to the lower end of the ascending broadening price pattern … and below.
Because this time I don’t think the S&P500 would stop at the lower support line.
How low could it go?
The origin of the pattern is often the bottom of any drop below the lower support line. In this case, we can anticipate that such a pullback would push the S&P500 to about 3,500.
That’s a 20% drop and it could be starting right now.
Now let’s look at the NASDAQ index which is comprised mostly of tech stocks. This represents an even more fertile opportunity that’s setting up right now. But before we get to that, I want to show what happened the last time:
On February 19th, I was looking at an ascending broadening price pattern where there was a double top and key reversals. I surmised the NASDAQ was set for a meaningful decline.
That’s why I started buying QQQ puts at the 334 level as leveraged bet on the NASDAQ’s fall. This was before the collapse to about 300. (The QQQ is an ETF that mirrors the NASDAQ.)
That turned out to be very profitable.
Now here’s the situation today:
First of all, there’s an important trendline here that’s been holding up the index and all the tech stocks for over a year. Every NASDAQ stock has been bouncing off this trendline.
It's my theory that once the NASDAQ retreats once more and retests the line, that retest will fail and the NASDAQ with plunge right through the line.
I’ve already begun putting on positions in anticipation.
While the DJIA and S&P500 are much further away from their support line, the NASDAQ is very close to its own version. I think we’ll break it this time.
That line of support will become resistance during an enormous move to the downside.
And again, I'm wondering if what we saw in the cryptocurrencies last week is a preview of coming attractions in the NASDAQ, where the riskier part of the asset spectrum is starting to come apart as we get closer and closer to what I think is going to be a liquidity crisis.
(Having said that, I never ask the reason why anything is going to move in a direction, I just observe what's happening and surrender to the direction the market is showing me.)
To add to the NASDAQ bearishness of the ascending, broadening price pattern and a now-precarious support line, there’s also a double top at 14,000 too.
I think the QQQ could retest the 300 area once again (the March lows) and then possibly drop much lower than that.
That’s why I’m establishing short positions in a number of NASDAQ stocks as well as 315 QQQ puts that expire next week for $0.90-$1.00.
Yes, it’s a very aggressive bet. But it won’t take long to see what happens.
So why am I short certain NASDAQ stocks again?
Despite the fact the NASDAQ and other stock indexes were until recently hovering very close to their all-time highs, there's a subset of NASDAQ stocks I call the second-tier stocks which have not been doing well at all.
These are not Microsoft, Netflix, Apple, Google, or Amazon. These are the second-tier growth stocks which have already begun a precipitous collapse from their all-time highs.
Amongst others, I’m referring to Zoom (ZM):
This market has declined precipitously from the double top / head and shoulders combination (the double top formed the head of the larger pattern).
This has been the governing price pattern in ZM. Since its formation, the stock has bene trading within a bearish descending triangle.
Last week I saw ZM would likely rise from the bottom it put in just below its support line. The price did indeed rise from $290 to about $330.
Yet last week's reversal put the brakes on that rally. I feel ZM is now ready to once again move in the direction of the main trend: down.
Another stock that I've been having a field day shorting is a fairly obscure company called Quantumscape (QS):
Again, this is indicative of a mania. QS is a SPAC, a special purpose acquisition company that went public via a reverse merger.
Yet this SPAC was doomed from the get-go by virtue of a its initial parabolic rise, just like Bitcoin.
These kinds of curves usually end up in tears and I think QS is a preview of what the price of Bitcoin is likely to look like in the future.
QS topped out with a head and shoulders price pattern all the way back in December. This was the governing price pattern and since then I’ve shorted every rally in this stock.
In fact, I've made literally seven figures just shorting the stock. Yet I anticipate that QS is still going much lower.
There’s a descending triangle here, just like ZM. Plus a lot of double tops scattered across the chart too.
I can't see that QS has anywhere to go but much lower over the next few days, weeks and months.
Now for Tesla (TSLA):
This has also been a parabolic chart (to a lesser degree) as it went from $100 to $900 very, very quickly.
I'm surmising that it will probably come down just as fast. TSLA has become somewhat been tied to the crypto market with founder Elon Musk tweeting about Dogecoin and Bitcoin.
But that’s not really all that important.
What counts is the chart, and the most important thing on the TSLA chart is the long-term trend line that has been holding so far.
While the NASDAQ composite is a hair above its own long-term trend line, TSLA recently broke below its line and then bounced off the underside of it.
This suggests there are no more bounces to be had.
And that’s a potentially very ominous preview of coming attractions for Tesla, as well as the NASDAQ. A serious break below should be the starting gun for what I think will be a precipitous decline in the fortunes of TSLA and the NASDAQ in general.
TSLA even has a large double top in place and any break below the neckline could be what triggers the main decline.
It could be quite dramatic because there’s nothing but air under the stock once the neckline is broken.
This means there are some fantastic opportunities ahead for those who can see what’s coming and make appropriate bets on the short side.
Unfortunately, most people have been trained to buy the dips and are going to find out the hard way that markets fall faster than they go up.
Now for the forex markets …
One of the most formidable risk/reward trade setups I've seen in a long time is once again taking shape in the somewhat obscure GBPNZD pair (the British pound versus the New Zealand dollar):
All the way back in 2016 - 2017, GBPNZD traced out a double bottom and rounding bottom combination. That gave rise to a stealth bull market with lots of profits to be made along the way.
Right now there’s an eerily similar pattern on the chart, which could prove to be just as (perhaps even more) profitable.
As a side note, you could also look at these patterns cup and handle patterns:
Either way, GBPNZD is about to puncture the neckline of the latest pattern combination at 1.98.
This has been a strong resistance level so far, but I think GBPNZD is getting ready to break through. That’s why I’ve been aggressively accumulating long positions.
The good news is that it’s not too late to do the same. I think there’s a 1,000 pip move to be had from current levels.
GBPNZD is around 1.97, but I don't think it's unreasonable to expect 2.07 or even 2.17 in the foreseeable future. This is the best risk/reward opportunity in the FX markets right now.
So how’s the dollar doing?
Here’s the DXY (US Dollar Index) which measures the US dollar against a half dozen major currencies.
I feel the dollar has topped and is in a long-term reversal to lower prices. In 2018 and during the height of the pandemic fears, USDI made a huge double top.
This implies DXY is going a lot lower.
It’s currently hovering at a major support level and may bounce around this area before ultimately breaking lower, but it’s a question of not if, but when that break happens.
To my mind, the best way to play a lower dollar is to be short USDCAD (the US dollar versus the Canadian dollar):
Once USDCAD broke through the neckline of that large head and shoulders price pattern, this implied a major reversal.
USDCAD has since retreated all the way back to the 1.20 line and has now broken through even the most recent support line.
I advised members to partially exit their short USDCAD positions last week on the basis that there might be a bounce the long-term support line.
Use any such bounce to start getting short because the path of least resistance remains down in USDCAD.
Another dollar-based prospect is the pound…
With all the issues surrounding Brexit now in the rearview mirror, GBPUSD (the British pound against the US dollar) has started to gain steam and traction to the upside.
There’s an inverted head and shoulders with an extra shoulder here, and once GBPUSD cleared the neckline at 1.35 it was going higher.
GBPUSD even retested the neckline before moving up again. That’s even more confirmation that this is a real move.
You want to be long GBPUSD even though the price is currently hovering near major resistance levels around 1.43. I wouldn’t be surprised to see GBPUSD test and then back and fill in this area.
But the more congestion we see at this level, the healthier the platform for the next move up. Patient traders can start establishing long positions.
I would view any pullback as an opportunity in what I view as a long-term bull market in GBPUSD.
By virtue of what we saw in DXY, all the major currencies (Euro, Australian dollar and so on) are likely to rise against the US dollar over time.
It's just a question of picking your opportunities.
Another is USDJPY (the US dollar versus the Japanese yen):
Over the years, I’ve made a bundle of money shorting USDJPY every time it hovered near the resistance line of the descending triangle.
But while USDJPY is there right now, I’m not short … yet.
Recent trading has traced out a multi-week coil with the last three bars hovering within each other. Any such coil represents a storing of energy.
So how should this energy be released?
I still think USDJPY is going to break lower. The way I would play this is to sneak a sell stop under the recent weekly lows around 108. Then let the market do all the work for you.
If the market does break out to the upside, you won't be filled. But if you leave that sell stop resting there, you’ll get filled on a nice move lower.
Now for the precious metals …
In this chart, I'm looking at XAUUSD (spot gold) which for the last several months has been trading within the boundaries of an ascending broadening price pattern:
The stock indexes are just at the beginning of the declines implied by their ascending broadening price patterns, whereas gold has already had its decline (adding more weight to the “coming attractions” idea with the indexes).
Earlier this year, I surmised gold was going to pull back to the support line while it was still in the mid $1,900’s. That’s exactly what happened. Gold successfully retested the bottom and put a very nice looking double bottom price pattern.
And now it looks for all the world like gold is heading higher.
Yet last week I suggested that members exit their long positions. We made a huge amount on the upside, and now XAUUSD is now in the area where a couple of key reversals are overhanging the price.
Whenever you see reversals like that, you need to be cautious because they represent significant resistance.
That’s why I've taken my chips off the table. I'm waiting to see how gold goes from here.
But there’s another way to view gold too.
There’s a descending triangle here. The yellow metal broke through the downside to create a bear trap before breaking out above the trendline. Has this “busted” the triangle pattern?
Right now it’s too early to tell.
Because of the resistance I mentioned, I want to see how gold trades in this area. Will it continue to consolidate? I want to see more price action before I have enough confidence to bet on an imminent move higher.
In the meantime, I’m putting all my chips into my short bet on the NASDAQ. I think we're going to have a huge move lower there. That's where my focus is.
And while I’m out of my gold and silver positions and I remain on the sidelines, I could be back very quickly if I see the right kind of price action. I want a base from which I can establish a better risk reward trade than I see right now.
So here’s XAGUSD (spot silver) for comparison:
The driving pattern here has been an inverted head and shoulders, followed by a double bottom which provided support in this market.
But you can also see there’s upside resistance at the $29 - $30 area. And last week was a key reversal which may not be too ominous, but isn’t especially bullish either.
It just could be that silver is just consolidating at the upper levels and will take its sweet time before moving higher. But the more time it spends not breaking down (and simply holding at the upper levels), the better the chance for a bullish continuation here.
And that’s it for the week!
To summarize, I’m very bearish on the NASDAQ itself and the second-tier NASDAQ stocks including ZM, QS and TSLA. That’s the main focus of my attention right now.
But I also like the opportunities on the long side of GBPNZD as well GBPUSD. I favor being short USDCAD and USDJPY. I’m on the sidelines in gold and silver until I see where the price action takes them next.
I wish you a very healthy and prosperous trading week.
Mark "MajorCorrection" Shawzin