Look Out Below: Stocks Are About To Fall

Mark Shawzin
July 21, 2021

I'm going to start off this week with the US stock indexes as well as some individual stocks that look particularly interesting.

Here’s the NASDAQ, which finished on its low after reaching an all-time high:

This stopped a run of eight weekly highs in a row. This had happened only 14 times since 1985.

So what’s next?

I'm going to go out on a limb and say this is probably the high for the indexes for the year. That’s because a large run like this will likely not be repeated anytime soon. This reversal could be the beginning of a slide.

After all, the NASDAQ has made a monster run from the pandemic lows at 6,500 all the way to 15,000. This has bee  a virtually uninterrupted run over the last year and a half on the heels of unlimited stimulus from the central bank as well as the US Congress.

But the NASDAQ’s power has been derived from about five stocks that comprise 20% of the index.

Microsoft is an all-time high ...

Google is at an all-time high …

Facebook was recently at an all-time high (although it has recently retreated) …

Apple is at an all-time high …

And Amazon was at an all- time high (although it too has recently retreated) …

These five stocks make up 20% of the NASDAQ and the S&P500 too. These are real companies that have real earnings. They’re the mega cap tech stocks with very reasonable price to earnings ratios (around 30 times earnings at this time).

Meanwhile certain other NASDAQ tech stocks have no earnings yet. Their earnings are way out in the future (if they happen at all) and yet they’re trading at 300, 500, 700 times earnings -- Tesla is a good example.

And in the meantime, there have been a whole bunch of industries that have cracked already. These include many of the SPACs (special purpose acquisition companies) such as Quantumscape.

QS is about 80% off its highs.

There were also companies in the EV space like Plug Power that have collapsed from $75 all the way to $26.

We even have the IPO sector rolling over. Coinbase was a recent IPO that opened at $430 and is now trading half that at $225. It looks like it's ready to collapse even further.

Recently the energy stocks have begun to roll over. These include high-end stocks like Exxon Mobile which made a high at $65 but now trades at $57.

Even the oil drilling companies like Schlumberger are doing the same.

So again, a half dozen stocks have run up the indexes and made it look like everything was rosy.

But underneath the hood, there’s been a lot of carnage and destruction in individual sectors and individual stock names.

Now I'm going to look at some individual stocks like Tesla that are way off their high. TSLA topped out at $900 last year and is now trading at $644.

There was a key reversal last week and it looks like Tesla and a whole bunch of stocks are headed lower.

Here’s TSLA at the daily level:

TSLA put in a subtle double top as the head of a head and shoulders pattern. This bearish pattern has been the governing pattern and has dictated lower prices ever since.

What’s more, I think TSLA’s going a lot lower along with most of the NASDAQ ‘name stocks’ that have had tremendous run-ups this year.

TSLA has been trading within the confines of a descending triangle. Then there was a double top at the resistance line that featured some key reversal bars.

Those key reversals are pointing in the future price direction of Tesla. There was even a small inside bar on Friday and I think any penetration underneath that inside day bar is going to unleash that pent-up energy to the downside.

The first target I'm looking for is $620. If TSLA takes that out, then there's nothing to stop prices from falling back to $540 and even lower.

Now here’s the weekly price chart of PTON (Peloton):

There’s a long-term head and shoulders forming here and the recent price action looks like a falling knife already. Yet the bear market hasn’t even started.

So I expect the velocity of Peloton to keep picking up to the downside. The key area that I would look for is $90. If PTON hits that neckline, it would confirm a long-term head and shoulders price pattern.

Then PTON goes a lot lower after that.

Now here’s ARKK (the ARK Innovation ETF) which is run by the famous -- or infamous -- Kathy Wood.

As you may know, I've gone on record saying that Ms. Wood has misrepresented her fund to investors by giving them false hope for unrealistic price targets for a lot of the companies in her portfolio.

To my mind, this is setting up ARKK for a big fall.

This ETF is a proxy for the NASDAQ because it has a whole bunch of companies from a whole bunch of sectors within that index. What’s more, all the ARKK companies are concept companies that will have earnings growth only far into the future.

I think these are inherently problematic in this environment.

As for the chart, there’s an ascending broadening price pattern on display. ARKK is rapidly approaching the lower edge of that pattern.

That’s a crucial inflection point because either the price will bounce from that level or else collapse all the way to the base of the pattern where it started.

A bounce is possible, but I think the more likely price trajectory is a lot lower for ARKK.

Not only has there been wholesale carnage and destruction underneath the hood of the indexes, but the indexes themselves are now in danger of rolling over.

Here’s the NASDAQ again:

The NASDAQ has been trading within a channel and just hit the high edge of it last week. The new high was followed by a close on the low to create a key reversal. There’s a very good chance the NASDAQ will retest the lower support line at 13,500 and then possibly much lower.

Now I'm looking at the S&P500:

The S&P is tracing out the same pattern we saw in ARKK: an ascending, broadening price pattern.

This is also the same kind of price pattern where I called the top in gold. When gold hit $2,100, I said it was going to drop to the lower end of its ascending broadening price pattern at $1,600 or so. (We'll look at gold in a moment, by the way.)

I think there's a very good possibility the indexes are going to do the same thing as gold.

The S&P500 is very likely to touch the lower end of its ascending broadening price pattern and if it breaks through there, it could drop back to the base of the price pattern. That’s somewhere between 3,500 and 3,600.

I realize this is a bold prediction right now because things are going swimmingly, right? But prices are a discounting mechanism. Prices are ahead of events. Prices are ahead of the news.

This is why I rely on the objective evaluation of price patterns. So let's see what happens this year.

For comparison, here’s the DJIA (the Dow Jones industrial Average):

Just like the S&P500, I see the DJIA traversing within the confines of an ascending broadening price pattern.

I think there's a great chance the DJIA will retest of the 33,000 lower support area and probably lower.

Note the number of attempts to make new highs that failed. Typically when something stalls out at the top, it gets thrown in reverse very, very quickly. I have a sneaking feeling this is about to occur.

Again, I feel we've maxed out in these indexes possibly for the year.  Lower prices could be at hand starting next week.

Now let’s switch over to the FX side of the markets.

I want to start with USDJPY (the US dollar versus the Japanese yen):

We could be looking at a very potent opportunity in USDJPY in the short term.

USDJPY has been trading within the confines of a descending triangle for the last four or five years. Recently it broke out to the high side, but this appears to have run its course.

USDJPY looks ready to retreat inside the triangle. That could open up a major path lower very, very quickly.

Last week was an inside bar. Such a bar represents a coiling or storage of energy that will soon be released explosively. Due to the bearishness of the chart and the dying upside momentum, I feel USDJPY is going to release that energy to the downside.

To play this, put a sell stop just below last week's low around 109.60 or the previous week at 109.20. If USDJPY breaks either level, it will be on its way to 102 and the base of the triangle once again.

I feel that target is a strong possibility due to the number of times it’s been tested already.

Another pair worth closely watching is GBPAUD (the British pound versus the Australian dollar):

GBPAUD broke above last week's highs and above the neckline. Last week I suggested going long for exactly that reason.

But there’s still a solid path for this to go up a lot more based on the underlying price patterns.

Those include a double bottom at 1.75 and an inverted head and shoulders. This pattern has been confirmed by the close above the neckline.

In fact, there’s a lot of blue sky above this neckline in GBPAUD. I'm currently long and looking to add to my positions going into next week.

Now here’s GBPNZD (the British pound versus New Zealand dollar):

Like its cousin GBPAUD, I expect GBPNZD to go higher.

Frankly I was surprised to see it retreat from the nearby resistance level as I thought it would have cleared it by now.

GBPNZD has taken several runs at the 2.00 area just to be spurned and kicked back. But despite the nasty looking key reversal last week, I feel GBPNZD will find a way to collect itself and go higher based on the previous bullish underlying price patterns.

With a double bottom as the head of an inverted head and shoulders, this chart is very similar to GBPAUD and should play out the same way: upward.

Play this with a buy stop above the 2.00 area if you want, because once that level is smashed then prices are going a lot higher.

GBPNZD has been a very tricky pair to trade, but I still believe it’s in a stealth bull market. The uptrend is still in place and each sell off has been a buying opportunity.

I suspect this one will be too.

New Zealand was the first central bank to announce the end of its quantitative easing program and that's what gave support to the New Zealand dollar last week.

However, the underlying trajectory and bullish price patterns in GBPNZD suggest that even if there’s a retest of the uptrend line, the trajectory is still bullish.

Now here’s crude oil, which hit very meaningful resistance $75 - $76.

Historically, this has been a distribution level where every time oil hit that level, it’s been kicked back.

It’s a little early to tell, as the path of least resistance still looks higher. However, the performance of the oil drilling stocks as well as some of the major oil companies suggest we may see a turn lower in crude oil.

These reversals are not enough in and of themselves to send prices back down. That’s why I recommend standing aside right now to see how things develop here.

But if you're aggressive, then consider shorting any oil rallies.

Now it’s time to look at the precious metals …

This is the chart of XAGUSD (spot silver) which has effectively been in a very broad, congested trading range for about a year.

Silver has made zero progress one way or another and so I have not been a participant.

XAGUSD has been trading within an ascending triangle for quite some time. But right now silver looks a little bit heavier and the path of least resistance seems to be to the downside, perhaps the $23 - $24 area.

However, I’m not taking any short positions here. Silver has been in a long-term congestion zone and I want to see a breakout before I do anything here.

Now for gold …

XAUUSD (spot gold) has some similarities with ARKK, the DJIA and the S&P because it’s trading within the confines of an ascending broadening price pattern:

It was at the apex of that pattern that I advised members that gold had stalled out and was likely to retreat to the lower edge of the pattern. That’s exactly what happened.

Gold hit a low of $1,680 a few weeks ago and traced out a very nice double bottom, which implied an upward trajectory. That happened too.

But now there’s a lot of resistance at current price levels. The next trajectory for gold is likely to be lower and it could retest the lower end of the ascending broadening price pattern.

That’s not a trade recommendation, however. I don’t have a lot of conviction in gold right now (same as silver). Gold may not be finished going higher just yet and remains within a support and resistance band of $1,750 - $1,900.

And that’s it for the week.

To summarize, I’m bearish on all the US stock indexes right now and certain “growth” stocks in particular such as TSLA, PTON, QS, and PLUG. I also think oil stocks and possibly oil itself are heading lower.

I’m bearish on USDJPY and bullish on GBPAUD and GBPNZD.

I’m also bearish on the precious metals although they might be simply range-bound for the foreseeable future.

I wish you a very healthy and prosperous trading week.

Regards,
Mark "StockMarketPartyIsOver" Shawzin