The Best Trading Environment In Many Years (and What Will Follow Last Week’s Dow Jones Crash)
What a difference a week (or two) makes!
The Dow Jones Industrials (DJIA) stock index has dropped 30 31% from peak to trough – that’s 29,600 to about 20,400 (I’ll analyze that chart later in this report). We’re seeing unprecedented volatility across all markets too, not just stocks. Gold, oil, and FX have all been undergoing historic gyrations.
With all the unknowns surrounding the health crisis — as well as the emerging financial crisis — it's easy to think we should pull back and stay out.
But it's my contention that these markets offer unprecedented opportunity right now.
As proof, here are the recent trades I closed out last week for a huge 3,031 pips in profit.
We were long GBPNZD (the British pound against the New Zealand dollar) which collected 1800 pips between two different positions in that pair.
We were also short USDJPY (the U.S. dollar against the Japanese yen) which added to the rest of the 3,013 pip total. These are trades I’d been holding for only a couple of weeks too.
So what does that kind of profit mean? For every $1,000 invested you could have pocketed about $30,000.
And that’s why I believe we’re currently in one of the greatest moneymaking environments I've seen.
If you know what you're doing and you’re armed with the right knowledge, you can make a fortune in these markets.
Now of course, I have to make a standard disclaimer that past performance is not indicative of future results. There is a tremendous amount of risk in the markets right now. I'm not trying to discount that.
I'm just saying that when you’re armed with the right knowledge you can do very well, so please understand this balance.
Now let’s get into this week’s analysis. Where are the next big opportunities?
I'm going to start with the stock market because of the incredible, historic moves we've seen lately. Last Thursday the DJIA suffered its biggest point loss for one day. And then on Friday it enjoyed the biggest point gain in any day.
Overall, it's not a pretty picture though. I've been watching the U.S. stock market grow to the sky over these last few years and yet the laws of physics are such that trees don't grow the sky. Nothing continues forever.
But so many participants don’t seem to recognize that. Everybody was positioned on the long side and making money … for a decade. There are fund managers in New York in their 20s and 30s who have never seen a real bear market. Plus a lot of Wall Street now uses mechanized trading with algorithms that just look at the price, chase offers and levels and behave in a very rigid fashion.
These algorithms don't know book value. They don't know the meaning of oversold. They just step on a trade one way or another and this is at least part of the reason why we're seeing these giant extremes.
To my mind, this always presented a great danger. There’s been incredible complacency as we’ve watched the market endlessly go up and up every week and every month.
In the past, I’ve warned of a host of underlying problems in the stock market. And they all boil down to one word: debt.
We have an incredible amassing of debt. In fact, we have the biggest global debt to GDP ratio ever. The U.S. is $23 trillion in debt and has a national deficit of over $1 trillion adding to that debt.
We have corporations that are $12 trillion in debt. There's a whole host of BBB- companies with junk bond debt that are in serious trouble too. And once they can't pay their bills, there's not going to be enough chairs when the music stops.
Warren Buffett once called these debt bombs weapons of mass destruction. This was several years ago, so it's taken a while to play out. But I think we're now seeing a litany of sins coming to the front. This selloff will be attributed to the coronavirus, but to my mind this was going to happen one way or another.
Now that I’ve got that off my chest, let’s return to that DJIA chart:
So what’s happening next with the DJIA? Patterns are invaluable to help us figure out the most likely path. I draw my structure around the market and then I observe the price movements within the structure.
What we’re seeing with the DJIA is an emerging megaphone top, which is also called a broadening top.
Regardless of the name, the word you want to be focused on here is the word “top”.
Now this pattern is quite symmetrical, which means that it can be a continuity pattern or reversal pattern. If in fact the market gets some traction and starts rising again, this megaphone top will in fact be a continuity pattern within the context of the long-term bull market.
But if the market can’t rise significantly, then it’s a reversal. At the moment, I’m in the reversal camp. What will confirm that suspicion is the DJIA going through the bottom of the downward trendline and establish new lows. If the market hits 20,000 that should open up a huge move even farther down to 15,000.
Now of course this is a huge prediction. It’s obviously a massive decline from the peak.
But history does repeat, as I’ll soon show you.
For a longer term view, here’s the DJIA on a monthly timeframe where each one of these price bars represents one month in time.
Just as we saw on the weekly chart, there’s an emerging megaphone top price pattern.
Even though I’ve been trading for decades, it never ceases to amaze me how these chart patterns come together irrespective of the environment.
Yes, we have an outlier coronavirus event. Nobody could have seen this coming. But in the meantime, this chart pattern has been tracing out for months and years. The price action within the confines of this pattern was established in late 2017 and early 2018. It’s taken two years, but price action is again ahead of events.
So with a megaphone top in place, it’s likely to be a reversal pattern. That means the market will reverse from its prior direction. That doesn't mean you should just go out and short it.
Remember, these are monthly bars and this has taken a long time to come together. We’ll still have a lot of volatility to come.
The key level to watch is last week's price level at 20,400. If the DJIA comes back and retests this level that will confirm the pattern and point the way to the 14,000 – 15,000 level.
Now of course it seems astounding that this could happen. But that's why examining these patterns on a historic basis is invaluable.
Here’s a chart of the DJIA during the 1928 – 1929 timeframe.
As you can see, the DJIA traced out almost the exact megaphone top price pattern that we're seeing today.
There’s an A – B – C – D – E wave apparent in this chart. The other key point is that the DJIA bounced off the lower line and then dropped to retest it. That low couldn’t hold and the total move from peak to trough was 48.5%.
If you carry forward that percentage to today’s chart, that suggests a 15,000 DJIA level.
Now I’m not saying this will definitely happen. After all, this pattern could get busted by subsequent price action if the DJIA instead attacks the upper megaphone top line rather than the bottom one.
But to my mind, being forewarned is forearmed and it’s very useful to understand how these patterns may play out.
Let’s look again at today’s DJIA at the monthly level:
Just like in the 1929 chart, there’s an identical A - B - C - D - E wave within this broadening symmetrical triangle (megaphone top) price pattern.
Note that the bottom of the megaphone also coincides with the long-term trendline.
This is the magic of price levels and historical price patterns. By observing just price and not emotions and the news, we can get on the right side of the market and make fortunes while everybody else is scratching their heads and perhaps even taking large losses.
So again, watch very carefully how prices move. This is a monthly chart so it may take a couple of months to play out. But with this unprecedented volatility, we could also come down very quickly.
Besides the DJIA, another great example of how price action is so important is this chart of XAGUSD (spot silver).
In the background, there was all kinds of noise about U.S. / China trade tantrums. We had the bombing of Yemeni oil fields by Iran and we've also had this pandemic coronavirus crisis dominating peoples’ thoughts.
But although there was a run-up last September, at no time was silver able to surpass or exceed its previous highs despite all the recent hysteria. Each silver rally had a lower high, and it never came close to breaking out past the $21.15 level.
This price action served as a warning while gold ran up to $1,700. I advised my members not to chase that rally and yes, I left a little bit on the table because of that caution.
However, we made up for that in a big way by shorting gold last week based on my suspicions that something was wrong. The bearish divergence between silver and gold was highly significant to me.
Since silver couldn't make a run while gold was trending higher, one of two things had to happen. Either silver had to catch up to the price of gold or gold was going to be dragged down by the bear market in silver.
I was always in the latter camp and said that gold was likely to be dragged down. I’ll show you a gold chart in a moment, but one last word on silver first:
Once silver cracks the $14 level, there’s nothing to stop it from going to $12 … $10 … or even $8. There's no floor under this market and we’ll see nothing but continued bearish action in silver for some time based on the long-term charts.
With that said, here’s how XAUUSD (spot gold) looks now.
I made a ton of money on the run-up in gold when it first broke out from $1,479 through to $1,607.
And since that time, I’ve been very quiet on gold trades even though I run a gold program. I’ve been staying out of the yellow metal even though I saw there was something left on the table.
That’s because I instinctively felt that if I overstayed my welcome I could get caught.
And that's exactly what happened. Gold moved to a new high but couldn’t stay there for very long. It then crashed at 12% in one week (nearly $200).
Because of silver’s inability to reach new highs, there was bearish divergence between the two metals. And gold got dragged down by silver.
What’s more, I think we’re seeing an emerging double top in gold right now. The neckline is at $1,450. If gold continues to smash through that level, it should turn down in a big way.
That’s why I’m looking to short any gold rally right now. However, beware of the volatility we’re almost certainly going to see. If gold can rise by $20 or $30 that would likely be a good place to begin establishing short positions. Then add more as it drops.
I know that contrasts with views that gold offers a means of diversification and a safe haven. Yet gold actually sold off worse than several other assets in the recent chaos. And that begs the question of what the ultimate safety haven really is in this environment.
The answer appears to be the U.S. dollar as backed by the full faith and credit of the United States government. Here’s the U.S. Dollar Index (USDI):
USDI put in a huge key reversal where it made a new low and closed at the very high. It now looks like the dollar will continue higher.
It seems the only safe haven right now for global investors is Treasury securities (even though those securities are yielding almost nothing today). It's a flight to safety. People are looking for anywhere they can store their money where it's not going to crater.
So how have the other FX pairs fared in response to the newfound bullishness in USD?
Here’s EURUSD (the Euro versus the U.S. dollar).
EURUSD had a huge bounce from 1.08 to 1.15 recently. Yet this now looks like nothing more than a reaction bounce within a bear market. The main trend is down and the double top governing pattern remains in effect.
I think last week’s bearish key reversal put an end to any hopes of a market turn to the bullish side and the price action strongly suggests EURUSD is back on a course to lower prices.
That being said, EURUSD may rise a couple hundred points before it drops back down. Look at rallies as selling opportunities. And beware of the historic support levels waiting below. There will likely be significant bounces off those areas during the journey to lower prices.
Now let’s look at USDJPY (the U.S. dollar versus the Japanese yen):
Due to the prevailing bearish patterns including a head & shoulders plus a descending triangle, I’ve been advising members to sell short USDJPY on any significant rallies.
By and large, this has been the right strategy and we most recently made many hundreds of pips on our most USDJPY shorts.
However, I’m unsure where this pair goes from here. The price action is now ambiguous to me. Perhaps USDJPY will make a sawtooth descent within the confines of the descending triangle.
But maybe the descending triangle isn’t the correct pattern to judge this right now. Remember,
I draw my structure around prices, see how the market moves and then make my decisions based on that price action.
It’s not the other way around.
By that, I mean that I don't just draw structures and then try and overlay my opinion on the market. That’s because the market is always right. Let the market action tell you if your patterns are the correct interpretation.
So here’s another pattern possibility in USDJPY that might play out:
By redrawing the pattern, USDJPY can be seen to have formed a symmetrical triangle.
That puts a different perspective on the price action. Now it’s less apparent whether the bulls or the bears will win this tug of war. Which side was the fakeout and which is the real move?
I still feel that ultimately that USDJPY should drop. But I'm going to defer that to the market and wait for USDJPY to tip its hand with a clearer signal.
In the meantime, I’m looking for opportunities to go short on the stock indexes and in gold. (I'll be using derivatives the NASDAQ index, specifically puts on the QQQ ETF which tracks that index.)
I’ll keep you posted as I see new things.
But for now, what I wanted to get across today is the importance of keeping things in perspective. There are huge amounts of emotions swirling around right now. People are concerned about their finances and their health.
(Of course, health is first and foremost. To that end I want everyone to stay safe and safeguard yourselves. Wash your hands and be self-contained.)
And if you're going to trade the markets, be dispassionate. Trade what you see, not what you think.
Get that right and there’s an absolute fortune to be made in these markets.
That’s why I’m looking to make more huge profits by shorting the stock market and gold in the very near future.
I wish you a very healthy and prosperous trading week.
Mark "TradeWhatYouSeeNotWhatYouThink" Shawzin