The JPY Pairs May Be a Bull Trap! Plus 3 Bullish and 3 Bearish Stocks
The NASDAQ stock index is the proxy for the United States tech sector and it’s been making history of a sort.
The index has moved to higher highs eight weeks in a row now.
This is only the 14th time that’s happened since 1985. While there are no signs of a major sell off, the extent of this rally suggests it must be close to hitting some kind of wall.
I don't see any pattern or price action that indicates that reversal is about to happen. However, remember that trees don't grow to the sky. I don't expect the NASDAQ will either.
For comparison, here’s the S&P500:
The S&P500 is trading within the confines of an ascending broadening price pattern (bearish) and isn’t far from a major resistance level. I expect 4,400 to be a formidable resistance barrier.
In fact, I wouldn’t be surprised to see some kind of retracement back to the lower edge of the pattern.
And now the DJIA (the Dow Jones Industrial Average) which is also traversing within an ascending broadening price pattern.
The DJIA is now at resistance. I anticipate it will retrace back to the lower support line around 32,000.
That’s because unlike the S&P500 and the NASDAQ -- which have powered to all-time new highs -- the DJIA has already flattened out and looks more vulnerable to a decline.
Of course, the DJIA could still ascend from here, so 35,000 is going to be a very important level.
These different index behaviors mean some stocks are going higher and look like they will continue to go higher, while other stocks are going lower and look like they will continue to go lower.
For example, here’s MRNA (Moderna) the vaccine maker which recently broke out of a long-term ascending triangle.
Following the breakout, there was a retest and then MRNA made a new high.
That confirms the breakout and then last week there was a bullish key reversal which suggests prices will continue higher.
AXP (American Express) also closed at an all-time high:
The path of least resistance is higher for at least the next couple of weeks here.
We're going to see a raft of earnings reports from the bank stocks over the next couple of weeks, which will be very informative in light of plummeting 10-year bond rates. That’s because 10-year bond yields dropped about 0.25% last week before recovering to 1.37%.
Perhaps the drop-off in the 10-year rates is over and interest rates will climb from here.
If so, that’s likely to benefit financial institutions like AXP.
I also like the prospects of PANW (Palo Alto Networks), a cyber security firm.
There’s an inverted head and shoulders here and PANW looks ready to break out to all-time new highs.
Those are the stocks that look bullish based on their trends, patterns and price action.
Now I'm going to take a look at certain stocks I see going lower over the course of the next few days and weeks.
Let’s start with PTON (Peloton) with its budding head and shoulders pattern:
Should PTON drop to the $90 level, that would represent the neckline of a formidable bearish price pattern and strongly suggest lower prices going forward.
In the meantime, last week's key reversal at the apex of the new shoulder indicates high levels of resistance at $120 - $130 and supports the idea that PTON is more likely to drop rather than rise.
Another stock I see building formidable resistance is BYND (Beyond Meat) and its double top price pattern.
There was a recent countertrend play here based on a bear trap (as I’ve mentioned in previous weeks), but that bullish momentum looks like it's run out of steam.
Starting off with last week's key reversal, BYND followed through with a sharp move lower. This suggests that BYND is turning back in the direction indicated by the massive double top.
There’s also a reverse triangle here and if the lower boundary is penetrated, that too suggests lower prices are on the way.
$113 is a significant price level in BYND since it’s kept prices in check for quite some time. Any penetration below that level could open up a path to much lower prices going forward.
And another price chart I’ve had a field day with is QS (Quantumscape) which started forming very bearish price patterns way back in December with a funky looking head and shoulders.
Since that time QS formed a descending triangle and once price broke below that, there was very little risk in being short this stock.
In the interests of full disclosure, I have a massive short position in both the stock and some 25 puts expiring at the end of next week.
So I’m certainly hoping QS is going to continue following through on the downside. For now it’s sitting on a ledge at $24. Any breakdown below $24 is likely to open up a huge path lower.
Now for the most interesting currency pairs on my radar right now …
A forex pair offering a great risk reward trade over time is GBPNZD (the British pound versus New Zealand dollar):
I’ve been saying that ever since GBPNZD made a double bottom back in December and despite the carnival ride ever since, it continues to build strength. Every time GBPNZD sells off, it's been a buying opportunity even though each selloff looks frightening.
With GBPNZD, you’ve just got to close your eyes and buy. Last week was no exception: after topping out around the 2.00 area, GBPNZD dropped 500 pips to 1.95 but then rallied back to 1.99.
The latest key reversal looks like it’s cleared out the ‘underbrush’ overhanging this stock. This most recent bar is pointing in the direction GBPNZD wants to take.
I think we could go a 1,000, 2,000, even 3,000 pips higher in this pair.
You can see that with last week's close above the neckline. It's just more evidence that GBPNZD is building a solid base before the big move up.
That’s why I’m long three positions in the last couple of months. These are positions with very wide stops due to the volatility, and I expect to be rewarded handsomely in due time.
The cousin of GBPNZD is GBPAUD (the British pound versus the Australian dollar):
This pair also looks like it's going considerably higher. After a huge sell off, there’s now a double bottom as the head of an inverted head and shoulders. And as with GBPNZD, it's starting to poke its nose above the neckline.
This confirms the pattern and suggests GBPAUD is likely to go higher.
One other thing …
Several months ago, I predicted there would be a huge sell off in GBPAUD due to the ascending broadening price pattern it had formed. (This is the pattern that we’re seeing in the S&P500 and the DJIA. It’s also evident in gold.)
That’s why it’s worth taking a look at the outcome of these patterns so we can see how they play out.
In the case of GBPAUD, once the lower line was breached, it fell all the way to the base of the pattern. I predicted this. I felt that when GBPAUD broke at 1.96, it would fall to 1.75 or thereabouts and that's exactly what happened.
However, I’m now bullish on this pair due to the double bottom/ inverted head and shoulders that’s formed since. Higher prices should be on the way.
Now here’s USDJPY (the US dollar versus the Japanese yen) which has been giving me quite a bit of grief lately:
I’ve been trying to project the next major move here. Historically USDJPY has traded within a huge descending triangle.
Prices recently busted out and broke the cadence of lower highs within the triangle. That led me to believe that USDJPY would see a major levitation and breakout to the upside.
However, last week's price action back toward the descending triangle has made me rethink that.
USDJPY is now locked up between 109 and 112. And where it goes from that range is going to have major implications going forwards.
If prices come back to 107 – 108, that suggests USDJPY is going much lower, perhaps all the way down to the bottom of the triangle yet again. In fact, anything under 109 would suggest a major turn lower.
Alternatively, if USDJPY takes out previous highs around 112, it’s set to go higher.
Either way, it shouldn’t take long to see which direction this pair wants to go.
For comparison, here’s EURJPY (the Euro versus the Japanese yen) at the monthly level:
The monthly price chart shows EURJPY broke above its major downtrend line within a symmetrical triangle. But now this is starting to look like a bull trap where all the bulls chasing the breakout could get trapped.
Any movement back into the triangle could lead to a major washout. This was my earlier belief, long before the bullish price action convinced me (temporarily, anyway) that prices were going higher.
However, the recent uptrend line has now been broken. If we see some follow-through here, that suggests the head and shoulders and double top patterns remain the governing patterns on this long-term chart.
So the rally went a lot higher than I thought and did fake me out, but the way EURJPY has reversed now has me thinking the primary, secular downtrend is still in full force and effect.
Any breakdowns below last week's low will likely open up a path to much lower prices overall.
So it looks like the huge recent uptrend in the yen pairs may be in the process of reversing.
We need a little bit more history to make a final conclusion, but last week represented a major hit to the bullish camp for EURJPY.
Now here’s GBPJPY (the British pound versus the Japanese yen) also at the monthly level:
Recent price action has come up against the dominant downtrend line and peaked.
GBPJPY has hit a major level of resistance on both on a short-term and a long-term perspective. It appears prices will now turn back in the direction from whence they came.
This won’t happen overnight. There will be some backing and filling and there’s no need to charge in with the utmost urgency right now.
So sit back, let the yen pairs put on a little bit more history, and then jump on a trade once there’s more evidence they’re going to roll over and go lower.
Overall, it looks like JPY pairs on their way down rather than breaking out.
Now for the precious metals …
In this chart, I'm looking at XAUUSD (spot gold):
This is a great example of how toggling between two different timeframes can give you two completely different perspectives on the same instrument. When I look at gold on a weekly basis, I can see that gold is trading within the confines of an ascending broadening price pattern.
On the surface, it looks like XAUUSD has grabbed a solid foothold along the support line with a nice looking double bottom a couple of months ago. There was also some good key reversal price action there.
And there’s been further encouraging price action to the point that gold now appears to be in the middle of a new trading range. Does it go higher? Does it turn lower?
While it looks like there’s some gas left in the tank to the upside, I’m not so optimistic when looking at the monthly chart.
Let’s review that now:
On gold’s monthly chart, the ascending, broadening price pattern is still quite obvious.
But by virtue of the bearish price bars on the monthly chart, I'm going to put my head on the block and say the next move in gold is going to be lower.
That’s because if you look closely within the monthly price bars, there are a lot of bearish key reversals. In fact, there’s formidable resistance between $1,900 and $2,000.
Gold is at $1,800 now, which suggests there's still room on the upside. But to my mind the yellow metal could turn back very quickly and violently due to those monthly key reversals.
Pursuing gold’s upside is going to be a fairly hazardous affair going forward.
Silver also looks ominous for much the same reason.
In this chart, I'm looking at XAGUSD (spot silver) at the weekly level:
Here it still looks like a bullish chart. There’s an inverted head and shoulders and an ascending triangle too.
This suggests silver will take a poke at the upper resistance level.
Yet on the monthly chart, things look considerably less optimistic:
There’s a lot of weight hanging over the price here.
In fact, it increasingly looks like silver could make another move to the downside.
Last month silver saw a reversal back from the $29 area to $26. And while we're only a short way into the current month, I think silver will take out last month’s low to the downside.
Any drop below this ascending trendline could open a much lower path for silver.
That’s why I’m getting the feeling that the bullish case for both gold and silver is limited and that there’s a good case for lower prices.
And that’s it for the week!
To summarize, the major US stock indexes are looking increasingly precarious. There are stocks that still look bullish (MRNA, AXP, PANW) and those that look bearish (PTON, BYND, QS).
I’m still bullish on GBPNZD but now feel the yen pairs (USDJPY, EURJPY, and GBPJPY) may be at the end of what once looked like a paradigm shift to the upside and instead are on their way down.
And of course, both precious metals now seem to have a limited upside and longs should be very careful here.
I wish you a very healthy and prosperous trading week.
Mark "NASDAQTear" Shawzin