The Tech Wreckoning Isn’t Over Yet (Plus: A Paradigm Shift in JPY?)
For my February 21st report, I sent out an email titled “Stock Market Rollover”.
I probably should have been more specific because I was alluding to the NASDAQ. I felt the NASDAQ was about to roll over based on my observation of an ascending, broadening price pattern and also a key reversal where the market made a new all- time high and then closed on the exact low.
Based on my prediction of a NASDAQ decline, I loaded up on QQQ put options on February 19th.
(A put option is a time-limited bet that an instrument is going to decline. And QQQ is an ETF that acts a proxy for the NASDAQ. If you want to buy the NASDAQ, you'd buy QQQ.)
In this case, I was expecting a decline. So I was buying put options.
At the time, QQQ was trading at 334 and my strike price of 320 was far away from the market price.
I bought 350 of the 320 puts in just one account, which cost me about $35,000 as I was buying them for about a dollar per put. (Each contract is based on 100 shares – that’s why these purchases cost me about $35,000.)
Just two days later, I was able to sell them for between $4.85 and $8.10. I made between 500% and 800% on my initial investment. That equated to over $195,000 on that $35,000 purchase – a 559% gain in just two days.
The very next week, based on my observation of another imminent decline in the NASDAQ, I started loading up on more puts. However, things didn’t go my way immediately.
By Tuesday I was in a loss position to the tune of -$24,000 in my account.
Then the next day I was up $142,000.
The day after that I was up $348,000, which did not include other options that I'd already taken off the table.
The final result was that I made about $500,000 each week for two successive weeks.
That was a wonderful windfall of profits.
And since then, I’ve held additional short positions. But you can see this past week, I didn’t fare so well.
Options are indeed very risky business. You can lose most or all your investment very quickly.
I owned 300 of the 295 puts which ended up expiring worthless, for example.
And so the old saying “easy come, easy go” applies to the options game. I got a bit of a bloody nose this past week. But just like every good fighter, you've got to dust yourself off and come back for the next round.
I don't think the NASDAQ decline is over yet. I’m going to show you what I'm looking at in just a moment.
But first, the good news: while I lost about $40k last week, that’s fairly small compared to the million I made during the prior weeks.
And of the $87,000 loss I’m showing you here, half was in IPGP stock which may yet turn into a profit as I’m still short that particular company. I believe I’ll end up making money and perhaps a lot of money on that short.
So while it looked like I lost almost $87,000 for the week, the fight isn’t over. I'm still short IPGP and I've also bought some put options on Gamestop and we'll see how that goes.
Now here’s the real time weekly chart of the NASDAQ:
The main reason I turned bearish when I did was because of the ascending broadening price pattern followed by a key reversal at the top of that pattern.
Subsequent price action broke below the lower support line of that ascending, broadening price pattern to confirm it.
Then last week was an inside bar. With an inside bar, the entire trading range is inside the previous week’s range. Inside bars represent stored energy ready to be unleashed in one direction or the other.
Last week’s inside bar simply retested the upper levels of the breakdown level.
So the NASDAQ is at a very key inflection point. Either it will continue ramping up and busting the ascending broadening formation (less likely) or it will roll over and break lower with new lows (more likely).
Look for any piercing of the major trendline around 12,500 to initiate another (and probably much larger) move lower in the NASDAQ.
Admittedly, it's been somewhat difficult to be in the bear camp of the NASDAQ, because last week we learned a monster stimulus package (the $1.9 trillion COVID bill) is going to be unleashed. Much of it will find its way into the stock market.
There’s also the fact that most analysts are calling for a monster year of 7% GDP growth. The business media are all yammering away about how bullish they are, how much money companies are going to be making, how consumers are going to respond to the huge pent-up demand on and on.
Yet the price action remains bearish to me.
That’s because the market is a discounting mechanism. The market has already taken those considerations into effect.
And I trust in the picture I'm seeing on the daily chart:
There’s a head and shoulders price pattern here. This is quite bearish and suggests we’ll see lower prices. (If prices instead continue to go higher, then this pattern is no longer going to be in force and effect and it will become a “busted” price pattern.)
But because the NASDAQ broke below the neckline of that head and shoulders and is now re-testing it, any break under Friday's lows (around 310 – 311 on the QQQ) should open up a path lower.
That head and shoulders isn’t the only bear price pattern I'm seeing.
The ascending, broadening price pattern I show you on the weekly chart is more visible on the daily chart. The price has clearly broken below it. Only the longer-term support line remains in place now.
So at the moment, the NASDAQ is hovering in what I call the zone of opportunity. Price may kick higher, but I think the higher probability is that prices will instead roll over.
Of course, it's one thing for me to say something and it's another thing for the market to actually follow through. After all, the market is the only thing that counts.
Watch for the price to pierce under recent lows at the 310-311 level in QQQ, because the only thing holding up the price now is the support line from which the NASDAQ just bounced.
While I’m keeping my existing shorts, I’m not adding to them until I see which way this market wants to go. I’m not taking off those shorts because of the head and shoulders and the ascending, broadening price pattern.
If I’m right, the ascending, broadening price pattern suggests our first price target is the base of the pattern before it drops to a longer-term support level at around 11,000.
But the QQQ isn’t the only way to play this expected decline.
In this era of momentum, there are a couple CEOs out there who have achieved a certain cult-like
One is Elon Musk at Tesla and the another is Cathie Wood who runs the ARK Financial ETF (symbol ARKK). There are a lot of kids out there who are following ARKK and worshipping Cathie Wood as their new guru, I think the market is not a place to start adopting a cult mentality.
That ‘s because the market ultimately doesn't matter about personality and eventually the laws of physics kick in and the fundamentals reflect the underlying value of an entity.
Cathie Wood has had huge success, but to my mind you should only follow one “guru” in this market and that’s “Mr. (or Mrs.) Market”.
And price action suggests to me that Cathie Woods’ ARKK is priced for destruction.
In fact, this chart looks very much like others in the tech sector right now: bearish.
There’s a double top at 160 to form the head of a head and shoulders. And since the right shoulder is lower than the left shoulder, the neckline here is sloping down. That makes this already-bearish pattern even more bearish.
The price has bounced for a couple of days and now everybody thinks it's safe to go back in the water. I disagree.
I feel ARKK has been buying “fad” stocks and the chickens are about to come home to roost. I think we’ll see ARKK at 100 before it sees 150 again.
If I’m wrong, I’ll send a personal letter of apology to Cathie Wood. But until then, I remain very bearish here.
One more reason I’m bearish is that the major FAAING stocks (Facebook, Amazon, Apple, Netflix, Google) have flatlined for the past six months. Apple has in fact fallen from 140 to 120 in that time.
There’s now a whole second tier of stocks that about to get clobbered, such as Peloton and Zoom.
Here’s Zoom (symbol ZM):
This company has been a market darling because they were growing so quickly during the pandemic. Now we have a reopening economy and so this company (and other pandemic favorites) are going to be faced with decelerating cash flows that must be a discounted to higher interest rates.
(To determine the enterprise value of any company, you need to take future cash flows and discount them at the appropriate interest rate. Since interest rates have been rising, that means those future cash flows are now worth less than before and so the company itself is worth less than before.)
However, I don’t apply such fundamentals for timing and for direction.
I only look at price and price patterns, and to me everything is baked in the cake for a monster decline in ZM in the near future.
There’s a double top to form the head of a bearish head and shoulders, followed by another double top even more recently. All this price action is connected by a neckline that’s holding on by a thread.
Any break below 340 should open up a huge drop to the downside. So I think there’s all kinds of opportunity in this stock as it comes tumbling down like Humpty Dumpty very, very quickly.
Now onto the forex market …
For the last 20 years or so, the Japanese yen has been in a significant strengthening mode. But we're starting to see what could be a huge paradigm shift toward a weaker yen.
That makes Japanese yen trading pairs a fertile trading opportunity that’s starting to brew.
In this case, I'm looking at EURJPY (the Euro versus the Japanese yen).
EURJPY is starting to break out from a formidable downtrend line. It could get rejected at a nearby resistance level. But recent momentum has been very steady and orderly. This is very bullish.
I would play the long side until the market shows us otherwise. The next potential turning point is likely around 130, then 133, then 137 before there’s nothing but blue sky above.
Either EURJPY will roll over at one of these resistance levels, or this is the beginning of a new paradigm.
I’m sliding into the latter camp because there’s EURJPY is showing a double bottom as part of an inverted head and shoulders pattern.
This is especially bullish since EURJPY recently took out the neckline of this pattern.
So if you're not long already, consider taking a small position soon with the view that we could see an explosive move in the near future.
For comparison, here’s GBPJPY (the British pound versus the Japanese yen):
There are very bullish price patterns here as well including a double bottom as part of an inverted head and shoulders. What’s more, GBPJPY has just risen above long-term resistance at 147.
Again, this is a very orderly advance. Where you don't see huge volatility and huge price ranges from a high to low each week, that’s a good sign the trend isn’t over yet.
Now there’s resistance at 152, then again at 155, before we reach the same blue sky potential as with EURJPY.
I would use any dip in GBPJPY to accumulate more on the long side in anticipation of this pair going higher over the long run.
Continuing with the GBP theme, here’s GBPNZD (the British pound versus New Zealand dollar):
I'm very bullish on all the British pound trading pairs right now because the overhang of Brexit has been removed. It looks like the pound is headed for loftier levels against all major currencies.
GBPNZD has already been in a long-term stealth bull market since forming a double bottom in late 2016, early 2017. And while it's taken its sweet time, I think there’s still a monster move to the upside somewhere in GBPNZD’s future.
Price broke out over the neckline of the most recent double bottom at 1.85.
If you're not already long, I would put a buy stop above last week's highs around 1.94 because I feel this pair will levitate very quickly once it decides to move.
In this chart, I'm looking at XAGUSD (spot silver):
There’s been a cat and mouse game going on in silver: will it break out to the upside or not? Until then, silver is stuck in no man's land bouncing back and forth.
The double top remains significant, of course. It will take a lot of work for silver to overcome the huge key reversals that formed those tops. That’s why I’m still more bearish than bullish here.
However, silver did trace out an inside week bar last week. Prices could uncoil either way. But until I see the direction silver wants to take, I’m staying on the sidelines.
If silver drops, it would suggest a major top is in place. If it doesn’t, we’ll likely see a lengthy consolidation before the next leg up. The longer silver can consolidate without going down, the healthier the run in the future.
For now, I’ll defer to the market to see what it wants to do. Only then will I get into a silver trade.
This is XAUUSD’s weekly chart (spot gold):
Gold has been trading within an ascending broadening price pattern which is the same pattern we saw with the NASDAQ. Of course, this one's much bigger and much wider and therefore much clearer.
Gold almost made it to the lower edge of the ascending broadening formation, which was my original target. I still feel we could hit that target, but gold did find some support last week and traced out a bullish key reversal.
I’m not calling a bottom yet. In fact, I’d be inclined to short gold once more in anticipation of it coming back to at least the recent lows.
But not just yet. Right now I’ll sit on the sideline and see just how much momentum gold has from that key reversal. I will be looking for any weakness to put on a new short position.
And that’s it for the week!
I’m still bearish on the NASDAQ and many tech stocks and ETFs, including ARKK and ZM. I’m bullish on the JPY pairs, and on the sidelines (but bearishly inclined) for both silver and gold at this time.
I wish you a very healthy and prosperous trading week.
Mark "TechWreckoning" Shawzin