The Two Stocks To Short and One Currency to Buy
This week, two out of three major US stock indexes powered to new, all-time highs on the heels of unlimited Federal Reserve stimulus, US government monetary stimulus government stimulus, infrastructure stimulus, and pretty much any kind of stimulus you care to name.
We've had literally trillions of dollars’ worth of stimulus from COVID relief. Now there's a proposed $2.2 trillion infrastructure package about to be being unloaded on the markets too.
Based on all this free money, the market has powered from a pandemic low of 18,000 in the Dow Jones Industrial Average (DJIA) to almost double that at just under the 34,000 level.
Here’s the S&P500 where we see much the same picture.
The S&P is now hovering above 4,100 after starting out life at about 2,100 at the depth of the pandemic.
As for the NASDAQ, it’s near its all-time high. It’s about to retest that level after slipping 15% from a hair under 14,000 about a month and a half ago.
Now it's a question of where do we go from here?
For the NASDAQ, the index itself isn’t enough to give us a good feel for the market as a whole. That’s because there are a handful of stocks responsible for 20% of the NASDAQ growth right now (Facebook, Microsoft, Apple, Amazon, Netflix, and Google) and all of them except Netflix hit all-time new highs last week. Collectively they look like they’re going higher.
But these are what I call first-tier NASDAQ stocks. The FAANG stocks are first tier because they're more mature. Their revenues and earnings are more predictable and their multiples of earnings are far less.
Then companies like Tesla or Zoom or Beyond Meat are a lot different. These are what I call second-tier NASDAQ stocks.
Why is that so important? Because as we see interest rates heading higher -- and we're above 1.6% yield on the risk-free 10 Year US Treasury Note -- this becomes much more complicated for the second-tier growth stocks.
But first I'm going to peel apart what's happening at the NASDAQ so we can get some perspective when something is hitting an all-time, multi-year high.
Here’s the monthly view of the index:
There are a couple things to note here, starting with the ascending, broadening price pattern. This is inherently a bearish pattern.
If price penetrates the underside of the pattern, price should drop all the way to the base of the pattern. Obviously this didn’t happen and instead the NASDAQ powered higher after touching the bottom trendline.
By now there’s a very steep uptrend in the index which has largely been fueled by unparalleled central bank and government stimulus programs.
The price has finally returned to the peak it first saw back February. At that time, prices were clearly rebuffed with a bearish key reversal. Will that happen again?
The NASDAQ will surely feel some resistance by virtue of the volatility that occurred the first time around. There may or may not be a double top here.
Right now it’s too early to tell. We need more price history before anything like a double top could be considered. Price would have to crash through 12,000-- the neck line of this hypothetical double top – for example.
Clearly we’re not there yet and a double top might not happen at all.
But one thing is for certain: the NASDAQ index is masking what's really going on underneath the hood. The FAANG stocks (plus Microsoft) are driving the index higher while there’s all kinds of carnage and destruction happening to second-tier stocks.
Let’s look at some examples …
A few months ago (and commensurate with the meteoric rise of Tesla from about $100 to $900) the EV (electric vehicle) space caught fire. This was a major fad back in December and January.
The chart of Plug Power (PLUG) is a good proxy for this phenomenon. The stock was trading around $11 and then soared sevenfold to $75.
Then the shine came off and it dropped back to $32. That’s more than a 50% decline in what was a very popular space.
Similarly, FCEL (another EV company in this space) plunged from $29 to $12:
Again, that’s a 50%+ crash.
And recently we've had a wave of SPACs (Special Purpose Acquisition Companies) unleashed upon the market. A SPAC is a firm that begins when a group of people with good reputations get together and investors write them a blank check to find a good company to acquire for the SPAC.
One of the most popular recent SPACs was Churchill (CCIV). The anticipation that Churchill was going to merge with Lucid Motors (a new EV company) to give Tesla a run for its money. When investors got a whiff of that, they got very excited and ran the stock from $9 all the way to $65.
Now CCIV is trading about 80% lower and under $23. So that you can see that chasing fads and chasing momentum is not the way to go. Or (if you must participate) then look at these things objectively and trade them up and down without getting married to them.
Although they involve concepts that could solve all our problems in the future, you have to look at each instrument as its own thing. And whenever something goes parabolic, meaning it goes from nothing to something in 60 seconds flat, that’s always a red flag.
Meanwhile the NASDAQ looks like it's starting to red line. It's been pushed dramatically higher and you wonder how much is really left on the table. This is reflected in those second-tier stocks I’ve just shown you – they’ve just been crushed.
Now here’s what I think is tradeable …
Two of the stocks I really like as short candidates have already come down, but I'm looking for them to further plummet: Zoom (ZM) and Beyond Meat (BYND).
Let’s start with ZM:
I've recently had a field day shorting ZM on every bounce from $340 or so. Every time it rallies, I short it and it's had the same result: the stock goes lower.
That hasn't been an arbitrary activity for me. What I look for when I tradesis the trend and the governing pattern that defines that trend.
First the trend: with ZM, the trend for the last eight months has been lower. Starting from a high of $588, the stock has been trading about 40% lower and is looking to go much lower.
And the governing price pattern is the head and shoulders with a double top acting as the head of that pattern. The neckline was around the $575 area and once this was cracked, it confirmed the bear trend we’ve seen ever since.
Zoom has subsequently formed a two more double tops and most recently a descending triangle price pattern. That’s simply a sawtooth pattern of successively lower highs off a common low.
Once ZM breaks the neckline of that triangle at the $300 level, there's nothing but air under the stock. I could see Zoom going $100 lower from here. So I’m actively shorting the stock. I don’t like the options as much as they’re a bit rich and don't offer as much leverage for the risk.
Now just to digress for a moment…
For those of you who are uninitiated with my trading methodology, all I look at to make a trading decision (including those where I commit potentially millions of dollars) is that I only look at the price history. It doesn’t matter whether it’s EURJPY (the Euro against the Japanese yen), XAUUSD (spot gold) or ZM.
All I look at is time and price. I don't look at the news. I don't consult with analysts. I don't watch TV to see what other people are thinking.
I avoid all that because to my mind, that's not the way to go.
You see, there are two ways of judging an investment, particularly a stock.
One is what's called the fundamental camp where analysts look at all the data behind a stock. That includes mergers and acquisitions, the price to earnings ratio, sales turnover, the quality of its management team, and so on.
I just look at the technical aspects. I only look at price action because to me, the price itself is the news. The market is a discounting mechanism and whenever we try and think intellectually about something the market is well ahead of that.
The market is already discounting the future of whatever we're thinking right now.
That’s why I’m showing you this report that came out on March 2nd called “Beyond Meat Fills Analysts With ‘New Found Enthusiasm’ After Major Brand Deals”.
It mentions McDonald’s, PepsiCo and Yum! Brands and the article is very bullish on BYND’s future with a $185 price target when the stock was trading around $147.
Right at that time, I was shorting the stock thinking based on the price chart, by the way.
So who was right? Beyond Meat (BYND) is now trading at $130 presently and there's nowhere to go but lower in this stock.
Here’s the technical analysis behind that:
As you can see, all I'm looking at is price and time here. I don't look at indicators: there are no moving averages here, or Bollinger bands, or MACD. There's no volume either.
This chart shows nothing but price and time.
Yet from this picture, I can make an excellent educated guess about where this stock is likely to go.
There’s not one but two prominent, double top price patterns here. The spike up for the second double top was during the GameStop phenomenon, by the way. That’s when Wallstreetbets players were looking to run up stocks with short interest.
BYND was one of those target companies and traders ran the stock up to $218 in late January. But by the end of the week, it went to $193 to create a bearish key reversal that was pointing in the direction the market wanted to go (down).
That set up the second, asymmetrical double top.
And since that time, it's been nothing but lower prices for BYND.
At the moment the stock is tracing out a descending triangle, much like we saw with ZM. To my mind, it's not a question of if but when BYND hits the neckline of that triangle around $115.
After that, there's nothing but a lot of air underneath. Look at how many times the price has sunk to $115. It’s a good rule of thumb that when price has hit a particular level so many times, it’s pretty much inevitable that it will break down at some point.
Once it does, there’s usually a huge vacuum underneath. BYND will likely experience a “quicksand” moment and sink rapidly.
To add to the bearish fuel on the fire, there’s even a mini head and shoulders within the triangle.
So my first target is $125 and after that $115. Then the abyss beneath. In short, I don’t see any way for BYND to get to $184 (the price target of the fundamental analysis I showed you earlier).
And that’s why all you need is the objective information we're seeing in the chart to take critical price decisions in the market. The only thing that counts is price. Price is the news. Price is the information.
Now let’s look at the forex markets…
Another major opportunity could be coming in the form of Japanese yen trading pairs.
Here’s EURJPY (the Euro versus the Japanese yen) on a weekly basis:
EURJPY has clearly broken above the downtrend line which itself is part of a large symmetrical triangle pattern.
There’s upcoming resistance above, but EURJPY has so far been hugging a very sharp uptrend line as it climbs out of the triangle. There's no real volatility. This very orderly advance confirms EURJPY could be at the cusp of a major breakout.
For the longest time, I thought the bearish price patterns here were the governing patterns. The head and shoulders and the double top looked to too formidable for EURJPY to push through.
Yet there’s also an opposing bullish pattern now: the double bottom is the head of an inverted head and shoulders. This large pattern has already cracked through the symmetrical triangle.
All this added together suggests this momentum is very real, and that the path of least resistance is higher. If EURJPY really gets going, we could see a huge move higher.
There’s still some resistance ahead at 133 and 136, of course. But I think a major paradigm shift in the yen pairs and notably EURJPY is underway right now.
In this chart, I'm looking at XAUUSD (spot gold) on a weekly basis:
For the past four or five months, I've been observing gold within an ascending, broadening price pattern. Because of the bearish implications of that pattern, I advised members to take a variety of short positions (mostly successful) from the $1,800’s and $1,700’s area.
The price objective of those trades was the $1,650 - $1,700 area, which coincides with the lower bounds of the ascending broadening price pattern.
Gold eventually did hit $1,670 and may now have put in a significant double bottom at the lower edge of the ascending broadening price pattern.
On both descents to $1,670, gold made bullish key reversals to close on the high each time. So we have a mini double bottom with two attempts at the lows and two key reversals.
Normally, I would say this is a “go to the bank” pattern and go long.
However, I expect significant backing and filling before a significant uptrend in gold can get underway. Look at how gold descended. It came down very steeply and typically when markets come down steeply, they don't go straight up again.
That’s because they’re fighting against a lot of recent price history and selling pressure.
So I'm a bit skeptical on the yellow metal’s advance here. I suspect we’ll see a number of weeks of backing and filling first.
And there’s still a chance this could be a fake-out, where gold suddenly shoots up and then drops back down to current levels (or even lower).
However, gold does look like it’s in the initial stages of turning around. I just want to see more price history before I jump aboard this trade.
Now let’s look at silver …
XAGUSD (spot silver) has been mired in a trading zone between $24 and $28.
We’ll need to see a good deal more price history to determine how or where silver escapes that range.
On one hand, I see a very clear inverted head and shoulders plus a double bottom on the bullish side. And yet there’s a distinct double top on the bearish side.
So it’s really a tug of war right now. There’s no clear governing pattern in place. That tug of war (and the associated backing and filling) is going to continue until we more price history here. Therefore I’m on the sidelines with silver until a clear governing pattern emerges.
And that’s it for the week!
In summary, I’m bearish on ZM and BYND, bullish on JPY pairs (especially EURJPY) and neutral on the precious metals with maybe some cautious bullishness on gold.
I wish you a very healthy and prosperous trading week.
Mark "TaleOfTwoMarkets" Shawzin