Waiting for the Market Dice to Fall in Stocks, FX, and Metals
Before I dig into the weeds with my analysis of the NASDAQ, I want to give some background to recent testimony provided by US Federal Reserve Chairman Jerome Powell last Wednesday.
In the face of projected 6% - 7% GDP growth in the United States and roaring interest rates where the 10 Year US Treasury yield has risen from below 0.5% a year ago to north of 1.7%, Jerome Powell didn't blink. He said he was going to keep interest rates as low as he could for as long as he could.
He also said he wasn't going to concern himself about a potential whiff of inflation. He’s planning to wait until inflation is here.
Now I've been around a few decades, and I have never seen a US Federal Reserve Chairman maintain such a uber-passive monetary posture in the face of robust growth and inflation. While I don't want to play an armchair economist, I do like to observe how prices react to certain pieces of information.
To me, it's not Powell’s information itself but how the market responds to it that counts.
Now here’s the NASDAQ weekly chart:
There’s an ascending broadening price pattern here which has been climbing for the last several months. This is typically a bearish pattern, especially when price breaks the lower support line as it did a few weeks ago. The NASDAQ dropped hard with the QQQ ETF (acting as a trading proxy for the index) plunging from over 330 to below 300 and ultimately about 297.
Then the market rose to retest the lower boundary of the ascending broadening price pattern.
I feel this was a very negative retest because at the high of last week's a trading range, the NASDAQ bounced off that lower boundary. Then by the end of the week, the NASDAQ closed near the low.
I believe this foretells ongoing weakness in the NASDAQ. Also, the nature of the ascending broadening pattern gives us a target as to where prices might fall: the base of the pattern, which is about 12,000.
This market could fall even lower in the days, weeks and months ahead. So I’ve added a second, lower target at 11,000 to reflect that.
Why? Because despite a robust economic backdrop in the United States and despite an uber dovish policy by the US Federal Reserve, we see signs that price is pointing lower. And since the market is a discounting mechanism -- price itself is “the news” -- the only thing you should look at is the price while treating everything else as a distraction.
That the NASDAQ can’t make new highs on the back of Powell’s stance and testimony says it all.
Now here’s the S&P 500:
Both the S&P and the Dow went to new all-time highs while the NASDAQ has failed to follow suit. I believe this is a bearish divergence between the indexes with bearish price implications for all of them.
That’s because there’s also an ascending broadening price pattern in the S&P. One featuring what looks like an emerging double top and with a bearish key reversal to mark what looks like the second top.
Just like the NASDAQ, price went to a high, but by the end of the week the sellers were in control and price closed at the low of the bar.
The convergence of an ascending broadening price pattern, a double top, and a key reversal suggest the S&P500 is going to the support line of the ascending, broadening price pattern.
If it gets broken (as we’ve seen already with the NASDAQ) then I would put a 3500 target on the S&P, right at the base of the pattern.
Let’s look at the Dow Jones Industrials (DJIA) to compare:
This index also made new highs, suggesting that growth stocks will be under pressure and cyclical industrial stocks will remain relatively strong. But “relatively” is the key word here because there are similarities between the DJIA and the other two major US stock indexes.
While the DJIA is stronger than the other two indexes (it broke above the upper line of its ascending, broadening price formation, it still traced out a bearish key reversal.
I would look at being short the S&P and certainly the NASDAQ before the DJIA, but it looks like the DJIA is headed back inside the ascending broadening pattern. This suggests it may retreat to the lower edge of its pattern too.
If so, it may pull back all the way to the 29,000 level: the base of the ascending broadening price pattern.
I’ve also been looking at other broad market measures.
Consistent with my philosophy that you can analyze almost any trading instrument through the prism of price action, I've been keeping an eye on the LQD ETF. This ETF tracks investment grade corporate bonds.
I feel this era of unlimited liquidity and free money has covered a litany of sins. There are probably dozens of zombie companies out there which should have been priced out of existence. Companies that should not have survived, have instead been kept alive by that open tap of liquidity.
When this chart drops, it indicates higher interest rates. This is potentially a very big problem for zombie companies who are barely alive even with ultra-low interest rates. I believe there could be numerous companies going bankrupt if rates keep rising.
And so this chart is starting to tell a story.
There’s a double top at the high. That suggests lower prices are on the way – especially since LQD has already broken the neckline of that double top.
If we get a crash in the corporate bond sector, that could ultimately destabilize the entire market. Higher interest rates will drive bankruptcies, which in turn would drive higher interest rates (to compensate for added risk), which would drive more bankruptcies, and so on.
That’s why I’m keeping one eye on the LQD ETF right now.
Let’s look at some individual stocks now.
While I believe the whole NASDAQ sector is vulnerable to decline, the upper FAANG tier consisting of Facebook, Amazon, Apple, Netflix and Google remain stronger on a relative basis.
However, there’s a second tier “underclass” within the NASDAQ that’s very vulnerable.
Should the indexes start going down, this second tier of tech stocks are exposed to a massive decline. Names I would put on this list include Peloton and Zoom.
Here’s a daily chart of Zoom (symbol ZM):
Zoom sells the popular teleconferencing video software that became very popular during the pandemic by making our lives easier. However, I'm seeing a lot of cracks that suggest this stock is going much lower.
There’s a very prominent double top here, plus that double top has been shown to be the head of what I call a complex head and shoulders. When there’s more than one shoulder on one (or both) sides of the head, it becomes a complex head and shoulders pattern.
It’s a very large pattern and it has a very large neckline to help us see when that pattern is finally confirmed.
And that's exactly what’s occurred in this stock. ZM peaked just under $600 and is now trading a bit above $300 – it’s dropped 50% already on the back of the double top alone.
But ZM should go a lot lower. That’s because it’s just breaking the neckline of the complex head and shoulders now.
Any penetration below the neckline here will expose ZM to a massive fall. We can project just how massive by measuring from the top of the move (the double top) to the neckline: about $280.
If we take just 75% of that (let’s say $200), and subtract it from the neckline, we arrive at a $100 price target for ZM.
Now that might seem totally crazy at this point, but I believe it’s quite possible. It’s why I’m aggressively short ZM stock and why I recommended members short it at the $340 level.
There’s a lot of air below this balloon, and it's about to pop.
One thing I want to mention here: because of the emerging bearish price patterns in the stock indexes (most notably in the NASDAQ), I’ve been focusing upon and trading in these markets much more than I normally would. I anticipate this will continue for the next several weeks because I don't really see a lot of things going on in the FX pairs right now.
That’s because we’re seeing a lot of consolidation in the dollar correlated pairs. There’s some emerging strength in the dollar which shouldn't last long. But for now we remain stuck in a higher to sideways pattern in the dollar.
I feel the Euro is most exposed to the downside here. The yen pairs are at the cusp of a major change. And GBPNZD (the British pound versus New Zealand dollar) looks like it could be an interesting opportunity too.
I'm still focusing most of my attention on the stock market, but many readers want to hear my views on the FX market too, so let’s start with the USDI (the US Dollar Index):
Although I think that the dollar is long-term bearish by virtue of a litany of bearish price patterns (including the recent head and shoulders on this chart), USDI has grabbed a foothold right along the long-term support line.
There’s even an interim double bottom, which suggests USDI could rise back to the breakout area from the small double top that occurred a few months ago.
I feel this represents a flight to safety in US Treasuries offering a better yield than stocks. It could be a few weeks (or even are few months) before USDI is ready to move lower once again.
In this chart, I'm looking at EURUSD (the Euro versus the US dollar):
It's an upside-down version of USDI since the Euro comprises about 60% of that index.
So you can see where there was a double bottom on USDI, we have a corresponding double top in EURUSD. What’s more, there were bearish key reversals at each top – the price made a new high and then closed at or near the low for that week.
This is strong evidence that EURUSD’s next move is lower. It broke below the neckline of that double top, retested it on the back of Chairman Powell’s testimony, and then closed on the low of the week.
Several weeks ago, I suggested shorting EURUSD at 1.1937. I'm still in that trade and looking for lower levels. Aggressive traders can put a sell stop under last week's low around 1.1870.
To my mind, EURUSD is going to keep falling to the 1.15 – 1.16 level before the drop is done.
And while I think the dollar will incrementally strengthen against most other currencies, including the British pound and the Australian dollar, it's really been gaining ground against the Japanese yen.
Right now it's an open question as to where USDJPY (the dollar versus the Japanese yen) will go from here.
For last several years, USDJPY has been trading within the confines of a large descending triangle. This can be a bearish or a bullish pattern depending on how price breaks out from the structure.
Normally it’s a bearish pattern and I’ve shorted USDJPY successfully on multiple occasions using this pattern as a guide.
(Ultimately, that’s what I do. I draw my structures or boundaries around prices, and then defer to the market. I let the market tell me where it wants to go. It's not important where I think it's going to go. I defer to where it wants to go.)
And right now USDJPY is sitting at an inflection point. Despite a history of lower highs, it remains to be seen if this pair will roll over yet again or if today’s prices represent a breakout and a paradigm shift. The market could literally do one or the other.
I’m still biased toward thinking USDJPY will roll over as it has so many times in the past.
However, the mini key reversal at the inflection point isn’t enough evidence to get short yet.
That’s why I’m waiting for the market to give me more price history. I might miss a piece of the move by being patient, but it beats getting into the wrong move by jumping the gun.
In fact, I feel USDJPY is likely to give us a few head fakes before it moves significantly.
But what I'm really excited about -- and what you should be excited about -- is that we’re not too far away from finding out which direction USDJPY is going to go.
When it does, I think there's going to be a big move across all the yen pairs.
Here’s EURJPY (the Euro versus the Japanese yen):
I always try to determine what I call the governing price patterns on any given chart. That means searching within an apparently meandering chart to see which patterns are most likely to dictate a sizeable, tradeable move.
Sometimes it gets a little confusing and this chart is a good example.
There’s a double top, and prices did collapse after they broke through the neckline of that pattern.
Then EURJPY traced out what appears to be a double bottom, and possibly even an inverted head and shoulders.
So where does EURJPY go from now? Which one is the governing pattern?
Last week EURJPY traced out a bearish key reversal at a major resistance level. But that’s not enough evidence to go short yet. After all, EURJPY has been hugging an uptrend line for many weeks now. That key reversal could be just a fakeout before the next leg higher.
As with USDJPY, I’m waiting for the market to give me a bit more history. It could take a few days, it could take a few weeks. But again, the exciting thing is I think we’re on the cusp of understanding the next big move or trajectory in these yen pairs.
It’s always worth waiting a bit for what could be one of the biggest currency moves of the year, right?
In the meantime, here are my thoughts on another potentially big FX trade …
Here’s GBPNZD (the British pound versus New Zealand dollar) which I've kept an eye on while maintaining some small positions on the long side.
The double bottom five years ago has been the governing price pattern in GBPNZD and has prompted a stealth bull market.
More recently the double bottom at 1.85 was followed by a series of bullish price reversals. GBPNZD is now hugging the upper area between 1.93 and 1.95.
I would play this with a buy stop above the weekly highs around 1.95. If the market goes lower, you won't be filled. But if 1.95 is triggered again, that could open a huge move to the upside. This can be such a frustrating pair to trade, but the potential for a large win is worth waiting for in GBPNZD.
Now let’s take a look at XAGUSD (spot silver):
The same conflict as EURJPY exists here too. Which is the governing pattern? The double top or the double bottom?
Right now XAGUSD is smack in the middle of a tug of war.
Again, I’ll watch from the sidelines for now. Let’s see how prices behave within the confines of the consolidation zone that’s trapping silver right now.
The more silver consolidates without going lower, the more it's likely to break out to the upside. On the other hand, a weakening price strongly suggests the double top is the dominant price pattern.
I’ll wait for the market to lead me in the direction that it ultimately wants to go. Then I can take a big piece out of the next move.
Here’s XAUUSD (spot gold):
For the past several months, gold has been trading within the confines of an ascending broadening price pattern, just like the NASDAQ, S&P and DJIA.
Because of the bearish implications of this pattern, I started shorting gold in the mid $1,800’s and my objective was the lower boundary of the ascending broadening price pattern.
Last week we came very close to that lower boundary by hitting $1,670. From there, gold grabbed a bit of a foothold with a key reversal.
But is that foothold enough to trigger a huge upward move? I’m skeptical. I think gold could rally a bit higher to resistance at $1,760 - $1,770. But at that point I think it would retreat and retest the
lower end of the ascending broadening price pattern.
For now I’m waiting to see how gold behaves at that resistance level before making any further trading decisions.
And that’s it for the week!
The dollar pairs and the yen pairs and the precious metals are all a bit muddled right now. I'm waiting for these markets to speak to me about their next direction. I want to see prices move through certain levels.
However, I’m still strongly bearish on the stock indexes (and certain tech stocks such as ZM). Lower prices here should open up significant declines and that's where my focus is right now.
I wish you a very healthy and prosperous trading week.
Mark "TumblingDice" Shawzin