What’s Looking Good in This Weird “New Normal”
Before I get into the charts this week, there are three major events that have occurred in the financial markets that could have enormous implications for investors, savers, life insurance buyers, and pretty much everybody going forward.
Not necessarily in order of importance:
However, that optimism has been short-lived. In retaliation for U.S.-imposed tariffs, China responded late last week with a $75 billion tariff on U.S. imports. Trump tweeted out further US retaliatory taxes and penalties in a tit-for-tat response after the markets closed on Friday.
1) The US-China Trade War: Last December, Trump told us he had an “excellent relationship” with Chinese President Xi and inferred a good outcome on the trade front. On the basis of a resolution of economic hostilities between the major powers, the U.S. stock markets powered to all-time new highs just a few short weeks ago.
2) Yield Curve Inversion: A few weeks ago, and again last week, we saw an inversion of the U.S. Treasury yield curve. An inversion occurs when the yield on the benchmark 10-year Treasury note goes below the 2-year rate. (Normally you’d expect the yield of the longer bond to be higher.)
This is an odd bond market phenomenon that’s been a reliable, albeit early, indicator for economic recessions. The last similar inversion began in December 2005, two years before the financial crisis and subsequent recession. Economists often give the spread between the 10-year and the 2-year special attention because inversions of that part of the curve have preceded every recession over the past 50 years.
But here’s the one that concerns me most …
3) Negative Interest Rates: For the past several months, central bankers around the world have been tripping over themselves to lower interest rates to zero – and even into negative territory. If this seems crazy to you…it's because it really is crazy.
Let me put it this way, if I said I wanted to borrow $100 from you, and pay you back $99 five years later … would you do it?
If you said, “Hell no!” you would be entirely justified.
And yet this is exactly what’s happening right now in the banking systems of Japan, Germany, France, and other European countries.
Negative interest rates — where the lender gets paid back less than they’ve loaned — now add up to 30% ($16 trillion and counting) of the global tradable bond universe, according to JPMorgan (JPM). (Germany just sold the first negative yielding 30-year bond issue, by the way.)
Everything about the markets seems to be turned upside down with this phenomenon.
Why would you pay money for the “privilege” of letting someone else borrow it?
That’s why I have a feeling this will end badly. Negative interest rates have all the hallmarks of serious trouble for the financial markets. Even though they’re an anomaly growing fast after seemingly coming out of nowhere, they’re under-recognized, poorly understood and dismissed as not consequential. I think that’s a mistake.
To my mind, the recent $300 surge in gold and the unprecedented daily volatility in the stock markets are flashing red warning signs to all those paying attention.
I’m not trying to be a scaremonger.
Neither is it my role – or objective – to play junior economist. What I am trying to say, is that there are rumblings in the economy and financial markets that could be perilous to traditional buy-and-hold stock and real estate investors.
Yet wherever there’s danger, there’s also opportunity.
I believe there will be enormous opportunities for investors and traders who adopt an objective and asymmetric approach to the markets.
So let’s take a look at those opportunities right now, starting with the U.S. dollar as represented by the U.S. Dollar Index (USDI).
As you can see, the dollar is struggling to hang on to its recent gains and looks to be getting ready to break down again into its earlier trading range. We appear to have a false breakout (also known as a bull trap) on our hands.
That doesn’t mean the dollar is about to crash, though. USDI could very well slide sideways for several more weeks before a further downturn. Yet I strongly feel that we’ve likely seen the dollar’s highs for the summer.
Now for the upside-down version of USDI, which is the EURUSD (Euro against the dollar) pair:
It looks like the summer lows have been put in for now, especially when you see the two bullish key reversals including the one that completed last week.
However, I think EURUSD’s upside is limited. I doubt any Euro rally will make it any farther than the upper bound of the channel I’ve drawn for you.
The pound is looking a bit healthier too.
GBPUSD (the British pound against the dollar) has caught a bid at previous support and appears to have some upside potential, however limited.
I’m not exactly bullish on this pair but it’s more likely to rise than fall in the very short term. If you’re keen on playing the upside, do so with caution. I don’t see a new bull market forming here at all.
That being said, some GBP-related pairs have already done well and are in bull mode.
GBPNZD (the pound against the New Zealand dollar) still looks very promising for a further move upward due to a bullish double bottom and a long series of inside bars on the daily chart.
I told my members to prepare to buy GBPNZD with this email two weeks ago:
That went very well as GBPNZD rocketed up for a 500-pip gain (and counting). I’m still holding for further gains.
You can see the result on the weekly chart since that email.
I remain bullish due to the double bottom and rounding bottom combination.
The neckline from those patterns that used to be resistance has now become support for a new double bottom.
Patient traders on the long side of GBPNZD should be rewarded. I think there’s a lot more than 500 pips to come, just don’t expect fireworks right away.
My favorite short USDJPY (the dollar against the Japanese yen) is now looking weak again.
I’ve been bearish on this pair for awhile due to the double top and long term descending triangle.
Now it looks like we’ll finally break the lower support of that triangle. It will be a fairly volatile, rocky drop however due to all the support underneath that line.
We could very well see parity (100) in this pair eventually, but as with GBPNZD, be patient. That’s because USDJPY is forming a series of inside bars (a coil). The direction of the coil’s energy release from is yet to be determined, but I’m confident we’ll see this pair dropping over time. There’s a lot more work to be done before we’ll see some serious downside action here.
Crude oil also looks destined for a lower price.
Crude oil has been in a downtrend for the last several years and looks set to drop even further with a double top from which it crashed, recovered to the neckline and then formed another double top.
Any upward momentum in recent weeks has been kept in check by the recent downtrend line. Once the latest support level breaks then look out below.
Here’s a five-year weekly chart of spot gold (XAUUSD):
There’s a double bottom with a number of additional shoulders on each side of it. Thankfully the gold price continues to hold after breaking out from the long-term resistance line.
Last week was an inside bar. This represents stored energy and it will be released soon — most likely upward in yet another leg of the newborn bull.
Silver is also looking quite bullish. It’s also formed a number of bottoms at the $14 area, then broken out decisively.
There’s an inside week bar here too, just like with gold.
Silver still has much work to do, however. There’s still lots of resistance overhead and not until the price clears $18.50 should silver enjoy relatively smooth sailing to much higher levels
Meanwhile, there are similarities between the dollar (as represented by USDI) and the U.S. stock market indices too.
Here’s the Dow Jones Industrials, which have seen tremendous volatility recently:
From previous reports, you might recall that the Dow highs earlier this year didn’t impress me very much at the time.
New highs combined with narrow range bars looked like a false breakout (or bull trap) with the more likely path being down. That’s where we are now.
However, the price has dropped to rest near significant support and might bounce at least one more time from here. I don’t see new highs appearing, though.
In fact, we might be looking at an emerging (and very bearish) head and shoulders pattern right now. It’s too early to say for sure, but I’m definitely not confident the bull market in stocks is still alive.
We’ll know more when we see which way last week’s inside bar decides to break.
One other point: expanded volatility in the last year reflects uncertainty and often precedes a change in direction (which means down). Just look at how small the bars were on the long run-up. Compare those to the very long bars we’re seeing now.
Such high volatility suggests a major trend change and significant vulnerability to the downside if and when existing support can’t hold.
So please be careful out there. The stock market, in particular, looks fairly dangerous, and no one knows exactly what will happen in an economy with negative bond yields.
I wish you a very healthy and prosperous trading week.
Mark “WeirdNewNormal” Shawzin