In last week’s article, I went out on a limb and predicted a gathering storm for "risk-on" investors.
So what’s risk-on?
A risk-on environment is where investors use their capital to purchase stocks and other high-yielding instruments. Investors are willing to take on more risk because they feel the risk is less of a threat compared to the promise of reward.
Conversely, uncertainty concerning overall market conditions (like what we saw in the fall of 2018) is labeled a risk-off environment. Investors perceive that higher risks aren’t worth the reward and retreat into the safety of cash and cash equivalents. Recent uncertainty has centered around further Fed rate tightening, Brexit voting, and the ongoing US-China trade war and tariff situation.
When sentiment tips over to ‘risk off’, investors pull their money out of stocks by selling their shares and sell other risky instruments like high-yielding currencies.
In a "risk-off" market mood, investments such as U.S. Treasuries and German bunds become popular because these are seen as essentially risk-free. Shares of utility and consumer staples companies often outperform the rest of the equity market in these situations -- that’s because these stocks typically have stable profits and pay dividends. Currencies such as the U.S. dollar, Japanese yen and Swiss franc are typically considered defensive and therefore rise during a risk-off move.
So what actually did happen after last week’s article?
Right on cue, US (and global) stocks and stock indices got decimated. Oil prices collapsed. The Japanese yen strengthened significantly too.
Now here’s the most important part: based on my technical analysis of price, I believe this could be just the beginning of some very significant emerging trends in these respective asset classes.
Quite frankly, I’m wrestling with what, and how much, I should say at this time.
Since this article mails to many thousands of members around the world, I feel a responsibility to be entirely objective and dispassionate in my analysis.
To that end, I try not to be a "fear-monger".
However, I think it would be irresponsible if I didn’t share my current sentiments.
When I look at the current market environment where we’re seeing crashing US stocks, crashing oil prices, and strengthening yen - all harbingers of a "risk-off" environment, I see what could be more than a gathering storm.
I see what could evolve into a cataclysmic crash in traditional financial asset classes. While this is admittedly a somewhat premature call, please protect yourself accordingly.
Let’s get started with some analysis of last week, beginning with the NASDAQ100, a proxy index for the U.S. tech sector:
The month before last, the NASDAQ100 set a new high. Then last month it carved out an even higher high and the made a major key reversal. By “key reversal”, I’m talking about when the price moves to one extreme (up in this case) and then closes at the other extreme (the low in this case). That long red bar at the end of this chart is a very bearish key reversal.
When you compare the NASDAQ100 to the Dow Jones Industrial Average (DJIA), we can see this action wasn’t limited to tech stocks.
Here we see that both indexes make huge key reversals, the likes of which we haven’t seen since last October when the 20+% stock market correction began.
Right now the sellers are firmly in control of these markets. Not only were there key reversals, but the reversals occurred at pivotal resistance areas where prices had stalled in the past.
But there’s more. When the NASDAQ reached a new high this month, the DJIA did not. So there was a disparity between the two. The DJIA did not confirm new highs and now they’ve both turned back into their trading range.
There’s another key piece of information in the above chart: note the orderly rally over the last several years. The bars are small and there’s been little volatility.
Now there’s steadily bigger bars –this heightened volatility often indicates a major change in trend as major players try to quickly unload positions they accumulated slowly during the bull’s rise.
No, I’m not saying there’s a bear market yet.
But the market does seem to be changing gears from ‘bull’ mode to ‘neutral range-bound’ mode on these monthly charts.
Eventually this range bound market should deteriorate into a major bear market once we penetrate the low of the current channel set back in December. In fact, there could be another huge sell-off (like the one last October) in the offing.
Meanwhile, bellwether stocks like Berkshire Hathaway (BRK.A) and Apple (AAPL) are flashing major warning signs. If the currently-forming bear patterns in these stocks carry through to completion, that would strongly suggest a major decline lasting several years.
Let’s cover AAPL first with a 25 year chart.
Right now AAPL is forming a massive double top and just completed the biggest monthly key reversal we’ve ever seen in AAPL in 25 years. That’s very significant. AAPL has never been more volatile (especially on the bearish side) in a quarter century!
We also see a similar pattern as with the stock indexes: there’s been a long orderly advance with low volatility. That situation was very unlike the high-volatility behaviour we’re seeing now.
By applying a long term trendline, we can see that AAPL could easily fall to $130 and yet still be in a long term uptrend. That’s not a prediction, just an observation. We need to see more price action before I would be shorting AAPL. But it does bring to mind this thought: what happens to AAPL if and when it breaks that trendline?
You’re probably aware that Berkshire Hathaway (BRK.A) is Warren Buffett’s investment vehicle.
Mr. Buffet is a legendary investor, but even his company is looking set for a massive price decline:
There’s a double top (bearish) at the 335,000 level to start with. Then there’s a shoulder on each side to form a head and shoulders pattern, also bearish.
That head and shoulders pattern won’t be confirmed until we cross its neckline at the 280,000 level.
If and when that happens, then Berkshire Hathaway would likely decline massively from 280,000 to 225,000.
I got that number by measuring the height of the head and shoulders pattern from the neckline and applying that measurement below the neckline. So 335,000 - 280,000 = 55,000 and 280,000 – 55,000 = 225,000.
We might see levels perhaps much lower than that in a real bear market lasting for several years.
Now for a stock I haven’t profiled here for quite some time: Netflix (NFLX).
I think there’s a tremendous short opportunity here already.
There’s a prominent double top where the two tops are so even they form an M-top. Then there’s a new rounding top currently forming.
Any penetration below the neckline of that rounding pattern would suggest a massive decline is on the way. Consider shorting NFLX if we see a break below the neckline.
Now for oil
In this weekly chart, we’re seeing a dramatic decline from the 105 price level in 2015 to less than half that price today.
Oil is a harbinger of what promise to be weaker economic times ahead.
It’s definitely looking very bearish with an initial, lesser double top at the 75 area which itself has become part of a huge double top that could carry oil under the 30 level over the long term. We could soon be seeing multi-year lows in oil.
As for USDJPY (the U.S. dollar against the Japanese yen), there’s another potential omen in this price chart too.
Should we get a turn lower in the dollar, I believe USDJPY will be the most vulnerable currency pair and the best way to take advantage of the decline.
That’s why for the past two months I’ve steadfastly maintained that shorting USDJPY was the best risk:reward trade on the board. Last week I suggested adding to your short USDJPY positions.
That recommendation has already yielded some very robust trading gains. USDJPY has collapsed from the 112 price level it held just a few weeks ago to close at 108.30 on Friday.
Despite the recent price drop, USDJPY isn’t done yet. I think will decline to the December lows at 104 and then even lower in the weeks and months to come.
I’ve been bearish on this pair for a considerable period of time and I see no reason to change my stance anytime soon here. The long term head and shoulders with a double top (and the subsequent descending triangle) are both very bearish. I don’t think there’s any way we’re NOT going to re-test the neckline of the triangle at 104.
USDJPY could certainly bounce off that level one or more times, but the long-term trend would still be down. I ultimately see USDJPY going to the parity level (100) at some point.
Let’s take a look at something I haven’t examined for you before: the Gold to Silver Ratio.
This ratio is well-known to gold bugs, of course. And right now it’s sitting at a high we haven’t seen since 1990.
Again, I see this as another omen.
How will this ratio be resolved so it drops to a more typical level? Either the price of silver has to rise or the price of gold has to collapse. Whichever way it goes, the ratio of 90 indicates we’re at a severe inflection point.
Meanwhile spot gold (XAUUSD) hovers at a major inflection point after surging in the last part of the month.
That’s a 10 year symmetrical triangle price pattern we’re seeing on this month chart.
Any penetration above (or below) the range of last month's trading range in XAUUSD could be the catalyst for a multi-year trend in this asset class.
In previous weeks I’ve been quite bearish on XAUUSD, but last week’s surge had me closing out my short positions and going to the sidelines for now.
Why am I being so cautious? Because the most recent monthly bar’s high and low was entirely contained within the previous month’s high and low. This has created an inside month bar.
An inside bar often foretells a change in trend. An inside bar can be thought of as “storing energy” within its tightly coiled high and low (think of a compressed spring). That energy eventually gets released explosively one way or another.
Could this be the sign that gold finally heads higher? Or will we see a multi-month bear market to the downside instead?
Either way, I think we’re not far from a major breakout in gold.
Now for another currency pair that looks headed for lower prices even though I’ve historically been very bullish on it: GBPNZD (the British pound against the New Zealand dollar).
I was very bullish on this pair because of the double bottom and rounding bottom. We made lots of profit on the way up, but I don’t think that trend is intact any longer.
Recently, GBPNZD broke out above an ascending triangle price pattern as you can see here. That’s still bullish.
But the breakout didn’t last. Price headed the other way, and just a few days ago the price broke below the triangle. This ‘busts’ the triangle pattern and sets up the possibility of a bull trap and a potential decline.
A bull trap is a false signal, referring to a stock, index or other security that reverses after a convincing rally and breaks a prior support level. The move "traps" traders or investors that acted on the buy signal and generates losses on resulting long positions.
I think that’s what we’re seeing here right now with GBPNZD.
This article has been longer than usual, but it’s easy to summarize: I see a gathering storm across multiple asset classes.
I’m not saying this because I want bad things to happen to people’s portfolios, I’m only calling it as I see it: things look very ominous ahead if you’re on the long side of virtually everything I’ve examined here today. Be careful and take appropriate steps to protect yourself.
It’s looking more and more likely that we’ll be seeing some very profitable short trades soon, so stay tuned!
Now, I have EOW Trades for you!
Three END-OF-THE-WEEK “Compounding” J-YEN TRADING STRATEGIES
I wish you a very healthy and prosperous trading week.
Mark "GatheringStorm" Shawzin