This week I have to admit that I’m somewhat pissed off and a little scared too.
It has everything to do with what looks like an emerging global financial crisis and a crisis of confidence in the so-called experts too.
In fact, I don’t know where to begin — it seems that we’re really at a tipping point with the markets.
But perhaps a bit of recent history is the best point to outline where I think we are right now…
A few weeks ago, it was implied by Fed Chairman Powell that we’re close to the end of the rate hike cycle and it was "safe to go back in the water". On the heels of those comments the Dow soared 600 points. Then last Sunday, President Trump said he had an "exceptional dinner" with Chinese Premier Xi. He implied there was a cease-fire on the trade war front.
I was skeptical.
Last week, I said:
"....it seems like nothing was really resolved on either front - other than kicking the can further down the road, and the systemic and important underlying issues were not (adequately) addressed or resolved. Additionally now the two major issues have been "addressed", I can only see this as a lose-lose for Long (equity) investors. I abide by the old adage, "Buy the rumor...sell the fact".
As it turns out my insight and comments were right on the money.
Because last Monday, based on Trump's "thumbs up" to the China trade deal, the Dow opened 500 points higher to the 26,000 price level. Then things went bad. By the end of the week the Dow was 1,600 points lower, and closed at 24,400.
The so-called experts didn’t seem fazed, though.
On Thursday, 30- year veteran and billionaire investor Leon Cooperman provided solace to the market by effectively saying you could buy stocks at fire sale prices. He predicted stocks would end the year higher than they were on Thursday. Yet on Friday the Dow closed almost 600 points lower.
Then after the lackluster jobs report, Trump sent out his economic front man Lawrence Kudlow. Mr. Kudlow then claimed this was the greatest "blue collar " economy since the 1980's.
In a moment, I’m going to show you some charts that say “hogwash” to both so-called experts.
Yet this complacency seems to be rampant across the CNBC business channel a lot more lately. Very few analysts, portfolio managers, and CEO's seem to be able to reasonably explain the recent stock market price action. The mantra is something like: "2% growth next year, full employment, NO recession... everything is OK". Blah, blah, blah.
I’m willing to keep an open mind on these things, but I have to say I don’t believe a word of it right now. And I don't know what pisses me off more, government officials blatantly lying about (the impending disaster they know is coming), or analysts who don't know what they’re talking about. The ultimate effect is that the public wont know — or be prepared — for the economic devastation that’s probably lying in wait.
That’s because what’s going on now could have real consequences for our future.
The fact that prices are crashing, despite no known reason, should be very frightening to investors. Markets are a discounting mechanism, after all. They’re ahead of "news" or "events". Remember this adage always: The Market is Always Right.
And right now, stock markets are flashing red warning signs for anybody who’s willing to listen.
Prices are telling us there’s something wrong right now. If analysts are right, and there’s no recession, then the markets are forecasting there’s some other "boogeyman" out there — likely debt.
After all, I’ve been alerting you to the emerging problems in the $9 trillion corporate debt markets, and the troublesome $1.4 trillion leveraged loan asset class (ETF with the BKLN ticker). Last week BKLN prices crashed to multi-year lows as you can see here:
This price action implies interest rates in these very leveraged sectors are climbing inexorably higher. I believe it’s only a matter of time when these “debt grenades” start going off. And with dire consequences across all financial markets.
This is not conjecture or speculation. The charts have spoken. And the patterns are in the process of being fully formed. The patterns mean what they mean.
With that thought in mind, let’s get started with the U.S. Dollar Index (USDI):
Back in 2017, this market formed a bearish double top and dropped significantly. Since then, we’ve seen an inverted head and shoulders.
The price action’s been edging along an uptrend line, but now it’s stuck within a tight range as of the last few weeks. That leads me to believe that USDI could be in a bull trap where it makes a head fake before rolling over and heading down very quickly.
The new few weeks are key. If USDI can’t make any further progress, then what can’t go up must go down. It needs to break out soon to confirm the bullishness of the inverted head and shoulders and the triangle.
We see a near mirror image of the USDI chart in the EURUSD (Euro against the dollar):
That’s primarily because the Euro comprises about 55% of the USDI basket of currencies measured against the dollar.
The head and shoulders pattern is normally very bearish and would herald a drop in the near future.
Instead, in the last couple of weeks, this is looking more like a bear trap. That’s because we’ve seen some key reversals where the market failed to make new lows. And that’s why I think the price looks more likely to explode upward than downward.
To capitalize on such a move, put a buy stop 5-10 pips above last week’s high and let the market’s momentum do the work for you. If it doesn’t happen, it doesn’t happen. But if it does, the result could be a very profitable rise back to the highs of the most recent shoulder.
The next dollar pair I want to look at is USDJPY (the dollar against the Japanese yen).
I think this is the best way to play potential dollar weakness right now. The long term double top in 2015 and the head and shoulders should still point the way to the ultimate direction of this pair — downward.
Most recently USDJPY has broken out above the descending triangle. However, I believe this is a bull trap as the market is unable to make new highs and we’re seeing repeated key reversals here. I believe orices are now set to re-enter the triangle and then drop more from there.
There’s another way to play JPY strength, though.
You could also short GBPJPY (the British pound against the Japanese yen).
With Brexit voting and the overall Brexit circus still ongoing in Britain, we’re going to see a lot of volatility in any GBP pair. I think the overall uncertainty is going to play heavily on GBP overall.
Meanwhile the yen is getting strong, so shorting GBPJPY should be a good bet from here.
After all, we’re seeing multiple tops forming in a complex head and shoulders pattern. The price looks ready to break below the neckline as the pent-up energy uncoils from the recent tight range.
I expect GBPJPY to re-test the 140 area and then drop perhaps even lower. Just be careful of the volatility with all the Brexit news coming out of the U.K.
So what about spot gold?
XAUUSD (spot gold) has broken above recent monthly and weekly resistance and has really caught my eye.
Given the current backdrop, volatility and potential meltdown in the equity markets, the rising price action in gold is looking very positive. This technical price action could be followed by a significant move to the upside.
It looks like gold is ready to break out of the very tight trading zone as we’re seeing higher lows and higher highs right now. And XAUUSD couldn’t make any progress to the downside with a key reversal and then an inside month bar. That suggests the path of least resistance is up.
Now the recent penetration above the high of the previous month could be a head fake, but things are looking interesting on the upside.
At the weekly level, spot gold still looks very promising.
Over the last few months it’s been everywhere and nowhere. But there’s still a double bottom that’s retested the neckline twice. And it’s taking off again now.
In fact, gold broke out above recent resistance just last week. It might fall back a bit, but XAUUSD seems to be looking to go higher off some strong support. I think it’s worth a buy, just beware of the possibility it could fall back inside the weekly triangle before running higher again.
Now let’s look at the stock markets’ health, or lack thereof.
With the recent crash in equity prices we’re closing in on major support zones in the U.S. stock indexes. The support zone for the DJIA (Dow Jones) is 23,000 … S&P500 is 2550.00 … and NASDAQ 6,200.00.
The reason I am scared is that if prices go through and below those support zones.....there’s NOTHING THAT CAN SAVE THE STOCK MARKET. (We’d likely plunge much lower from current levels and very quickly too).
Let’s start with the the Russell 2000. Or rather, the ETF (symbol IWN) that acts as a proxy for it …
The Russell 2000 is an index of small-cap stocks and a proxy for the performance of small businesses. As of Friday's close, IWM is sitting on two-year lows going back to early 2017. So despite government officials hyping the greatest economy ever, there’s been no progress for the man-in-the-street. And it looks like things are about to get a lot more negative - in a hurry!
After all, a picture is worth 1,000 words: the IWM picture features a bearish head and shoulders about to go through the neckline after a large key reversal. This is the kind of pattern you don’t want to see after a long uptrend.
Because things look to be just getting started on the downside here: IWM could drop to at least 115 based on the height of the head and shoulders against the neckline. At the moment, we’re at a major support zone so there could be some backing and filling over a few weeks or months.
But this chart looks very bearish and the short side is the way to bet here.
Now let’s take a gander at the 3-year Dow Jones chart, or rather DIA, the ETF based on the Dow.
We’re seeing an emerging long-term head and shoulders price pattern here, just like the Russell.
Plus we’re seeing another large key reversal here too — that’s very significant in the context of the overall head and shoulders pattern. Right now the Dow is at a key support level and the next one down is 23,500.
As with the Russell, we might see some backing and filling in the very short term, but eventually we’ll likely see much lower prices.
What would change my mind is a large key reversal to the upside, but we haven’t seen one yet. I’m skeptical we’ll see a bullish case in the near term. That’s why I feel the markets are vulnerable to a large move lower. By “large”, I’m talking about a 20% - 30% haircut in a matter of weeks.
The price action is telling us something in the NASDAQ 100 too. Or rather, QQQ as the ETF proxy for it.
There’s another emerging head and shoulders here, this time with a double top at the head.
And there’s also a sloping neckline. Not only is this particular pattern very bearish but it’s also an indicator of a very quick drop. I think we’ll see 155 and then 150 pretty quickly, although the ride will be bumpy with all the congestion and support at these levels.
But a drop is much more likely than a rebound right now. Be very careful if you’re still holding tech stocks.
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That sums up my commentary this week, so good fortune and good luck in the week ahead!