Welcome back and I look forward to a great 2019 here at the Pattern Trader.
I hope you had a great holiday season, and wish you a happy, healthy and prosperous New Year.
Now 2018 was certainly a year to forget if you were a buy and hold investor in just about anything. After all, a record number of asset classes posted a negative return last year. That’s a record since 1901, which is as far back as this chart can show.
Yet 2018 was one of my best years ever as a trader.
That’s because my approach doesn’t rely on divining the mysteries of the fundamentals of the market. I take the view that those fundamentals are evident in the charts and make my buying and selling decisions accordingly.
One of the best examples of the effectiveness of this approach is Apple (AAPL) stock. As you probably know, AAPL recently became the first publicly traded stock to reach $1 trillion in market capitalization in history.
Yet the stock subsequently crashed by 30%. This drop was foretold by the head and shoulders pattern that formed in the chart very shortly after the $1 trillion mark had been attained.
A head and shoulders pattern is very bearish and as soon as the neckline had been breached, the bear pattern was confirmed and the downside slide was set to begin.
But here’s the key point: the slide started well before news of Apple’s sales and revenue troubles became public. The truth was in the charts before the fundamentals were known.
Price led the information discovery. That’s why I’m a pattern trader who focuses on price action!
That was then, but what’s coming up in 2019?
Let’s start by taking a look at the U.S. Dollar Index (USDI), which is a composite of how the USD is trading against the other major currencies of the world.
Here we can see how USDI has been creeping upward along a trendline … until now.
Last week USDI closed below that trendline. And it happened not long after the market made a new high too. That’s potentially very ominous.
After all, you want to see confirmation with further highs after the first one. Instead the price weakened and now it’s dropped below the trendline for the first time in several months.
It’s too early to call the end of the trend yet. That’s because this could be a head fake. So I’ll wait until next week’s close to see if USDI is indeed rolling over: a second consecutive close below the trendline would confirm that.
If it’s a head fake, the price will rebound above the trendline once again and the dollar bull remains intact.
Now for the Euro against the dollar (EURUSD).
Here we see a clear head and shoulders pattern. Normally this is very bearish as we saw with AAPL. EURUSD behaved very differently, though.
The price failed to confirm the bearish pattern by rebounding quickly after the initial neckline breach. In fact, EURUSD failed to make a new low for the past several weeks.
The short-lived descent was marked by a bullish key reversal. A bullish key reversal is where the market makes a new now and then closes on the high.
So far that key reversal has checked the decline.
And that’s why you need to review how prices behave around breakout/breakdown areas. You need confirmation of the bearish (or bullish) pattern.
A EURUSD rise here would “bust” the bearish head and shoulders pattern and indicate real strength in EURUSD.
A collapse back below the neckline would confirm the bearishness.
So for now I’m happy to wait a bit longer and see how EURUSD performs before making a trade. There are better USD-related pairs to use for trading right now.
The British pound against the dollar (GBPUSD) is an excellent example.
Here we’re looking at a very long term monthly chart.
January has been interesting so far – it’s still very early in this latest bar, but there’s been some key price action already.
GBPUSD made a new low very early in the new month and then (so far) it’s near the high. This is a bullish key reversal (so far).
Now we need to wait for confirmation on this at the end of the month. But if the current strength holds, then a key reversal would very strongly suggest a bullish double bottom and a future rise in GBPUSD.
The next point of resistance would be up around the neckline of the double bottom. In fact, the real confirmation of what could be an emerging (bullish) double bottom would be when GBPUSD breaks the neckline.
That would be hugely significant for a new bull market in GBP. But for now, let’s wait until the end of the month to see if the early strength does in fact hold up. Hopefully we’ll have a tradeable key reversal for February. A new bull market here could be worth thousands of pips (and tens of thousands of dollars per contract) if and when it materializes.
Of course, there was some real action in two major currencies while we were all enjoying our holidays.
Unprecedented volatility in AUD and JPY (Australian dollar and Japanese yen) was demonstrate in a rather spectacular was as both currencies moved 1,000 pips .
(Of course, you might have heard more about the stock market moving up and down by 500 or 600 points at a time over the holidays too – that was also quite dramatic and I’ll have much more to say about the stock market in just a moment.)
Let’s look at the yen first, specifically USDJPY.
For the past several months, my Daily Elite program emails steadfastly maintained “….the long-term Head-and-Shoulders (bear) price pattern formed in USDJPY the 2015-2016 time-frame (see chart below), was going to be the leading indicator as to which way this pair would ultimately head…lower…”
In fact, just before the holidays I sent out an email on December 17. I strenuously suggested going short USD/JPY at 112.61. And on 12/21, in my last video report before the break, I also said, “…if there is one trade I would put in my Christmas stocking was to go Short USDJPY” while it was trading around 111.50 at the time.
Here’s a screenshot of that trade recommendation:
Due to my extreme bearish outlook on this pair, I suggested a take-profit at 106.57 which was a long way from the prevailing trading levels at the time. As it turns out that take-profit was too conservative.
A rather spectacular yen “flash crash” last Thursday included a 500 pip drop in just eight minutes as USDJPY crashed to 104.87.
That delivered a tidy 1,100 pip cumulative gain on the suggested short positions in just a couple of weeks!
So why was I so confident before the crash? It all goes back to price action over the long term.
Here you can see USDJPY’s historic head and shoulders patter (with a double top) which set the tone ever since. There’s been a dark bearish cloud hanging over his pair since 2015.
So what’s next?
While USDJPY subsequently retraced from its Thursday lows, I believe there’s much more downside to go here. on the down-side. However, given last week’s outsized moves and volatility, we’ll likely to see consolidation and whipsaw price action across all yen pairs over the short-term.
It will be time to go short again, but for now just wait and watch.
While the yen was going crazy, we also saw a huge move in AUD (the Australian dollar) too.
Unlike the yen, AUD made a bullish key reversal after its heart-stopping drop.
A key reversal in itself is important, of course as it means the market is rejecting the lows and looking to rebound strongly.
But the chart shows another key thing: the new low matches the low of a double bottom from 2015 – 2016. This implies that AUDUSD may have bottomed and we’ll see higher prices.
However, be cautious about going long just yet.
That’s because given the huge magnitude of that key reversal, we’ll likely see a lot of near-term volatility first. Just like with JPY, there are potentially some huge gains ahead in this currency.
However, we need to be patient to let the market settle down a bit and let the trend establish itself.
Gold is looking interesting… if we can see a bit more bullish action.
The long term view of XAUUSD (spot gold) is implying an explosive move up in the yellow metal. While gold’s been locked in a range for several years now, I think we’re on the cusp of a major move
Look at the large symmetrical triangle.
We’re closing in on a potential breakout from that triangle and – if and when it happens – the results could be truly explosive for gold.
Don’t rush out to buy it just yet, though. We could still see some backing and filling before things take off. Remember the above chart is a monthly chart and things will take time.
However, the initial price action is very encouraging for a significant move higher in XAUUSD. My target area is 1310 for taking long positions in gold.
So for now, I want to see some further consolidation and upward momentum before the long-term breakout is confirmed.
Now onto stocks as I promised you earlier.
On Friday, following a very positive jobs report, and Fed Chair Powell's 180-degree pivot and about-face in his tone and comments a few weeks earlier …
… the markets just loved that and rocketed higher.
However, I find it concerning that stock market advances appear increasingly to be a function of debt-fueled corporate stock buy-backs, Fed-driven liquidity and central-bank jawboning. This is not the same thing as organic growth or productivity gains.
To me, there’s very little evidence that markets can make or sustain new highs without some sort of intervention or "cheer-leading" from central banks.
In fact, central bank (artificial) liquidity is coming out of these markets: the combination of raising interest rates while reducing their cumulative $15 trillion balance sheets (Quantitative Tightening) means the Fed and other central banks are beginning to drain the liquidity the stock market so intently craves.
A lot of that liquidity’s in corporate debt, which has doubled since 2007. That debt hasn’t been used for capital investment but instead for stock buy-backs to artificially prop up stock prices. Particularly problematic is the toxic, and covenant light, $1.4 trillion Leveraged Loan market.
Meanwhile government debt ($21 trillion) is expanding with no end in sight. It’s already risen another $2 trillion in the first two years of the Trump administration, by the way.
The upshot is that all forms of debt keep expanding while each recovery produces less and less organically driven growth.
That spells bubble to me, and I think the charts show it’s beginning to pop in a big way.
Now remember, as traders our sole focus should be on price action. Everything else is a distraction.
So while I have certain opinions as to what’s happening on a macro basis, those opinions are of little value to me as a trader.
Price action – as shown on the charts – is the ultimate determinant for trading.
That’s why I’ve been alerting you to a major reversal of the 10-year bull trend in the U.S. stock markets since late October based on emerging bear price patterns.
Before the holidays, I cautioned if prices went through the neckline(s) of the respective indexes (DJ: 23,000, S&P: 2,540, and NASDAQ100 (QQQ) 150.00): “Nothing could save this market”, and we would crash lower.
Over the break the indices did crash though their respective necklines. This effectively confirmed the long-term bear price patterns in all the major stock indices.
Since their October peak to the lows in December, the Nasdaq crashed 24%, S&P was down 20%, Dow down 19%, and the Russell 2000 down over 25%.
So while we could see a “retracement” to the December break-down levels, I continue to believe, based on technical price action, we’re headed much lower.
Here’s the QQQ (an ETF which tracks the NASDAQ100 index) as an example:
There’s a double top and a head and shoulders pattern here. Both are bearish. And you can see how we went right through the neckline during the Christmas break.
Is it the end of the world yet? No, because we did see a key reversal from that level and that may represent a short term bottom for now. (Think of EURUSD plus AUD, JPY and perhaps GBP too for other current examples.)
Most likely we’ll see a lot of sideways action and volatility in the immediate future. There’s going to be a tug of war between the bearishness of the earlier patterns and the bullishness of the latest key reversal.
All this means you’ll need to be very selective with your trades in the current environment.
That’s because we’re going to see a LOT of volatility in the weeks to come.
Right now I feel the way to bet is long gold and the Australian dollar and short USDJPY and stock market. But just be patient for now. Don’t jump in too quickly. Wait for the trends to assert (or re-assert) themselves.
That’s when we’ll make some very serious money together as pattern traders.
There are 5 stocks that are rapidly about to move. And i will show you how i intend to make a fortune trading them. Just check out the link below.
I wish you a happy and prosperous year ahead.