Wow what a week!
There’s been so much happening in the markets recently that it’s hard to know where to begin.
But let’s start with the S&P 500, which suffered one of the biggest declines since 2014 with a 3% drop.
The key reversal I highlighted in recent articles proved to be a very near term bearish indicator.
And the Dow Jones Industrials reacted just as fast. Again, one week after setting new highs, the Dow declined a precipitous 3% too.
Meanwhile the NASDAQ — which I was even more bearish on — plunged hard with a as much as a 4% drop.
I correctly called these moves earlier.
So let me explain why I was so bearish …
A few weeks ago, I felt I was seeing some serious “red warning siren” indications that NASDAQ would drop. For one thing, it was butting up against an uptrend line and otherwise looking quite bearish as you can see here:
There was also a large key reversal after a series of inside bars.
In fact, I said, “Because key reversals tend to point in the direction the market wants to go, I think we’re going to see a near-term drop in tech stocks with a reversal this violent. The price could re-test the bottom of the channel and possibly plunge even lower. After all, the month of October is often known as the month of surprises for the stock market. And the NASDAQ looks very vulnerable in the next few weeks.”
Referring to the inside bars, I also said, “Most traders think these bars are unimportant because they’re so small … [But] I believe they represent a “coiling” of energy which winds tighter and tighter the longer short inside bars persist on a chart. Then — finally — that energy gets released in what’s often a very explosive action …
Sometimes you can predict which direction the explosion will go and place your bet accordingly.”
That was then, and this is now: we definitely saw a violent reversal after those inside bars.
So what’s next?
Getting back to the present time, you can see how the decline moved all the way to the bottom of the channel as I predicted.
Now historically, the market has responded to previous reversals by quickly heading higher once again. After all, this has been a very, very strong bull market. Market participants have been conditioned to buy these rallies.
However, I’m coming around to the opposite view: that market rallies are potential selling opportunities. That’s because certain individual stocks within the indexes are showing some long-term bearish price patterns right now. (More on this in a moment.)
In fact, I believe the indexes are actually trailing certain stocks.
But we need a bit more price action to provide the evidence for this.
To give us a more clear direction on the near term direction, recall that we’re about to be flooded with a mass of earnings reports this quarter. We’re going to see between 30 and 40 major earnings reports over the next couple of weeks. Which way those earnings go will tell us if the major indexes will again rally as they have after previous corrections …
… or if this really is a serious trend reversal and the bull is over.
The market will usually tip its hand either way.
Remember that I look at structure, and then I look at price action to help me predict the biggest moves in markets.
Today’s S&P 500 market is no exception. Here’s the structure I’m looking for:
Right now there’s no M-Top pattern yet. But if the S&P500 drops to the neckline at 2550 – 2600 then we’re looking at a very bearish price pattern.
Now I’ll show you a couple of individual stocks I feel are “leading” the apparent bearishness in the larger indexes.
Take a look at the bearish price patterns in Goldman Sachs (GS) on a weekly basis:
Historically there’s a significant double top here, combined with a head and shoulders (Head and Shoulders 1). That signifies a trend reversal from bullish to bearish. In fact, the price tested the neckline on several occasions and failed to recover.
Then another head and shoulders formed, complete with a neckline. The price fell through that support too. And right now the price is hovering between Neckline 2 and the long term trendline.
And if and when that longer term support is breached, there’s lots of open territory for a further move downward. GS could fall precipitously if the 210 level fails.
This type of bearish pattern is showing up all across the board in multiple stocks.
So I’ll show you one more today: Procter and Gamble (PG).
First the stock made a double top and then plunged through the neckline like it wasn’t there.
More recently, PG rallied to that neckline … and then failed to hold above it. This suggests the next major move will be lower. The inside week bar we see here could very well be a continuation pattern for the recent drop. Look to sell any rally here, especially if it looks like that rally helps form a new head and shoulders pattern.
In fact, selling rallies might prove to be a useful strategy for most any industrial or tech stock in the near term.
The stock market isn’t the only area at a possible inflection point.
Let’s take a look at spot gold (XAUUSD) on a monthly basis to see why …
The inside month bar (last month) may have provided the same opportunity in reverse to the indexes (and stocks). XAUUSD may be ready to move up if the recent multi-month downtrend is over.
There’s already a new high for the current month. So we might be seeing an emerging opportunity for gold to move even higher.
A weekly chart seems to bear that out.
We saw no less than 8 weeks of small bars contained within a very narrow price range before a strong upward move.
It’s what I call the “beach ball effect”. If you take a beach ball and hold it underwater, it explodes up into the air as you release it. That’s because the energy goes where it most wants to go — up!
Gold might very well be the latest beach ball in the markets. Last week’s strong upward move might be the start of a serious bullish reversal in spot gold.
With that in mind, any upcoming selloff in gold could very be an excellent buying opportunity for the longer term.
You could also trade the Euro against the dollar (EURUSD) on this premise.
That’s because the Euro is also looking likely to reverse against the dollar.
Over the last several months, EURUSD has traced out what looked to be a head and shoulders pattern. Normally this is bearish.
But after initially penetrating the neckline, the price began trading above it and now looks to be using that neckline as support for a new rally. For a “real” head and shoulders, the price should have failed to penetrate the neckline and descend significantly.
Since this has failed to happen and we even have two bullish key reversals at the neckline, this suggests the head and shoulders is busted. We could see a major EURUSD rally to perhaps 1.20.
Meanwhile the U.S. Dollar Index (USDI) itself adds more support to both ideas.
As I’ve pointed out several times over the last few weeks, the dollar has been trapped against a major resistance area after a key reversal made several weeks before.
Now we’re seeing a double top and any price action that crashes through that neckline at 121 should lead to significantly lower prices.
I hope you can see the potential from these major inflection points that appear to be forming in the stock market, gold and at least one major currency too.
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