What a year it’s been!
Before I delve into this week’s analysis, I should let you know that this article will be my last until early next year. It’s been very gratifying to interact with you and help you make the most of the trading opportunities available this year. I hope you’ve had a great and very profitable year, and that next year will prove to be even better for us as events (and chart patterns) unfold.
In late October, I observed, “It appears there are two secular trends currently percolating in the financial markets: 1) US Dollar – HIGHER, and, 2) StockMarkets – LOWER”.
(I’m usually not comfortable crowing about past calls, but I’m particularly proud of this one).
Because last week the dollar closed at six-month highs, and the stock market(S&P500) closed at six-month lows. What’s more, both of these trends show no sign of stopping any time soon.
Let’s look at the dollar first …
As you can see, the US Dollar Index (USDI) closed above recent resistance with anew high.
It appears headed inevitably higher from the initial H-bottom and key reversals which heralded its bull market earlier this year. I called this bull run in April after being bearish. TheH-bottom and key reversals convinced me.
Now the dollar has set new highs and will likely challenge the next resistance area at 126 in the next few weeks or months.
This will of course have a strong effect on USD currency pairs, such as EURUSD (theEuro against the USD). Here’s the monthly EURUSD chart — which means this is a very long term view here:
We can clearly see the large descending triangle which began with a double top at1.60 way back in 2008. EURUSD had been on a major bull run to that point. But since then it’s been all downhill.
Over the last year and a half, EURUSD has made a small head and shoulders pattern which recently broke down below the neckline.
The current monthly bar isn’t yet complete, but it looks like it will be an inside month bar. That should lead to an explosive move at some point in the near future, most likely down. After all, the price is near recent lows.
Should EURUSD penetrate below the 1.12 price level, I believe we could see a dollar move to parity (1:1) with the Euro. Short any rallies or any breakdowns below recent lows.
As for the British pound, it too is in a long-term downtrend against the dollar as we see from the monthly GBPUSD chart.
Prime Minister May survived a recent no-confidence vote, but Brexit fears continue to drive down the pound after any rally. It was unable to overcome the bearishness of a large historical head and shoulders pattern, and the more recent (and smaller) head and shoulders will likely have the same effect. The recent neckline was broken and the price looks likely to close near the lows of the month.
In the new year, I expect GBPUSD to collapse to last year’s lows and probably lower.
The only thing stronger than the U.S. dollar is the Japanese yen as I continue to be bearish on USDJPY.
The above chart is similar to others I’ve shown you before: a historical head and shoulders followed by a rally and then a descending triangle. I think the current rally above the descending triangle trend line is a bear trap and will fall from here.
In fact, last week was an inside bar (USDJPY could not make new highs despite the dollar strength) and so I would not be surprised to see this pair turn backdown.
To add support to this idea, I’ve drawn a new and smaller descending triangle for you here:
Now it’s possible USDJPY could break out of the triangle and go on an upward run, but the path of least resistance is down and I would expect USDJPY to drop to the neckline and then much lower as 2019 progresses.
Spot gold (XAUUSD) disappointed me last week.
It’s been very much a range bound market for some time, but the week before last gave some hope to gold bugs that gold was about to break out.
Unfortunately, the bullish momentum didn’t last. The spot gold price dropped back into the range after last week’s breakout. After all, it’s hard for gold to go higher when the US dollar does too.
The potential for a big move isn’t gone, though. I expect gold to be very volatile in the months to come. Whether that volatility will come in the form of a wider trading range or a large run remains to be seen.
Mean while, anyone hoping for a recovery in the stock markets probably felt even more disappointed than the gold bugs.
About the only positive about this long term monthly chart of the NASDAQ100(representative of tech stocks) is that the chart hasn’t made new lows relative to last month. At least not yet.
You can’t say the same about the S&P 500 and the DJIA though. They’ve broken down more significantly than the NASDAQ. First, the S&P500 …
And then the Dow …
As with gold, expect lots of volatility ahead in the major stock indexes and the stocks they represent.
Because I consider the NASDAQ so important, it’s worth a closer look. Here’s a weekly look at the NASDAQ100:
With the double top and head and shoulders pattern here (both bearish), theNASDAQ100 looks set to drop more, and soon.
The only real hope for the bulls is that the 6400, 6300 and 6200 support levels are yet to be tested in the most recent drop. Those levels are critically important. If they hold, we won’t see a bear market in tech stocks. If they fail, then look out below …
This is reflected in the daily chart of the QQQ (the ETF we can use to trade our predictions on the NASDAQ100):
Immediately after confirming the double top, QQQ broke the neckline in a big way and has trended downward ever since. The double top has heralded a major trend reversal so far.
So far the support has held up against recent tests. But considering the down trend line and double top and the fact that successive rallies have been weaker and weaker, be aware of the danger that the existing support levels might get taken out quickly.
Now let me add some commentary on the state of the markets in general, seeing how this is my last article of 2018 …
If you’ve been a regular reader, you know I base my analysis on price patterns and price action. The reasons as to “why” a market goes in one direction or the other is irrelevant to me. The reasons are superfluous. The “why” of where a market goes, is usually only apparent well after it’s made its move.
That’s because the markets are a discounting mechanism. They’re ahead of the news and events. If it was possible to make money forecasting the markets based on the here-and-now, all you would have to do is buy a copy of the Wall StreetJournal. (Hint: it doesn’t work that way.)
When the stock markets were making new highs in October, there was no apparent reason at that time as to why they crashed from those lofty highs so quickly.
Now the NASDAQ is down 16% and the S&P and Dow are down about 12%. All these indexes are dancing a hair above their long-term support levels. (Meanwhile theRussell 2000 small-cap index has already breached its major support).
Since we’re at critical technical price action inflection points in the major indexes, I do expect we’ll also see a lot of volatility at current levels.
The next major support levels to watch out for are NASDAQ 6200, S&P 2530, andDow Jones 23,000. If (when) we penetrate those index support levels – watch out. Because the markets are likely to unravel very quickly.
What’s most unsettling (and a little bit frightening) is the severity and velocity with which the financial markets are breaking up right now.
While most analysts are pointing to growth slowdown, trade wars, and rising interest rates as the primary culprits for the 30% - 50% declines we’re seeing in“quality” individual stocks such as AAPL, I believe the real bogeyman spooking this market is an emerging credit bear market. (After all, global credit markets are in bubble territory and global debt-to-GDP is at an all-time high).
Yes, a decade after the financial crisis, the seeds are being sown for the next potential meltdown and this time, the tinder isn’t subprime mortgages but a mountain of risky U.S. corporate debt that looks eerily similar (I.e. leveraged loans.)
You see, during the past 10-year bull run there’s been an unprecedented debt build-up in the U.S. corporate sector. U.S. corporate debt as a percentage ofGDP has never been higher.
In a zero interest rate “free money” environment that was okay. But now the credit cycle is changing as the Fed raises rates. That means the virtuous cycle of debt accumulation is now beginning to unwind. That’s why I believe the cratering of financial assets over last two months is just a preview of coming attractions.
A turn in the credit cycle is not some specific point in time – it’s a slow process which takes years to play out. But it normally begins when growth is strong and Fed policy begins tightening. Now this process has started.
As it evolves it will expose the weak links in the chain (meaning defaults, and probably lots of them). These will expose the excesses that have built-up in this long bull market run.
Remember that confidence and liquidity are the unspoken glue that binds bull markets together. Now I believe both these “commodities” will be in short supply over the very near term. Goodbye bull market!
Those who take the “ostrich head in the sand” approach and are in denial about what’s coming will be hurt badly. But on the other hand it’s going to be a time of unprecedented opportunity and windfall gains for those who are prepared.
I will do my best to keep you informed while educating you about potential trade sand strategies which capitalize on these new market dynamics.
I believe there are 2 currencies that are about to crash. Check out the link below to find out which currencies.
These 2 Currencies Are About To Crash
Thank you again for your trust and support. It’s something I never take for granted, and endeavor to earn each day.
Have a great holiday….and a happy, healthy (and very prosperous) New Year.
We’ll talk again in 2019,