This week is fraught with uncertainty — and probably high levels of volatility — on all sides.
That’s because we’re dealing with not only the US mid-term elections (Tuesday) and an ongoing trade war with China, but also the November 21 deadline to determine the Brexit outcome is looming larger in the market’s mind … day by day.
Plus today’s rising bond yields are taking shape as a result of hawkish Fed policy too.
So be very aware that even though October is now behind us, volatility is likely to continue well into this month too.
Where are we most likely to see this volatility?
Let’s start with the most likely path for the dollar in the guise of the U.S. Dollar Index (USDI):
As we can see, the market has formed a bullish inverted head and shoulders pattern. It’s a bit asymmetrical, so there’s a bullish sloping neckline rather than a more normal (and conventional) flat one.
And right now, USDI is currently hovering at previous resistance.
I don’t think that’s going to be a problem for very long, though. Unless we see a major key reversal, I think we’ll go through that resistance relatively easily.
That’s due to the strength of the inverted head and shoulders pattern. In fact, the dollar’s role as a “safe haven” is likely to propel it all the way up to the historical resistance levels I’ve highlighted for you.
Now here’s something I haven’t covered for awhile:
It’s worth taking a close look at the movement of interest rates when you consider the recent volatility in the dollar and the stock market. If we can see where the credit markets are going, that will likely tell use where everything else is most likely to move.
To that end, I’m closely monitoring the price patterns and price action of the iShares Hi-Yield Corporate Bond Index ETF (HYG). High yield bonds are less politely referred to as junk bonds, by the way. And of all the credit instruments, they’re the most vulnerable to market instability.
Remember, when viewing HYG, prices move inversely to interest rates. So rising interest rates from a hawkish Fed are likely to lower bond prices.
As you can see, prices are indeed starting to head lower.
The bearish rounding top price pattern has been inexorable and currently HYG isn’t far from the 83.24 support lows set in late 2016. A break below this level will likely translate to a crash in stock prices and a boost to the dollar.
That’s why HYG is worth keeping an eye on.
Now let’s look at stocks.
Within the U.S. tech sector (as defined by the NASDAQ 100 index and mirrored by the QQQ ETF), many important individual stocks have traced out very bearish technical price patterns. This suggests they’ve topped and will continue to descend lower.
QQQ itself is a tradeable proxy for the NASDAQ index …
QQQ’s recent bearish M-Top (so called because it resembles the letter M) appears to have killed off the earlier uptrend and initiated a powerful downtrend in its place. What’s more, the recent key reversal strongly suggests that downtrend isn’t over.
At the very least I think we’ll see a return to recent lows.
But how do things look at the weekly level?
There’s some hope of a short term bounce given the key reversal we saw last week. But I would sell any rallies at this point based on the earlier double top and steady downtrend we’ve seen over the last few weeks.
I’m not bullish on QQQ (despite the key reversal) because the behavior of so many bellwether tech stocks is even more bearish than the index itself.
NFLX (Netflix), FB (Facebook) and NVDA (Nvidia) are showing serious bear price patterns and price action that reflects the damage done in the tech sector. To me, it feels like there’s more to come.
I’ll show you Netflix first.
NFLX has its own bearish double top (M-Top) and has failed to breach the neckline of that pattern on several times now. It’s even crashed below a secondary support line. So support becomes resistance and it doesn’t look like NFLX is going to push above that resistance in the near term.
In fact, the recent key reversal suggests we’ll see a return to the earlier lows and perhaps new lows beyond that point.
NVDA is similarly bearish, although the patterns are different.
The megaphone top pattern is an interesting one. Note that the height of the widest part of that pattern equaled the magnitude of the subsequent drop below the neckline. That’s a characteristic of megaphone tops during the rare times when they happen.
And since then, NVDA hasn’t looked strong enough to challenge that neckline. As with NFLX, I think it will re-test the lows and then possibly drop even lower that that.
Facebook is the last of the bearish stock charts I’ll show you today …
FB’s bearish descending triangle has defined the price action for some time. And once FB dropped below the neckline of that pattern, it’s tried and failed twice to climb back above it. I think we’ll see another drop in FB and soon.
I could show you more bearish charts of tech stocks, but I think you get the idea by now.
Individual tech stocks look much worse than the NASDAQ index itself, which suggests the stocks are leading the index. So the carnage could get a lot worse before it gets better.
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