There are some potentially very interesting trades in the US stock market right now.
Especially in tech stocks on the NASDAQ. I see a huge emerging opportunity here.
So let me get into that now. (I'll return to my regular forex analysis next week as I feel this opportunity is far more important to share with you today.)
First, let's take a look at the S&P 500 and the Dow Jones Industrial Average (DJIA).
As you can see here ...
The S&P only recently cleared the old highs set back in February. Since then it's held at that old high, then pushed higher to close at an all time high. Everything looks good here for the bulls.
Meanwhile, the DJIA managed to close just above its February highs too.
It's been less strong than the S&P, but with the new high, everything looks fantastic here. The bulls are firmly in charge and I would expect new highs in the days and weeks to come.
However, things aren't looking nearly as rosy in the NASDAQ, the premium U.S. tech stock index.
The NASDAQ index made a new high about 3 weeks ago, then reversed immediately with a strongly bearish key reversal at the sloping resistance line I've drawn for you. (Remember, a bearish key reversal is where the bar makes a new high and then closes on the low.)
After that long red bar we had two inside bars that fit entirely within it. When you see an inside bar, that means the market is coiling up like a spring and getting ready to release energy explosively.
I believe the direction of that explosion is likely to be downwards.
We could be on the precipice right now.
Because not only is the NASDAQ failing to make new highs with the other two indexes, there are also red warnings flashing in individual stocks.
Before I review those stocks, I should point out that any plunge in the NASDAQ will likely halt at one of the two support trendlines showing on the chart. One is at 7300 and the other is at 6900. Both are likely to offer strong support in the event that my prediction of a NASDAQ correction comes to pass.
But what's the catalyst for such a plunge?
Any close below the last 3 weeks should trigger the uncoiling of the energy contained in the current inside bars we're seeing now.
Once we close below 7400, I would expect to see 7300 and probably 6900 fairly quickly before the market stops to catch its breath.
Now let's look at a couple key NASDAQ stocks and ETFs to see why I think we could see a significant correction here.
First of all, the QQQ. That's an ETF that tracks the NASDAQ index itself.
The QQQ is an excellent proxy for the NASDAQ and it's an excellent vehicle for trading. That includes buying puts and calls on the direction of the market too.
While QQQ has of course been trending higher in recent weeks, an emerging double top appears to be forming.
This double top won't be confirmed until the price penetrates below the neckline at the 180 price level. But things are looking bearish here, especially when you see the most recent key reversal within that emerging double top.
So while there's not a definite bear sign in QQQ just yet, things are trending in that direction.
How about Amazon (AMZN)?
Despite becoming the world's first trillion dollar company not long ago, AMZN is showing an emerging double top here at the 2000 level. I see it as an M-top thanks to the very distinctive pattern.
The price is about to breach the M-top neckline at the 1900 level. Recent price action has been very bearish.
All it takes is a close below 1900 and we could see a significant decline in AMZN.
For an advance look at how that might play out, let's take a look at Netflix (NFLX)...
NFLX offers a possible "peek into the future" of AMZN due to the similarities of the patterns on show.
In the Netflix chart we see a prominent double top at the 420 level. Just like with AMZN, it's an M-top. See how the price dropped considerably once that neckline was breached?
The price did retrace all the way back up to the neckline at 380. But then a new double top formed, and now NFLX looks ripe for another plunge.
NFLX's long uptrend looks to be over for the foreseeable future. Any further declines could be quite traumatic for the longs. Because it doesn't hurt to remember that markets usually fall much faster than they go up!
What happened with NFLX is no guarantee that we'll see the same thing happen with AMZN, but similar patterns often lead to similar outcomes. Reading this patterns and making bets on big moves is how I've made my fortune as a Pattern Trader, including gains of more than 9,000 pips in the FX markets last year alone.
(That 9,000 pips translates to $90,000 for every $1,000 at risk, if you're not familiar with FX. My methods of examining and profiting from price patterns work equally well in stocks and currency pairs too.)
Now here's another tech darling: NVIDIA (NVDA) ...
Again, another emerging double top is taking form here. Just like with QQQ. This time the neckline's at the 260 level.
How low could NVDA go?
NVDA has formed large reverse triangle (sometimes called a megaphone top). The neckline of such patterns often provides an indication of the potential low.
Here we see the neckline is at 210. And that's where I would expect NVDA to go if and when the double top neckline at 260 is breached. A 50 point drop in the stock would be very profitable for shorts and put buyers.
It could be as interesting as what's happened in Facebook (FB).
This stock is already in a significant bear trend, it seems.
As with NVDA, FB also looks to have a large reverse triangle as part of its price structure.
FB has already broken down and doesn't have as far to fall to reach its neckline at 150. However, it's far more likely to go down than up at this point due to the bearishness of the price action. FB might offer another "future glimpse" of the fate in store for NVDA if history plays out in similar fashion.
So what does all this mean?
All these bearish patterns taken together -- QQQ, AMZN, NFLX, NVDA, and FB -- suggest a sharp downward move in NASDAQ and its key stocks.
What's more, we could be seeing some serious action soon. The profits could be immense if you're positioned at the right time with short sales and/or put options on any or all of these.
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