For reference to terminology used, please look at technical analysis under our resources section here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.
Elliott Wave counts are meant to provide context. Each colored count represents the most probable paths given the current price data. There is a pattern unfolding in real-time, one of which will play out. By monitoring price levels that are held/broken, it will help us figure out which one is in play, so that we can better manage risk.
Broad Market Analysis
The Larger Trend
The below image is a weekly chart of the S&P 500 (SPX). So, each price bar represents one week of price data. The weekly chart provides a great snapshot of the larger trend in play. There are currently two scenarios/counts that I am tracking, as of now.
- Green – This is the primary scenario that I am game-planning for. In this count, we completed a large 5-wave pattern off of the COVID low, which topped in January 2022. This also completes the even larger 5-wave pattern that started on March of 2009, which, if true, would suggest a larger bear market is in play than just the 2022 drop.
What has followed the 2022 top has been the start of a secular bear market. That would make this year a cyclical bull market within the larger secular bear market. In Elliott Wave speak, 2022 was the (A) wave down, 2023 is the (B) wave up, and 2024 should be the final (C) wave down.
Where this puts us now is that we should see one more multi-month swing high before the larger (B) wave tops. As long as the current correction that we are in can hold 4163 SPX, I am viewing this volatility as a correction within a larger uptrend.
- Red – This count is the alternative/secondary count that I’m tracking. The only difference between this and the green count is when the (B) wave will top. Green says it will top after we see one more swing higher. The red count says July was the (B) wave top and we are in the very early stages of the final (C) wave that is pointing towards 3000 SPX. If we break below 4163 SPX in the coming weeks, I will have no choice but to abandon the above green count, and shift into the red count as my primary.
I’d like to also point out the RSI on the above weekly chart. The RSI is a momentum indicator, and provides excellent clues on the strength or weakness of current trends. Note how the weekly RSI held that red trend line from the COVID low. The green arrows mark bottoms in a bull market.
Then note how that trendline, which was bull market support, became bear market resistance in 2022. We had a brief period where we reclaimed this key trend line, but we are well below that trendline now, which suggests that we are still in a bear market momentum pattern. Furthermore, note how the 2023 uptrend held the black trendline until recently, further supporting internal weakness in the market that is not seen in bull markets.
These are weekly charts, which means that we can still see a push higher. However, I would fully expect any push higher in price will be met with weaker momentum. What this means is that the market is on thin ice, and simply does not have the needed strength to keep pushing higher well into 2024, as of now. If we do hold the 4163 SPX pivot and turn back up for one more push higher, that red trend line will likely be the key resistance for tracking the top.
Cyclical Bull within a Secular Bear
If we zoom in on the 2022 top through today, you can see where I believe we are within this secular bear market. I have the first leg down (A) ending at the June low. This would put the move off of the October low as the C wave within a large (B) wave.
All C waves are 5-wave patterns, and the current structure looks incomplete. If accurate, the current period of volatility is a 4th wave suggesting a 5th wave push higher to complete the larger structure. This means that the larger trend is still pointing down, and the current “bull market” that we are in is a correction within this larger downtrend.
What would invalidate this scenario is if we drop directly through the 4163 SPX pivot. Below this level and the green count gets too stretched to be valid, which would put us directly into the red count. This would mean that the July top was actually the (B) wave top, and we are in the early stages of the final (C) wave within the secular bear market.
Since C waves are always 5-wave patterns, a drop through the 4165 pivot would suggest that we are in the 1st wave of a larger 5-wave pattern pointing us towards 3000 SPX. This 1st wave would target around 4000 SPX, which would then be followed by a large bounce back to, at least, 4200 SPX. If this plays out, the 2nd wave bounce is the last chance investors have to manage risk.
In conclusion, as long as any additional volatility stays above 4165 SPX, we expect a final swing higher to take us to new 2023 highs in SPX and NDX. Below this level, and the odds of a new high diminish greatly.
Another key point, which is also a warning, is that even though SPX and NDX suggest another high is probable, it’s important for investors to understand that most indexes/markets/stocks appear to have already topped. So, while SPX and NDX could make another high, many stocks will simply make a lower high.
Supporting Markets
NASDAQ-100 (NDX)
The tech-heavy NASDAQ-100 (NDX) appears to need one more drop to complete the current correction we are in. But, unlike the S&P 500, the NASDAQ-100 is in a more bullish posture. This correction, unlike in SPX, has not retraced a significant portion of the large breakout we saw earlier this year, unlike in SPX. So, it has higher probabilities to push to new highs even if the 4163 SPX pivot does not hold. If this plays out, I still view NDX in a larger (B) wave. So, expect us to continue to sell into any further push higher from here.
The Equal-Weighted S&P 500 (RSP)
It is important to track the equal weighted S&P 500 (RSP) vs. the market cap weighted S&P 500 (SPX). An equal weighted index gives the same percentage weighting to Apple as it does, say, Under Armour. In an expanding and healthy economy, we tend to see mid-caps outperform, as well as expansive growth in all stocks and sectors. So, when RSP is outperforming SPX, it tends to signal a healthy economy.
In the normal S&P 500, which is organized according to a stock’s market cap, the higher the price goes for a stock, the more of a weighting it takes up within the index. This is how you can have an index of 500 stocks being held up by a handful of mega cap stocks, as we are seeing right now.
The below chart compares the S&P 500, equal weighted S&P 500, and the top 7 stocks in S&P 500. As you can see, when you don’t allow for these 7 stocks to take up an outsized portion of the index, you get negative returns for the year, signaling broad weakness in the markets.
If we look at RSP alone, it has just broken the uptrend support that started at the October low. This is usually not a good sign, especially following such a weak and messy uptrend pattern. I believe RSP is leading SPX, and it is only a matter of time before Big Tech follows.
Ark Invest (ARKK)
We have nothing but respect for Ark and their research. The reason I am tracking ARKK is not to pick on them, but because they are a great benchmark for high beta tech, which I believe is also leading the broader market.
The bounce from the January low in 2023 is a perfect corrective pattern. Note how symmetrical it is, as it took the shape of a 3-wave pattern. This suggests that 2023, so far, has been a correction within a larger downtrend.
If accurate, keep in mind, that the larger downtrend is a 5-wave pattern. This means that the final drop will also be a 5-wave pattern. Note what pattern has just developed off the 2023 high. You can clearly see a 5-wave drop that is coming to an end. What this suggests is that the next rally will provide a lower high for ARKK, while SPX and NDX make a higher high. If this happens, it will be a big warning, and further confirm our green scenario.
Small Caps (IWM)
No matter how you count the current structure, IWM will not likely see an all-time-high (ATH) for some time. I have been tracking the structure since the 2022 low. It is definitely a triangle pattern, which only shows up in B waves and in 4th waves.
The question is – what direction is this triangle pointing? If SPX is in the red count, then IWM will likely lead with a sustained break down below $167. If SPX bottoms and begins tracing the green count that I laid out, then I expect IWM to also follow. This would have IWM make one more high in a direct fashion before topping out.
Financials
We’ve continued to warn about something brewing within the larger banks. Some of these charts do not look healthy, and suggest the red count in SPX should not be completely ignored. Below are the charts of two major banks in the US – Citigroup (C) and Bank of America (BAC).
They have both broken the major trend line that has been in place since 2009. These patterns look like 10 – 12 year bear flags. C is on the doorstep of confirming a head and shoulder topping pattern that has taken 3 years to play out.
There’s just no interpretation of the above charts that is not concerning. However, these are large patterns that have taken years to develop. So, they can allow for the green count in SPX to play out before letting go. If SPX and NDX make a new high in the green path, I’d look for these banks to trade sideways or make a muted lower high.
Regional Banks are also pointing lower after providing us with a similar pattern as ARKK. After completing a corrective looking bounce, we got a fresh 5-wave drop from the 2023 high. This is likely the 1st of 5 waves that will take us to the final target for this drop.
Note the divergence in momentum. This means the selling pressure is fading, which is common after completing a 5-wave drop. What should follow is a multi-week to month 2nd wave that will give us another lower high in the coming rally.
In conclusion, we are not seeing the type of breadth and leadership that accompanies a new bull market. Many economically sensitive stocks and sectors have put in a larger top, and are likely leading the broad market lower. However, the patterns in SPX and NDX both can allow for one more large rally to end the year. As long as SPX holds our 4163 pivot, we will be looking for this to play out. This means SPX and NDX will make a fresh high, while many of the other indexes and stocks discussed make a lower high.
Macro – The Two Most Important Markets
Once banks began to fail in Q1 of 2023, we saw a panic into cash and short positions in preparation for the next leg lower. This sentiment only fueled the next leg higher, as April saw its first of many upward surprises in economic growth. This was accompanied with a strong disinflation trend that has surprised to the downside for most of the year.
When we see growth accelerating and inflation decelerating, it creates the type of economic environment where high beta/risk-on investments tend to outperform. This is what we have seen since April through late July of 2023.
However, as early as July, we warned our readers not to celebrate a permanent victory over inflation. With history as our guide, we stated in our July Positions Report, “It is likely inflation starts to surprise to the upside again in the second half of 2023, further supporting the need for continued tightening until the economy enters a recession in Q4/Q1.”
We have been beating the drum each month that inflation will likely return, which could derail a richly valued market that is pricing in a FED pause. In the last CPI report we saw a bottom in inflation and reacceleration of the headline CPI print.
While the market tracks the YoY number, we prefer to track the 3-month annualized reading. The reason for this is because it provides better insight into the actual trend in play. Also, in order for the YoY number to reach the FED’s 2% target, we will need to see several readings at or below the YoY target. So, it is a measure that can help you see the developing trend.
From this perspective, the 3-month annualized CPI print bottomed at 1.9% and has reaccelerated to 3.9%. Though we have seen a nice deceleration in core inflation from its 5% range to 2.4%, this is nowhere near enough to get us to the FED’s 2% YoY target, and it wasn’t enough to offset the move higher in oil.
What we are dealing with now is a return to an uptrend in crude oil prices. After a very long and complex correction, crude oil has given us several higher highs, while reclaiming key levels from the prior downtrend. What’s even more concerning is that we have a very clear 5-wave bounce from the May low. This implies that a new uptrend is underway, which, if accurate, should target new highs.
How this lines up with the green count in SPX, suggesting one more multi-month swing high, is that oil is due for a reasonable pullback in both time and price, which is currently underway. The first 5-wave pattern off the low took ~4 months to complete. I would expect the coming 2nd wave retrace to be about 1.5 – 2.5 months long. This will relieve inflation concerns, rates, and also provide a path higher for equities.
The other key market to track is the US Dollar. I track the Dollar Index (DXY), which is a basket of currency pairs against the dollar. What is undeniable in this market is the inverse relationship between DXY and US equities.
The reason for this relationship is based on the abundance of global debt denominated in the US dollar. Some estimates claim that $12 Trillion of global debt is denominated in the US Dollar, while others have claimed its even as high as $65 Trillion. This would be debt in US dollars coming from non-US banks and shadow banks. These figures are in relation to a global GDP of $104 Trillion.
Regardless of the actual denomination, with so much global debt priced denominated in dollars, when the dollar goes up in value, compared to a country’s own currency, the cost to service this debt is also going up. This drains liquidity from that foreign economy, which is less money to spend on stocks. Adversely, the opposite is true, which is one of the reasons why we have seen such a sharp increase in US equities. As the dollar has dropped sharply from its high, global liquidity has also bottomed and slowly trended up.
If we analyze DXY, it appears to be in the final stages of the corrective rally within a larger correction. It hit the middle target around $107; however, the structure looks like it can extend towards $108 in the coming days/weeks. It could even extend a bit higher, but the bigger picture has DXY, and the US Dollar, continuing its downtrend once this corrective rally is over, which should be good for US equities.
In conclusion, we believe the body of evidence supports one more push higher in equities that could take us into early 2024. However, in order for this to pan-out, we need oil to pullback along with the US Dollar. This will open up global liquidity while relieving pressure on inflation concerns, and therefore rising rates.
We do not believe the growth data in the US supports a Q3 recession, which lines up with a Q4/Q1 top due to an inevitable recession. With the US growth story remaining resilient, and sentiment approaching extreme bearishness, again, the setup is there for this final swing higher.
I/O Fund Portfolio
We remain in a defensive posture due to the on-going macro risks that have yet to be resolved. We do believe a recession is inevitable, and continue to target Q4-Q1 for this timeline. Until then, we do not see the FED starting a new liquidity cycle, which has been a necessary ingredient for lasting bull markets.
However, the next swing higher, if it manifests, could take us into Q1 of 2024. So, we have been adding to our longs by building a large position in Crowdstrike, starting a new position in Enphase, and adding to existing positions, like AMD.
We do not believe this environment nor these prices are good long-term positions. We also believe the risk is quite high without a nimble exit plan. Our intension is to raise more cash if/when we reach our target for the green count.
Advanced Micro Devices (AMD)
The drop from the June high in AMD looks corrective. In other words, the red count suggests a top in June and the start of a C wave to new lows. However, the structure of this drop does not look like a 5-wave pattern, which we would expect to see in a C wave drop. So, I’m leaning towards a low in our bottoming area, and a push to new 2023 highs, which will complete this pattern. We need to hold the $89 support on any further weakness, or the count that can take us higher is likely over.
Nvidia (NVDA)
There are 3 potential counts I’m tracking with NVDA. The green count has put in a bottom in the 4th wave, and we should see a direct trend towards $545 – $575. The blue count is a variation of the green count, which still should see a push towards $545 – $575. The only difference is the 4th wave decline we are in. This count would have us push towards the $355 level before finding a bottom. The red count would have us break below the $340 critical support zone. If we do this, then the top is in, and we will start developing a new buying plan, targeting much lower levels.
Aehr Test Systems (AEHR)
My confidence in AEHR’s chart is not high. The structure has become so complicated that I went back and re-worked the entire count from scratch. I would like to see AEHR drop and hold around $37. If this happens, I will likely buy. If we break below $37, that’s not a good sign, but it still leaves a path higher. From every count that I can create with the current price data, none can go below $23 and still suggest another push higher. So, that is the critical support level to monitor.
Bitcoin (BTCUSD)
BTCUSD has been stuck since April. With its failure to breakout over $32,000, it keeps the door open that we could push lower to make a new low. As long as we stay above $20,000, I’m leaning towards a continued consolidation with one more push lower, followed by a breakout over $32,000. If we instead breakout over $32,000 directly, then the low is in, and we can shift towards buying the breakouts.
Microsoft (MSFT)
MSFT can make a push lower towards $307 or $301 and still allow for a new 2023 high. There is a lot of support in this region. If MSFT breaks below $293, then the green count will be taken off the board, and the red count will become my primary. Considering how important MSFT is to the market, this would have implications across the board.
Crowdstrike (CRWD)
Unlike many stocks, CRWD has a clear path to go much higher from here. This does not mean that it will take this path, but it is notable that it is present. Most stock that I track do not have a path with this much upside in them. Crowdstrike can suffer a drop as low as $118 and still hold this upside potential. Below this level and we are heading towards $75.
Ethereum (ETHUSD)
ETHUSD has the same setup as BTCUSD. I’d allow a 2nd wave retrace to $1265, but below this level and the larger breakout setup is in question. The confirmation price for the larger breakout is above $2285.
Netflix (NFLX)
With NFLX going below $382, the odds of a new high, as shown in the green count, are diminishing. It needs to reclaim that trend line and break above $395 very soon to negate the breakdown setup. We took heavy gains at $408 and $448 due to this potential setup playing out. We will continue to trim NFLX on any extended bounce from here.
Marvell (MRVL)
MRVL’s break below $52 has made the possibility of a new 2023 high less likely. I’m not liking this count, and struggling to make sense of what’s next. We like MRVL as an AI play, but we are likely early. If we do sell out of this one, expect us to get back in at lower prices. We will wait to see what kind of bounce we get from here. If we instead go directly below $48, we may stop out.
Supermicro (SMCI)
SMCI went from being the perfect setup to buy, to becoming a mess. My best interpretation has us making another leg lower towards $205-$195 from here. However, this runs counter to what I’m seeing in a lot of other stocks. So, if we do see another leg towards our target, we will buy. On the other hand, if we see a breakout above $305, I’ll consider the low in for a very ugly correction, and we will setup new overhead targets.
Chainlink (LINKUSD)
LINK’s range-bound consolidation has been nothing short of epic. After looking back at various exotic Elliott Wave patterns, I’m convinced that LINK’s consolidation is what’s called a barrier triangle. This is an extended consolidation that stays on a horizontal plane. It is almost always seen as a 4th wave, meaning we should see a final drop towards $3.5 to complete this large degree correction. This is where we will heavily buy. If we do not get that low, for me to consider the low as in, I’ll need to see a break above $11.
Enphase (ENPH)
Enphase has gotten hammered this year, moving in the exact opposite direction of big tech. We are seeing signs of selling exhaustion while we approach the final parts of this very large corrective pattern. I’m expecting a bounce soon, which should take us to $145, at minimum.
Taiwan Semiconductor (TSM)
TSM has topped. After giving us a complete 3-waves up off its low, it has broken the trend channel in an obvious 5-wave pattern pointing down. We will look to close it on the next larger bounce.
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