For reference to terminology used, please look at technical analysis under our resources section here.
Regarding the charts below, the vertical tan shades represent time factors. These are inflection points where we have high odds of something significant happening. More times than not, (3/4 of the time), they mark a turning point in the trend. So, what matters is the direction we are trending into these periods. Regarding the vertical lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.
Elliott Wave count are meant to provide context. 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
Broad Market
The evidence still supports, at minimum, heightened risk from a technical perspective. The market appears to be tracing out a complex corrective pattern that started in early 2022, and it suggests one more large drop to new lows in order to complete the pattern. Our target, as of now, is 3050 SPX. The current low and following uptrend we have been in does not have the type of characteristics that tend to coincide with a new bull market developing. Here are a few:
- Breadth has been quite weak in the recent push higher into April. The NYSE+NASDAQ has given us net new 52-week lows five out of the past six weeks, all while price continues higher. This tells me that many stocks are still in a down trend, while a handful of bigger names are holding the indexes up.
- Volume continues to trend below average, as less and less buyers are showing up at current levels.
- The market internals are still in a bear market pattern. Once the weekly RSI can break above that resistance line, it will be an early signal that a meaningful low could be in. Until then, the momentum in the market is quite weak.
What Would a New Bull Market Look Like?What Would a New Bull Market Look Like?
Another problem that we have to address is that we only have a 3 wave pattern off the October 13th low. Why this matters is because if we were going into an obvious new bull market, that pattern would likely be in the form of a 5 wave pattern.
Three waves up, more times than not, is a correction in a larger down trend. This is what the probabilities support, and this is one of several reasons why we decided to be cautious. The good news about having a 3 wave pattern is that if a new bull market is starting, it can ONLY be in the form of an ending diagonal pattern.
An ending diagonal pattern is the final move in a larger pattern. So, in a 5 wave pattern, it would be the 5th wave. This pattern tends to trace a trend channel, consist of 5 waves, where each wave is an overlapping 3 wave pattern. Here is an example in SNAP’s chart. Note the red pattern in the 5th wave.
You can see how it is a messy, overlapping pattern that traces a trend channel and is a series of 3 wave moves in both directions. Now, if this pattern were going to play out on a larger scale in the broad market, it would look something like this in the S&P 500.
This is the very general path that this type of pattern would take, and it is still too early to confirm if this is playing out. What is important to understand about this pattern is that if it is in play, and we did put in a major low in October, we have likely not even completed the 1st wave. And, we will need a confirmed 2nd wave drop in order to fully confirm it is in play.
Many investors get FOMO, and chase trends based on these emotions. This information should embolden investors that if we are wrong, and a new bull market is playing out, we still have the vast majority of this bull market to capture, once we get confirmation.
This market has literally been range bounce for 6 months. Neither the bulls nor bears can take control. And, based on the underlying structure of this uptrend, if the bulls are going to push us into a new bull market, it will have to be after a deep 2nd wave retrace.
The current Time Factor will likely mark a major top or a low/break out that can push us higher for the next couple of months. We are getting mixed messages in the supporting markets, but what seems to be quite universal is how the coming pullback unfolds will be the biggest tell.
If we do see a low and break out, it will result in the final bullish swing of the current larger pattern that started October 13th. Once we top, if we haven’t already, how the market turns down will determine what will play out. If it is a 5 wave pattern, then the bear market will likely resume. If it is a 3 wave pattern, we will establish an alternative buying plan along with targets.
Take Away: markets do not move in random ways. All trends develop into repeatable patterns on all time scales. The fact that we only have a 3 wave bounce off the October 13th low has reduced the possible patterns that a new bull market will take. If the coming top turns down in a 3 wave pattern, it will strongly support that a new bull market is developing, as we will have a much better opportunity to buy stocks at lower levels.
I do not believe this scenario is likely. However, I want to explain to our readers how this type of analysis can reduce risk, and help you get on the right side of a trend early. We have no confirmation of a new bull market, and if we do, you will see us pivot aggressively.
Supporting Markets
Dow Jones (DJI)DJI)
DJI was leading the market higher into early 2023. Since then, it has fallen behind. What is interesting is that the pattern lower is very messy and overlapping. In other words, it fits the characteristics of a B wave, with a C wave to new highs on deck.
If we are in a C wave, remember, C waves are always 5 wave patterns. The bounce in April, so far, looks to be 5 waves pointing up. This would be wave 1 of the large C. If this is playing out, we need to see a 3 wave pullback that holds the 31,987 supports, then a breakout above the December high at 34,750. If this happens, then we should expect, at minimum, another multi-week to multi-month push higher into summer.
At minimum, if we get confirmation of the above, we should expect to see some stocks/markets make new highs, while others make lower highs. As bullish as they may seem, this will be the last swings higher that complete the large degree pattern off the COVID low. Many markets and stocks have already topped.
NASDAQ-100 (NDX)NASDAQ-100 (NDX)NDX)
Like the DOW, NDX appears to be topping out, to some degree. The NASDAQ-100 doesn’t look like it has room for one more swing higher, like the green count in SPX suggests. This is better confirmed with the various FAANGs that I have been discussing.
If we do see a breakout above 13,425, we would likely need to see some pullback first. If this pullback is a 3 wave drop that is relatively shallow, it will support the push into May/June that is suggested in the Dow, and also in SPX.
The levels to monitor for the NASDAQ-100 – NDX needs to hold the bear market trendline, or 11,200 to support this thesis. If we instead see a 5 wave drop, it will be a big warning of new lows on the horizon.
FinancialsFinancials
Financials more than confirm that any push higher will likely be limited. After completing a large bear pennant, XLF has completed a clean 5 wave drop from that breakdown. Keep in mind, XLF is in a C wave down, so that pattern will be in a 5 wave format, which is what we are seeing. So, this is a big warning, until proven otherwise.
From the 5 wave drop, we are now seeing only a 3 wave bounce, which further supports this thesis. This would suggest we are in a 2ndwave of 5 pointing down. The 2nd wave bounce could be shallow, at which point we would see a sharp drop soon, or it can morph into a bigger 2ndwave that could take us higher and into Summer. In order to negate this downside setup, we need to see XLF break above $36.
Furthermore, the more financial charts I view, the more concerned I become. No one is talking about insurance companies, yet. From what I can tell, they will be. My guess based on the combined charting is that we have many 5 wave drops from the Jan-Feb top. We should see a 2ndwave bounce that can take us into late Spring/early Summer, which lines up with Dow and SPX. During this time, I imagine the sentiment will be that all is safe, and it was an isolated instance. The countless charts I’m looking at on a regional, national and international level strongly suggest otherwise.
Small CapsSmall Caps
Most regional banks reside in the small cap universe. For this reason, the Russell 2000 (RUT) is quite weak. Usually, we see high beta/small caps lead us out of bear markets. This is not the case today. Note how, like XLF, we have a full 5 wave pattern drop from the February highs. We are trending up into the current April time factor, so we should see a 3rdwave breakout, or another large drop, confirming that we are heading to new lows. Because of the current setup, I believe RUT will be a big tell on what’s to come.
Putting it all together: either we will see some type of top or breakout this week/next week. The NASDAQ-100 suggests that it will be a top, while RUT could go either way. If the drop is a 3 wave pattern, we could be setting up for a bigger push into summer. This will push the Dow to new highs, while many stocks/sectors fail to make new highs. If NDX and DJI turn down in 5 waves, then the top is in and we will raise cash. The financial sector will be the most important to monitor. It is throwing off big warnings on a wide scale.
Macro
This week will be filled with FED interviews. We have a speaker every day, which should be interesting. Due to the fact that the current FED Fund Futures projections for a rate hike in May is now 86%.
Even more interesting, the projections for an additional rate hike into June is above 25%. We can further see this confirmation in the bond market where the 3-month yield has made a fresh high.
However, the 6-month and 2-year yields are seeing a reversal/pivot soon after this hike. Based on the recent inflation data, I believe the 6-month will push to new highs, as the FED announces that they will have to increase the terminal rate soon. This could be the catalyst for the next leg down in stocks that the NASDAQ-100 is picking up on.
For reference, the shorter the duration, the more controlled by FED policy. So, it’s important to monitor the 2-year and 6-month yields in relation to the 3-month yield. The 3-month yield is signaling more rate hikes, while the 2-year yield and 6-month yields not making a new highs, are saying that we are closer to a pivot than most think. Once the 3-month and 6-month yields collapse, you will know that we are close to a FED pivot, regardless of what they are saying. If this happens sooner than most expect, especially with the inflation data we have been getting, investors should be concerned.
The high frequency data that has been coming out has not been encouraging for the immanent FED Pivot narrative. For one, the CPI print was not as dovish as the headline numbers celebrated.
The only reason it came in so favorably was because of reduced energy costs. When you strip out energy/food, core CPI rose 0.4%, led by rent costs. Rent still has a long way to go to catch up to housing prices, so this will likely continue to put upward pressure on inflation numbers. The Super Core, which is the FED’s preferred means of tracking progress with inflation, came in at 0.4%. This metric is up 5.2% on an annualized basis for the first half of 2023, showing no progress.
Regarding the PPI, this told a slightly different story. PPI is more forward-looking as it measures the input costs of producers/manufacturers. This could be foreseeing a push forward of the decline in M2, which for those that are not aware, we have seen the largest M2 decline since 1930. When this does hit the economy, it will not be pleasant. However, energy costs were still a big part of the lower numbers. Though the trend is undoubtedly down, it is still well above the 2% target. Take goods, for example; it was down 0.1%. When you strip out energy, which was down 6.4% (led by gasoline, which was down 11.7%), you actually have an increase of 0.4%.
This was backed up by industrial production coming in better than expected, which was on the heels of two prior upward revisions. This was led by the Utilities segment, which posted the only gain, while manufacturing continued its decline.
Retail Sales logged a decline of 1%; however, retail sales are up 2.9% on a YoY basis. More importantly, it is still trending well above the average on a 3 month, annualized basis.
The more resilient the US economy remains, the stickier inflation becomes, as shown in the services and super core segments of the inflation data. This will likely embolden the FED to not only raise the terminal rate, but increase rates higher, which will further exacerbate whatever damage they have already caused to the economy in their battle to beat inflation. We expect this type of rhetoric to be on full display this week, as the FED continues to address inflationary pressures.
Now, let’s look at retail sales on a YoY basis stiped of inflation. When we look at Real Retail Sales, it is quite alarming. The headline retail sales numbers are including inflation. Without inflation we are trending well into contraction territory from prior cycles.
This concerns me because the FOMC is waiting very deep into this business cycle to lower rates, and they have to because of how stubborn inflation is. We are seeing many data points like the one above, all while inflation remains well elevated above the 2% target. The fact that they have to raise rates into this type of weak economy is concerning because of the lag time it takes for rate hikes, and cuts to filter into the system. This, amongst several other data points, suggests that the “mild recession” the FED is now forecasting will likely not be mild.
One additional point on inflation, core and super core data remains flat, at best. While the headline numbers continue to fall. This means that energy and food is the primary reason for favorable inflation data numbers. However, if we look at energy futures, a concerning picture continues to unfold.
GasolineGasoline
We have been showing this pattern developing for several months. If gasoline can get above $3, then a clear path to new highs will become probable. On the other hand, if we break down below $2.5, then the odds of this scenario playing out falls drastically.
Crude OilCrude Oil
Crude oil is targeting $87 in a very nice and developing 5 wave move off the low. If this pattern gets to $87, then provides a 3 wave retrace, then crude is setting up for a run to new highs. This scenario is not being factored into equity prices, and until it is negated, risk remains elevated.
If we look at food futures, another major contributor to inflation, we can see a similar theme playing out.
Cattle and WheatCattle and Wheat
Cattle prices have just broken out to all-time highs, and holding at these levels. This has been offset by wheat prices cratering. However, after a very stretched corrective pattern, wheat appears to be putting in a bottoming and setting up for potential breakout. If wheat breaks above $731.50, it could be a problem for food prices in future inflation data.
I/O Fund Portfolio
Our largest position remains cash, where we are holding about 18% of cash. We have taken considerable gains in NVDA and AMD, as they appear to be topping out after giving us an incredible run since the October low. We have allocated more money to AEHR due to a sizable increase for futures revenue and EPS estimates. We also have added to ENPH on its recent, and long-time coming, breakout. If we add more cash into the markets, we plan to target TSLA as well as Bitcoin.
HedgeHedge
Our hedge has been on point during this overlapping and messy rally. It has caught every swing higher, and gotten us out close to the top. The more we see it work in real-time, the more confidence we have in it. As of now, it is still in bear market mode, and recently flipped to sell.
Netflix (NFLX)NFLX)
NFLX continues to trace the pattern we laid out many months ago. It appears to be setting up for the final swing in a very large leading diagonal pattern. The $378 region will be very strong resistance, if we get there.
Enphase (ENPH)ENPH)
It’s hard to imagine ENPH pushing higher if we really are in a bear market bounce. Keep in mind, ENPH continued in an uptrend in 2022 while tech cratered. This is because ENPH is tied to inflation, specifically energy futures. If inflation does have a new impulse, driven by energy and food futures, expect tech to fall while ENPH continues higher.
Aehr Test Systems (AEHR)AEHR)
AEHR found support on the Gann 1×1 line (in red). As long as this level holds, we expect higher prices. Note how AEHR is moving into a time factor soon. If this signals a top and break down below the 1×1 line, we will stop out of a lot of our position. If it marks, instead, a breakout, we may add.
Nvidia (NVDA)NVDA)
NVDA continues to exhibit topping patterns after a very large 3 wave bounce. Even if the low is in, a sizable retrace needs to happen before the next leg higher. April 19 – 25 is a big time factor for NVDA.
Bitcoin (BTCUSD)
Bitcoin is at a key spot. We need to see escape velocity soon with minimal pullbacks, in order to confirm the bullish count below. I do find it interesting that Bitcoin looks to be in the middle of a move while Big Tech/Semis look to be at the end of a move. Either one is telling the truth or the correlation broke.
Ethereum (ETHUSD)
If we can power above $2300, the moonshot count below becomes a much higher probability.
Tesla (TSLA)TSLA)
There are many paths TSLA will take, all in line with the way the broader market breaks.
Advanced Micro Devises (AMD)AMD)
Microsoft (MSFT)MSFT)
Taiwan Semiconductor (TSM)TSM)
Chainlink (LINKUSD)
If this is the real thing for LINKUSD, and not a 4thwave fake-out, we need to see a large 5 wave pattern develop. The blue path below is what that would look like. The blue lines overhead are the breakout spots to monitor. If we do break above $11.6 in a 5th wave move, that would be your large 1st wave. You would want to wait for the 2ndwave retrace to get aggressive.
Also, LINK has a big time factor coming up in May 10 – 8.
Recommended Readings:
Q2 EARNINGS KICKOFF: WEBINAR REPLAY
POSITIONS REPORT – 4/10/23
POSITIONS REPORT – 4/3/23
POSITIONS REPORT – 3/28/23POSITIONS REPORT – 4/10/23
POSITIONS REPORT – 4/3/23
POSITIONS REPORT – 3/28/23