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.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 major US markets continue to trace the complex corrective pattern we outlined weeks ago. What this pattern calls for is a final 5 wave drop to new lows. For SPX, the downward targets are 3295, 3150, 2940. If we get confirmation of this pattern playing out, we will look to remove our hedges and commence buying around these key price targets.
From an Elliott wave perspective, the structure of the bounce from the October 13th low warrants caution. Anytime we see a 3 wave bounce, the odds favor this pattern being a correction within the larger trend, which is down. The above chart is clearly 3 waves up.
This is backed up by various supporting markets that are important. In short, for a major bull market reversal to be underway, we need the below markets to participate. Instead, they seem to be confirming the bearish setup.
Financials (XLF)
The Banks have been very strong since the October low. However, the structure of XLF off the low is also an overlapping 3 wave structure. Note how this 3 wave bounce has retraced the majority of the 2022 drop. Also, note the weakening momentum as price moves higher. This pattern may have one more high in it, but it is clearly a B wave until proven otherwise.
Transports
The Transportation sector is also flashing similar warnings.
Canada
The Canadian TSX is an important market to track for US equities. More times than not, it leads the US. When these markets diverge, it is a big warning of an imminent trend change. This is not what we are seeing. Note the bear pennant forming. This triangle pattern is common with B waves, which the TSX appears to be tracing.
If we zoom in on the bounce off the October lows, the S&P 500 appears to have an incomplete uptrend. The 3 wave bounce is marked by an A wave up, B wave down, and C wave up, which completes the 3 wave pattern. The C wave always plays out in a 5 wave pattern, and it appears that we only have 4 waves in place. This suggests that we see a final run towards a double top, or 4225 SPX in the coming weeks, but this is not guaranteed.
The above blue count has been my primary analysis for several weeks. In fact, we removed some of our hedge and have gone net long (25%) in an attempt to capture some of this potential move. This move needs to manifest this week, or it is in danger of not playing out.
My alternative count (red), which is quickly becoming my primary. This suggests that we already topped and are almost done with the 1stwave down in the final move towards the 3000 SPX level. If we push towards 3920 before breaking out over 4040, then this will become my primary, as we look to fully hedge on the 2nd wave retrace. In both cases, we should see a larger bounce before the wheels fall off.
Futures
It may seem odd that a tech service covers futures; however, I am always looking for clues in many markets so that we can properly position. Futures are very important right now because they track commodity prices, which is the underlying pressure within inflation. The most important to monitor is food and energy, both of which are suggesting higher prices into the near future.
Wheat
Wheat prices look to be completing the 5th wave in this large correction. It is trending down into major support with a cluster of cycles coming into play between Feb 28-Mar 3. Once we see a bottom, a large degree bounce should follow. This means food prices are likely going up.
Energy
Gasoline looks very similar to oil prices below. This very much looks like a consolidation before the next move higher. The next major cycle is in late April (this is a very big time frame to monitor). I doubt that we consolidate above the 1×2 line for that long. Look for energy prices to move higher in 2023, which will only put pressure on inflation.
Macro Analysis
Recent data growth has opened the door to the prospect of a “soft landing” or “no landing.” We discussed what a soft landing looks like last week – manufacturing contracts while services does not contract too much more. This last happened in 2014-2016, and most famously in the mid-90s. The idea of no landing means that we just continue to expand from here, avoiding a recession all together.
We would be onboard with this rosy outlook if it wasn’t for one key data point – inflation. All prior soft landings going back to the 80s had one factor in common – a supportive liquidity cycle. With inflation under control, the FED was able to allow the continuation of a supportive liquidity cycle (2014-2016), or start up a new liquidity (mid-1990s).
With talking heads focusing on stronger than expected growth metrics in the economy, they fail to acknowledge what this means for inflation. In short, inflation may have peaked, but the real battle will be getting it from 6.4% to 2%.
If you pay attention to what the FED is saying, they are now tracking something they are calling “Super Core” Inflation. This metric excludes food and energy, like regular core inflation, but goes one step further to exclude all other goods as well as shelter. Because the US GDP is ~85% tied to services, this gives the FED a look into how their policies are affecting the largest segment of the US economy.
In January, the Super Core prices rose at a 7.4% annualized rate. This is the fastest increase for any month since 2021. These prices are up 4.6%, which is just off its peak at 5%.
It is alarming how little effect the current aggressive rate campaign by the FED is having on services. While manufacturing remains in an on-going contraction, services continues to expand, proving that the economy is much more resilient than expected. This also means the FED will likely have to hike higher and for longer than the equity markets are pricing in.
So, the only questions an investor needs to ask – is it more likely or less likely that the FED will start up a new liquidity cycle soon, based on the overly resilient services segment of the economy? Will starting a new liquidity cycle hurt or help their primary goal to get inflation back to 2%?
Counter Analysis/Bail Out Levels
My current outlook for 2023 has evolved (or devolved) since the start of the year. I have grown more bearish as time has progressed, and would rather remain cautious until we get evidence that the above analysis is being shrugged off. The levels I need to see reverse, which would have me reverse my analysis is below.
Dow Jones Industrial Index (DJI)
The consolidation pattern in DJI broke to the downside, as it suggests a continuation of selling before a low takes hold. I’ve stated before, and will repeat, as long as the DJI holds its October low, no matter what else happens, it will set up a great buying opportunity. This still holds. However, for me to reverse course, the Dow needs to reclaim its December high.
Financials (XLF)
I’m adding XLF to the mix. Like the Dow, it needs to reclaim its February high.
Caterpillar (CAT)
I’m also adding CAT to the mix. CAT is a key stock to track for early signals. It put in a major top according to Gann – multiple time clusters coming together at the 1×1 line off the 2016 low. If it can reclaim its February high, then I will start looking to buy.
Bonds
I’ll also want to see TLT take out its December high.
It may seem like I’m adding more criteria to my reversal pivot; however, if we are entering new bull markets, all of these markets will confirm it in unison.
Hedge Signal
Our signal nailed this swing in both directions. We remain in the basement, and a long way from turning back to a buy.
Time Analysis
These are the dates to monitor for a trend reversal/big break put. The most important aspect of these dates is how the market is trending into them. These dates will be inflection points that can help determine swings.
- Small Cycles in March: 6-7, 15-17
- Medium/large Cycles: February 27 – Mar 3. Note how we are trending down into these dates. It should mark a low in red 1 or blue 4.
- Notable Events: March 22-23 is the next FOMC meeting.
- Late April will be one of the biggest time factors of the year.
I/O Fund Portfolio
Though it may seem that we are heavily concentrated, as of now, our biggest position is really cash, which nearly double the percentage of NVDA.
NVDA (17%)
NVDA tagged the 100% extension (this is where the length of the C wave is identical to the length of the A wave). This is the most common spot that a 3 wave bounce terminates. It is now struggling to break above this level, while momentum continues to fade at these heights. This is not where you buy a stock. After this 3 wave pattern is complete, we should see a drop back towards our target region. We plan to make NVDA a larger position, so expect buys in the coming months.
NFLX (14%)
I’m starting to question the below bullish count. I’m looking for a big drop in equities, while NFLX is close to the lower trend line. Another 16% drop towards $270 is as far as I would give NFLX. If we do see a more bullish outcome in the markets (my red count, where SPX tags 4225), then NFLX can complete the large degree diagonal for wave 1. That would make more sense, but that’s a big ask. Long-term, I believe NFLX has put in a major low, but we could see a deeper pullback in the coming months than previously expected.
AMD (13%)
The top is in for AMD. One more low and we have 5 waves down from the high. There should be a larger bounce that follows, for anyone looking to hedge/unload. We will plan to buy more at lower levels.
TSM (9%)
A crash scenario for TSM would likely be due to geo-political tensions. This would create a great buying opportunity, as this company is likely not going anywhere. Like all semis, it has completed a 3 wave bounce up, and now we get to see how deep the pullback takes us.
AEHR (9%)
Look for us to take more gains in AEHR on the next bounce. My confidence in the chart is fading.
ENPH (9%)
Without question the most interesting chart we track is Enphase. It continues to trade like an energy commodity. In other words, it appears to be bottoming while NDX/SPX appear to be topping. If correct, we could see a repeat of 2022.
MSFT (8%)
Regarding the FAANGs, first Google topped, then AMZN, NFLX, MSFT, and AAPL is now hanging on by a thread. MSFT is the key, right now. It looks like it has a 4th wave then one more drop to complete the larger 1st wave of the larger C down. We should see a corrective 2ndwave bounce before the wheels fall off.
TSLA (5%)
The 1st buy zone will be between $160-$140. My primary is that we visit $92, but we will begin layering in based on the red count. When technicals are calling for a drop that appears to be dramatic, especially when it runs counter to a recent positive earnings report, I prefer to set up buying plans based on both scenarios playing out.
MGNI (2%)
The top is likely in for MGNI. We need to get back over $14.30 to change my mind.
Crypto (14%)
One more swing high is possible from here, but that should be it. Then we have a very full pattern, which should lead to a deep retrace that holds the lows, at minimum. The next deep pullback should set up the buying opportunity we have been waiting for. Late March and late April will be the time cycles to monitor for Bitcoin.
