Last week, we stated that our primary count suggests that we have completed or are about to complete a 3rd wave down within a 5-wave structure, known as a C-wave. This week, the count has not changed; it is still valid and still in play.
As part of the 5-wave structure, we stated, “this will give way to a 4th wave corrective bounce,” which I believe we are in right now.
The below chart outlines this plan in blue. Regarding the corrective bounce, went on to say that “the structure of the upcoming bounce will be crucial for providing further clues as to the on-going direction of the market. If the correction is overlapping and symmetrical, it will support the 4th wave thesis.
I’m expecting this to find resistance around the 2500-2600 before topping out. However, if we see heavy volume and a structure that is impulsive – i.e., 5-wave patterns – then it will support the thesis of a potential bottom. I want to see the 2750 level taken back before I will believe the bulls are in control.”
So far, the market has met resistance and appears to be topping out exactly where we suggested it would – between 2500 – 2600.
As of now, my plan has not changed. I expect us the retest the lows and to slightly make newer lows. In the coming days/weeks, I will look for entries in this bear market between the 2250 – 2060 region.
Why I’m Cautious
That being said, I do want discuss why I’m hesitant to dive into equities this last week. One reason is that the 1800 range in SPX is still in play. It is represented by the red box, and would be an extended 5th wave drawdown. If the market breaks the 2065/2050 region with force, it becomes probable that we see this target.
If this count comes into play, the idea of a quick recession, which can see us at new highs by the year end becomes unlikely. Instead, the signals would indicate the potential for a more prolonged recession. As an investor, with this potential on the table, I am remaining cautious with my excess cash, until proven otherwise.
On the other hand, if we do bottom within the blue target range, which I am still expecting, I believe we could see the final 5th wave off the 2009 lows, which I have been talking about in many prior market updates. The target for this will be a multi-year bull market could take us beyond the initial 4000 target before we encounter a prolonged bear market. This is based on Elliott Wave theory, which I use to remove emotions from major market moves and to set up game plans.
On a fundamental level, if we see the economy open back up sooner rather than later and a potential vaccine or antiviral helps reduce spread, then we will likely see a sharp reversal in equities. Also, it can’t be overstated the record levels of liquidity dumped into the market by the Fed, which with improved sentiment and economic numbers, could create the environment for this renewed bull scenario to play out. This is also why I am hesitant to speculate on a bottom. If this plays out, the multi-year bull market, fueled by excess liquidity will more than make up for being late rather than early.
Further evidence we are in a 4th wave:
Fourth waves are notorious for complex and confusing structures. The structure of what the 4th wave is presenting us is not different. It can be counted as a 5-waves up pattern off the low, which is typically bullish. However, at a closer look, it appears to be a more symmetrical, complex A,B,C pattern. Because of this ambiguity, I tend to turn towards other clues that can help verify our thesis.
Negative RSI Reversal
The negative RSI reversal pattern is when the price is making a lower high, as represented by the red arrow on the chart, and the RSI (and/or MACD) is making a higher high, as represented by the green arrows on the chart.
We clearly have this pattern playing on the daily chart. It suggests that the momentum under the price is fading. In other words, it is taking more buying pressure to make lower highs. This is not a good sign, and suggests a reversal is soon to occur.
Volume Patterns
Price can rise on weak volume, but in a true bottom and reversal, it is usually met with massive buying pressure, which shows up in very large volume spikes.
This volume, typical increases its trend as the uptrend returns. This is not what we are seeing today. In fact, the volume trend is decreasing and the only daily volume spikes are red.
Volatility
The above chart compares the S&P 500, in blue, to the rolling 20-day realized volatility, in yellow, and the VIX, in orange. The VIX measures the implied or expected volatility in the S&P 500 over the next 30 days. When it is high, it means that based on the options market, there is an expectation for elevated levels of movement (up or down) over the next 30 days.
Realized Volatility is a topic in and of itself; however, in essence, it’s the actual measurement of historical volatility over a given time period. I used the 20-day measurement to provide us with a visible trend.
You’ll notice that the realized volatility peaks after the market bottoms whenever volatility hits. It then rolls into a recovery. Now, look at where we are. We have yet to suggest a peak, let alone a roll. Nearly every time, when the market has bottomed, we’d see this measurement already rolling.
The VIX is also at an extremely high reading. Anything above 30 has historically been considered high, and a warning to investors. Above 50 is typically considered extreme, and suggests speculation for anyone trying to initiate long term buy and hold positions.
Today we are above 60, and in an uncanny fashion, have stayed above 50 for one of the longest periods on record. This is not normal, and until the VIX can begin to settle at lower levels, it is unlikely that we find a meaningful bottom.
Bear Market Rallies
On Tuesday, the Dow gained 11.5% in a single day from extremely oversold conditions. This move was followed by two additional days of gains, inciting the FOMO crowd to think the bottom was in. The financial news media fanned this feeling by announcing that this was the fourth largest single day percentage gain in the Dow’s history.
What they failed to mention was the context in which the greatest single percentages occur:
The chart shows the greatest single day moves going back to the 20s. The one thing they all have in common is they occurred within major downtrends in a bear market. A week prior, Marketwatch put out an article that outlined the number of > 5% rallies and > 10% rallies within the past bear markets, like in 1973 and 2008, as well as deep corrections, like 2012 and 2016.
The results are shocking. Large swings are common when both realized and implied volatility are high. However, until the market breaks its bear market downtrend, coupled with additional indicators, these moves should be treated like small gains in a larger downward trend.
Our Goal
We believe that the best gains come from holding great companies involved in significant tech trends for an extended period. One of the benefits of deep and thorough knowledge about these trends and companies is that the analysis allows you to hold these companies for the long-term with conviction.
This conviction is the key ingredient, and one of the greatest values we believe this service offers. Most tech stocks are volatile, and can have multiple +50% drawdowns on the long road to becoming multi-baggers. We use technical analysis to simply manage this risk and seek out favorable entries.
Please keep in mind that with the right price, our plan is to hold without stops, hedge and add in weakness, and only sell when the story changes. We are excited about the prices we are starting to see, and are looking to make long-term allocations in this market when one of two things occurs:
(1) Prices get so low that we are OK with any remaining downside in the bear market. The targets that I outlined focus on these prices. In bear markets, we get a flush of sentiment and a rejection of hope that stocks will ever recover again.
Anyone who invested during the 2002 and 2009 bottom knows the feeling. This simply has not happened, which means that either this bear market is an anomaly, and new highs are in our near future, or that we have more of volatility in our future that will ultimately flush out the remaining sentiment.
(2) The economy corrects, providing encouraging data that a real expansion can occur. In this case, the bull market will be in its infancy and prices will be higher than they are at the bottom; however, there will be an element of safety with higher probabilities that the market will continue to grow with a new expansion of the business cycle.
It can’t be stated enough that bull markets create wealth, not bear markets. The primary focus of most legendary money managers is to conserve assets. It is much more difficult to rebuild than it is to preserve and deploy into safety. In other words, losses work geometrically against you. For example, and asset that goes down 50% will require a 100% gain to break even. If an asset goes down 80%, it requires a 400% gain to break even. We posted about this on the forum in regards to Boeing.
The advantage of protecting gains is why we spoke regularly about how our focus was to ride the remaining momentum of the bull market with reasonable stops to protect us from the downside. If you followed our stops and entries that we outlined in real time on the forum, as well as on the market updates, you should be sitting on nice gains and minimal losses.
We take our subscribers and your readership very seriously, and lean towards being conservative instead of reckless. Hence, the S&P 500 levels we are watching tend to be in the middle rather than within an extreme on either side.
Amazon, Facebook, and Google experienced multiple large drawdowns and required both conviction and risk management. This is what we hope to impart through our own strategies of using stops and proper position sizing. We do believe that we are in an environment that has the potential to offer us fantastic values for leaders in the next tech cycle.
Stock Updates
Nvidia (NVDA)
Nvidia, unlike many of the tech names we cover, does not appear to be in a fourth wave correction. It appears to be in a larger degree A,B,C structure. This is supported by the structure of the decline as well as the symmetry.
On the B-wave, noted in pink, the (a) wave is the same length as the (c) wave. While price is struggling to break out at this key level, the internals are weakening, suggesting another leg down.
The yellow band is the primary support in play. Below this level, and we could see a rather large suck out. With that said, I’ve raised my target to the lower end of the yellow band at $173.
Roku (ROKU)
Stepping back from Roku, it is clearly trading as a large degree ending diagonal – five sets of 3-wave patterns within a trend channel. When Roku hit its low, it tagged the lower end of the channel, which is enough to meet the 3-wave move down. This makes up the 4th wave in this pattern.
This means that we will either get a spill over on the next retest, of we are setting up for a 5-wave impulse into the final 5th wave pattern. The internals and volume are weak, which supports a retest. Regardless, I’ve raised my target to $70, which will account for both scenarios. We will likely add in increments in case Roku breaks down out of this pattern prematurely.
Shopify (SHOP)
I’ve also raised my target for Shopify to $285. Shopify, like Nvidia, is trading in a larger degree A,B,C pattern, which will put us in the early C-wave down.
These moves are typically symmetrical, which would target the $245 region. However, I can’t rule out that the retest of the lows may hold, which would set us up for a 5-wave move to new highs. For this reason, I’ve raised the upper range of the price target to $285. Like with Roku, we will likely layer slowly into a new position at these levels
Slack (WORK)
Slack is also in a corrective pattern. I believe it’s in an A,B,C pattern and not its final 4th wave down. This means, like with Nvidia and Shopify, we should see a C-wave down into the green target box. The volume and internals are suggesting the same. We’ve raised our target to the $17 range, and will look to add to our position around these levels.
Uber (UBER)
We closed our short on Uber for a nice gain last week, as stated. It has rallied on weak volume and weak internal momentum, which is suggesting another bout of price fatigue.
There are two scenarios at play: (1) we are in a fourth wave, which will take us back to the lows; (2) we are in an A,B,C pattern. In which case, we completed the A wave, and are in the process of topping out in the B-wave. If this is correct, the C-wave is projected to take us beyond the recent lows.
Above $35 should be a stop for anyone who wants to speculate another round of weakness for Uber. We announced on the forum that we purchased puts in both Uber and Lyft on this strength, which are dated through May.