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 Technical Analysis

Price Analysis

When you funnel the global community of investor into a quantifiable arena, like the stock market, interesting and repeatable patterns emerge. These patterns are the basis of technical analysis, and are used by analysts to predict market trends and establish risk parameters. The discipline of Elliott Wave analysis is simply an in depth study of these repeatable patterns, which provides the best context to market behavior that I know of.

For those new to this analysis, I have written up a detailed introduction here. The fundamental idea is that markets move up in a 5 wave pattern, and once this 5 waves pattern completes, we then see a 3 wave retrace/correction, which will make a higher low. This simple movement is not only happening on all time frames, and in all markets where people interact to find price discovery, but it is fractal. So, a small 5 wave pattern develops into a larger one, which then develops into a larger one, and so on. 

Because of the fractal nature within market patterns, we are able to fit the entirety of price information into a cohesive pattern. This means that the price action from the 1929 top, and 1933 bottom has an effect on the current 2024 price action. The below chart is the entirety of the Dow Jones Industrial Average’s price information, which is organized into an on-going Elliott Wave pattern.

The reason that I am providing this chart today is because I want our readers to understand the larger backdrop of the current market. Within this context, the 1929 top to the 1933 bottom, was a very large degree 2nd wave. What followed has been a 3rd wave within the same large degree time frame. When you analyze the internal wave structure, it appears that we are coming to the end of this large degree 3rd wave, which is suggesting the start of a secular bear market. This secular bear market would constitute the large degree 4th wave.

Furthermore, what this pattern is telling us is that the secular bull market that started in 2009 has actually been the 5th wave of this very large degree 3rd wave pattern. The below chart outlines this 5th wave, and organizes it into a its own 5 wave pattern.

We can further dissect this analysis and focus our attention deeper. According to the wave pattern above, the COVID low started the final 5 wave pattern within the larger 5 wave pattern above. As stated prior, these patterns are fractal, which allows us to organize each move into a cohesive pattern.

The below chart focuses on the smaller 5 wave pattern that started at the COVID low. With the above information in mind, we are able to have the proper context when trying to understand the current market. As of now, I have 2 potential scenarios on how to understand the final push in the secular bull market that started in 2009.

Blue – This count has the 2022 bear market as a 4th wave within a larger uptrend. What this means is that the 2023 bull market is the final 5th wave, which is taking the shape of an ending diagonal (I discussed this pattern in last month’s report here). This is an overlapping 5 wave pattern that is characterized by large swings in both directions. It is very common to show up as a 5th wave. Considering that the pattern is almost complete, if not already, the risk within this market is greater than many believe.

Red – This count is based on the secular bull market ending on January 2022. What this means is that 2022 was the A wave of this new secular bear market, while 2023 was the B wave bounce. In other words, 2023 to now is a cyclical bull market within a secular bear market. If accurate, the next larger drop will take the shape of a vertical 5 wave pattern pointing down. This 5 wave pattern would retrace the entirety of cyclical bull market that started in October of 2022.

If we zoom in on the ending diagonal pattern that started in October 2022, we can get an idea of how much farther this market can stretch. We are currently in the toping zone between 5145 – 5345. As long as we hold 5090 SPX, we can keep pushing higher. Below 5090 will be the first warning to the bulls. A break below 5050 and then 4945 SPX will confirm that a larger top is in.

Once a top is in place, we can then get a better idea of whether the red or blue count is in play. The red count will be a large degree C wave, which always takes the shape of a 5 wave pattern. It would be a more direct path to our final downside targets. The blue count would be less of a direct path, which would have large bounces followed by breakdowns to new lows. It would be messier, and characterized by a multi-month rangebound market.

In conclusion, if we are entering a secular bear market, this does not mean we should leave the markets. It simply means that we will have a period line 2000 – 2013 where the market goes sideways. These sideways periods have bear markets that are punctuated with multi-year bull markets. It is a period where buy and hold tends to struggle, and where a more active approach with a risk management focus could potentially navigate it profitably.

Supporting Markets

No one doubts that tech has been leading this uptrend higher. Since bottoming on October 13th 2022, the S&P 500 is up just over 40%. During the same time frame, small caps are up only 20%, while the tech heavy NASDAQ-100 is up over 70%, and The PHLX Semiconductor Index is up over 115%.

The consensus belief is that tech is leading the weaker markets, like small caps, higher. If true, then buying these weak markets appears to be a winning strategy, as they have a long way to go in order to final catch up with the market leaders.

However, when we view these markets through the lens of technical analysis, I believe that the stronger markets, like tech, are the ones playing catch-up, while the weaker ones, like small caps, are leading the larger trend. That being said, there are two types of markets – the ones that have topped, and the ones that are close to topping.

Small Caps

The Russell 2000 (IWM) is the most obvious pattern to track. From the 2009 low, we have a very clean 5 wave pattern into the 2021 top. Note how small caps have been trending sideways since the 2022 low, and they are substantially below their 2021 top. This looks like a large degree correction that has one more large leg pointing down before completing. 

When we zoom into this sideways pattern, it appears to be tracing a B wave bounce within a larger decline.  The key is the final move of the larger (B) wave being a 5 wave push higher. Note how we have a clear 5 wave pattern that tagged our $210 target (below). 

Further, the 5th wave is taking the shape of a clear ending diagonal pattern on decelerating momentum. If the next larger drop is a direct 5 wave move, then we have confirmation that we are setting up for a push below the 2022 lows.

There are several markets that resemble the small cap index above. In other words, they have been trending up from the 2022 lows in an overlapping pattern that resembles a bounce within a larger correction. The key is that these markets have trended sideways to up and are well below their 2021/2022 highs. Here are a few examples:

Consumer Discretionary (XLY)

Retail Sales (XRT)

Financials (XLF)

The 2nd type of market is the one that is still in their secular bull market. In other words, while the above markets ended their bull market in 2021/2022, the bellow leaders are completing their final 5th wave of the secular bull market. 

Technology (XLK)

The tech sector has the 2022 bear market as a 4th wave drop within a larger uptrend. This larger uptrend is coming to an end soon. Note now clear the 5 wave pattern is off the 2022 low. This 5 wave pattern is mature and full, as we push slightly higher on less momentum.

Industrials (XLI)

Interestingly, Industrials appears to be completing a large 3 wave push to new highs. This appears to be within the context of a large degree ending diagonal pattern.

Home Builders (XHB)

This market looks a lot like the S&P 500. It is completing an ending diagonal pattern for wave 5. Once complete, this should end the secular bull market for home builders.

In conclusion, from a basic understanding of technical analysis, one can see tech leading, with industrials and home builders breaking out to all-time highs and conclude that the weak markets will follow. This is simply not the type of market behavior we see going into a recession. Further, we are in a roaring bull market that seems to have no end, so it’s no wonder we see investors touting these weaker markets, like small caps, as the ones that will start playing catch-up.

However, within the context of Elliott Wave, these breakouts to new highs appear to be in the form of 5th waves, which are close to ending. What this means is that the weaker markets topped first in 2021/2022, while the stronger markets are the ones playing catch-up. This is also why there is such a bifurcation amongst analysts trying to put a cohesive narrative to this strange market behavior.

Divergences

When markets are moving in unison, you have a strong trend. However, when markets start diverging, we tend to see this behavior at the end of the trend. This is what is happening now. 

There is no question that big tech has been the market leaders throughout the entirety of this bull market that started in 2022. This is evident by the name given to these leaders – the “Magnificent 7.” However, what we are now seeing is that these market leaders, which were once moving in unison, are now starting to fall like dominoes.

First, Tesla topped in July of 2023, followed by Apple in December of 2023. We then saw Google top in late January of this year, followed by Microsoft in mid-February. What was once the Magnificent 7 is now the Magnificent 3, as the majority of past market leaders are now in a notable downtrends.

One could easily claim that we don’t need these stocks to move higher, obviously. However, when prior market leaders start to fall, more times than not, they are signaling exhaustion in the broader trend. What makes this instance so notable is the extreme weightings that these 4 stocks take up in the S&P 500. Together, they account for ~17% of index weighting. This is a large weight around the broad market, which should not be ignored.

Regional Banks are also diverging with the larger banks. These markets historically move together, and when they start separating, something isn’t right. Regional banks have made a series of lower highs while the bigger banks have gone to test all-time highs. One of these markets is leading, and until regional banks start making new highs, I do not trust this move higher with the big banks. 

The transportation sector is also signal a similar warning. The Dow Jones Transportation index is comprised of standard transportation stocks, while the iShares index has the same stocks, except with a higher weighting in the tech focused transportation stocks, like UBER and LYFT. Like the banks above, these two markets tend to move in unison. This is not the case today, as we see a sizable divergence that is not healthy.

The most notable divergence is between long-dated bonds (TLT) and the equities. Bonds tend to top/bottom long before equities get the message. Today, TLT is making a series of lower highs, while equities continue to power higher. The bond market is simply not buying this move higher, which is typically a harbinger for equity volatility.

Time Analysis

Elliott Wave analysis can tell you when a trend is coming to an end. It can also provide levels that must hold or break in order to confirm a pattern will extend or a counter pattern is emerging. Gann analysis provides you with time analysis. Markets move in cycles, and these cycles tend to create inflection points. More times than not, these inflection points mark trend reversals, and on occasions they mark large breakout/breakdown moves. I went through the Elliott Wave analysis for some key markets above, this section will look at the time analysis. Together, they are signaling caution.

Russell 2000 (IWM)

We discussed the concerning price analysis above. This market appears to have reached our target in a fully developed 5 wave pattern. This 5 wave pattern, I believe, is the final swing in a large corrective bounce that started in 2022 and is part of a larger bear market.

When we add the time analysis, we can see another layer of risk. The below chart tracks 3 cycles that have an effect on the price of IWM. Note how price tends to reverse its trend when it moves into one of these cycles. The most important piece of information regarding this cycle analysis is how price is moving into them. As of now, IWM’s price is moving up into all 3 of these cycles clustering right now.

Furthermore, when we place a Gann Fan at the 2018 low, note how the following price patterns reacted to these angles. Today, price is hitting against the most important angle in red. This is the 45 degree angle, and we tend to see strong reversals at this angle.

So, we have a significant confluence of price and time, which in Gann’s world tends to mark a meaningful trend reversal. When we factor this information in with the Elliott Wave analysis showing that we are in an ending diagonal pattern in the final 5th wave, it warrants caution.

Dow Jones Industrial Average (DJI)

I’ve discussed the Dow’s price pattern in several prior reports. No matter how you count this, the uptrend pattern off the 2022 low is setting up for a large pullback. The below chart shows various long-term cycles that have had an effect on DJI’s price movements. Note how we are seeing a cluster of these cycles show up now. When cycles cluster, it tends to mark a meaningful inflection point. For example, the last time these cycles clustered was around the 2020 top.

The NASDAQ-100

This index looks very similar to XLK above. It is completing a large degree 5 wave pattern off the 2022 low, and setting up for some type of trend reversal. Furthermore, it is trending up into a cluster of long-term cycles and hitting the 45 degree angle from the 2018 high. Much like other key markets, there is a confluence of price and time, which tends to mark trend reversals.

In conclusion, we are seeing several key markets trending up into a cluster of key cycles. Many of these markets are also hitting important angles from key inflection points in the past. These angles, along with the cycles tend to mark meaningful trend reversals. When we factor in price analysis, we can see that these same markets are in the final moves of very mature uptrend patterns. Price and time are coming together right now in a way that warrants caution until we see a resolution. If the market instead ignores these angles and cycles, it will be a show of strength that we will factor into our portfolio management. 

What If We Are Wrong?

I’ve laid out a strong position for an imminent market reversal. Both time and price seem to be suggesting this is the case amongst multiple key markets. However, all positions must have a point at which they are scraped and a pivot has to happen. Since our inception there have been a handful of pivots we have had to make, once a thesis appears to not be playing out. That being said, my alternative count is below. We would need to see SPX hold 4775 on the coming pullback, followed by a direct, 5 wave push to new highs.

Further, the divergences that I discussed prior would need to resolve. We would need to see all sectors in the S&P 500, along with the lagging FAANGs, resume their uptrend and make new highs. If this happens, you ‘ll will see us layer back into the market for the resumption of the larger bull market as we. Extend this bull cycle into 2025. I find this hard to believe, as most markets, like IWM, simply do not have an alternative interpretation that lines up with the above chart. However, we are prepared to pivot if this analysis is proven wrong. 

I/O Fund Portfolio

Because of the warnings stated above, the I/O Fund has taken a barbell approach to our portfolio in 2024. On one end, we are maintaining a defensive posture within our portfolio by holding a sizable cash position. On the other end, we are highly concentrated in market leaders such as NVDA, AMD, and Crypto. This strategy has worked out well for us this year, so far, as we continue to show relative outperformance while also being prepared for a sizable trend reversal.

Regarding our risk management, we have been very clear with the risks we see in this market. As a result, we have gone from being 85% net long in early November 2023 to 30% net long today. We are currently 35% hedged and waiting for our hedge signal to tell us when to go 100% hedged, and thus move toward being market neutral.

The below pie chart is the percentage allocation of our invested assets, not including cash.

Hedge Signal

The below is an update from Vincent Duchaine of WealthUmbrella, who created the hedge signal that we currently use.

Since the start of this year, market breadth has been considerably deteriorating. While some stocks continued their parabolic move higher, several stocks, including high beta stocks have declined considerably since their peak at the end of December 2023. Tesla is probably the most well-known example, being approximately down 35% from its July 2023 peak.

Market breadth is one of the primary components of the hedge signal. The on-going deceleration in market breadth has led to this component rising above the zero line for the third time since the beginning of this year.

This may seem insignificant, but just having a signal above 0 is something we typically do not see in strong uptrends. For example, during the bull market between June 2020 to December 2021, the signal stayed below 0 the entire run, and only rose above zero at the end of that bull market, just before the start of 2022.

Moreover, when the breadth component of the hedge signal rises above the zero line while the market continues to push higher, or even goes sideways, it has a high correlation with abrupt corrections. Though breadth is moving closer to a sell signal within the hedge, it is still in buy, for now. 

Another way we could see the hedge signal trigger a sell would be if the VIX rises drastically and enters full backwardation. Some components of the VIX ribbons are already in backwardation, so this scenario is a reasonable assumption to track.

 The other component of the signal that could trigger a sell is the options market. This component is less likely to trigger a sell, considering how the market has continued to defy gravity for so long now. This behavior is filtering into sentiment within the options flow.  I think the option market is as confused as everyone else, so it will likely not lead to a sell signal.

Regardless, one interesting aspect of the current state of options dynamics is in the SKEW. The SKEW printed a record high a few weeks ago. This is highly correlated with a more a pronounced drop in equities and something we are tracking closely.

Furthermore, with our proprietary market risk indicator comfortably in the red, we believe a more cautious stance in warranted.

Nvidia (NVDA)

Nvidia has either topped, or will see one more swing to, at least, the $1025 level. Price is in a wedge pattern and how it breaks will likely be the deciding factor. If we do break lower, the odds will favor a top. However, as long as it holds above $785, and then breaks above $915, we could see a new pattern develop that can take us higher in an extended 5th wave. Below $785 and the top is in for NVDA.

Advanced Micro Devices (AMD)

AMD appears to be at odds with NVDA and the rest of the market. The count below is what makes the most sense from the price action; however, it is suggesting a much larger uptrend is underway. I could see something like this happen as the broad market stays within a 5 – 12% range for the remainder of the year. As many stocks and markets make lower highs, AMD will go on to make higher highs, and thus complete the above pattern. I’m willing to hold onto this count as long as any weakness holds $159. Below this level and larger uptrend fails.

Another point of concern, AMD is now below $191. There was substantial institutional activity at this price level. For AMD to move higher, this level has to get reclaimed. We simply do not see block sales of this caliber and price continuing in a 3rd wave. So, as long as we stay below $191, we remain cautious.

Bitcoin (BTCUSD)

There is no reason to doubt the above uptrend pattern in play as long as critical support holds on any weakness. The higher Bitcoin goes, the higher this critical support is raised. Today, the level that must hold in $42,500. 

We are do for a pullback, which would be wave 4 of 3. These targets are around $57,000 – $48,000. Remember, $57,000 was strong resistance, and it is now strong support. If we get back to this price, we will likely add. However, we are in a 3rd wave; one we have accumulated for going back to late last year. Third waves tend to be marked with shallow pullbacks that leave investors behind. So, if we continue to see a push over $70,000, the odds will start shifting that the low is in for this drop.

Netflix (NFLX)

Note the bearish engulfing candle from last Friday. Netflix started the day green and then ended the day deep in the red. This happened on heavy volume, and it is what is called a key reversal candle. In other words, the type of candle that tends to happen close to a trend reversal. Netflix is completing the 5th wave of a larger 5th wave, so any additional upside should be limited from here. Below $544 and the top is in.

Ethereum (ETHUSD)

Ethereum is setting up for a bounce. Look at how deep the composite index went on this drop. This is typically where bounces occur. I’m expecting a b wave and final leg lower, but we may not get that if the next bounce is a 5 wave move higher. If this happens, it suggests the low is in for this drop.

Ethereum’s uptrend should continue higher as long as any weakness holds $2990. Below this level and my old red count will get reintroduced. As always, and especially within crypto, it’s best to not get married to a count and to be prepared to bail if a support region gets broken. As of now, this is not the case, so we will keep looking up. 

Super Micro (SMCI)

The 1st, 2nd and 3rd largest trade in SMCI’s history came within 72 hours of each other, and around the $1065 price level. We are significantly below this level, which implies institutional selling.  The next meaningful support levels are $865 and then $775. Below these levels and the odds build that the top is in. We have taken significant gains in this stock. In fact, we’ve sold about 12%, while only adding 6% at much lower levels. So, we have taken our cost basis off the table, plus ~100% gain. If we do see any further strength, we will continue to sell this position.

Crowdstrike (CRWD)

CRWD looks to have topped in a 3rd wave. The last push to new highs was in a 3 wave pattern, which looks like a B wave. This means the correction is an expanded flat, and the C wave should be quite sharp. I’m targeting around $265 for the 4th wave decline. If we break above the recent high, we can extend the 3rd wave, but eventually, and sooner rather than later, the 4th wave will have to happen.

Chainlink (LINKUSD)

Though it may appear that we are getting a 5 wave drop from the high, this drop appears to be part of an expanded flat correction. If so, this should be the A wave, followed by a 3 wave bounce for b and then another 5 wave drop pointing toward the $12 range.

Below is the count that makes the most sense from the price action. Note how we have 3 waves down, then 3 waves up to new highs. This is most likely the A and B of the expanded flat. If this plays out as expected, look for a 3-5% buy in our target zone.

Micron (MU) 

The move over $102 has forced me to rethink the potential counts in play. Since we are getting a gap over $102, then we should be heading to $154 in a larger 5th wave push. This breakout has to hold $102 or we could see a reversal. However, after that report, I find that to be unlikely.

Solana (SOLUSD)

Solana is in a 3rd wave. The 4th wave should take us back to the $137 – $85 range before turning back up for the 5th wave higher. If this drop from the high is a 5 wave move down, we will likely sell half of our gains on the bounce. Unfortunately, because we are dealing with such a large pattern, the critical support is below $85, for now. So, we will have to rely on the structure of the drop – 5 waves down will be an early warning sign. 

Cloudflare (NET)

I still hold to NET being in a very complex B wave. The final C wave of this B wave is a 5 wave push higher, and the final move in this corrective bounce. Either we topped with a break below $90, or we can hold $90 and see one more push towards $145.

Microsoft (MSFT)

MSFT broke the February 13th high for a day, before falling back. The push higher appears to be a 5 wave pattern. It’s hard to believe, but this 5 wave pattern is wave 5 of 5 of 5 of 5 of 5, going all the way back to 2009. Below $397 and the top is in. 

Resources:

• Q&A Webinar Replay – March 21, 2024
• Positions Report – February, 2024
• I/O Fund Crypto – Updated Technical Analysis
• Positions Report – January 2024

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. 

The Big Picture

If we look at the secular bull market that started in 2009, we have a clear 5 wave pattern that has taken more than ten years to mature.  There are currently three interpretations of how this pattern can be interpreted, which can give us clues on what the next move will be.

• Red  – This count has wave 1 ending in April of 2010, followed by a relatively quick and shallow 2nd wave. One of the guidelines in Elliott Wave Theory is that when wave 2 (or 4) is quick and shallow, expect wave 4 (or 2) to be complex and deep. This is known as the Rule of Alteration, which states that the two corrective moves in a 5 wave pattern will be different and non-matching in both size and complexity.

That being said, wave 4 started in late 2018 and ended at the COVID low, ending one of the toughest corrective periods in nearly a decade. This was followed by the final 5th wave into the January 2022 top.

What has followed has been a secular bear market where 2022 was the (A) wave. This was followed by a cyclical bull market, which is the (B) wave. What will follow this move higher will be the (C) wave, which should retrace all of 2023.

• Blue – This interpretation of the secular bull market is identical to the red count above, except in one specific way – we are still in the secular bull market. Instead of the final 5th wave of the secular bull market ending in January 2022, it is still developing.
• Green – This interpretation of the secular bull market has the 2022 top as the end of the large 3rd wave. This means that 2022 was the end of the large 4th wave, and we are building up for a vertical move higher, which would be the halfway point of the final 5th wave.

I find this count to be a low probability. Until SPX breaks above 5050 in a vertical fashion, I am not taking this count seriously.

Now that we have the aerial view in place, all that matters is how this final move in 2024 is being interpreted, and what levels/patterns can tell us what count is in play. So, if we focus only on the final 5th wave of the secular bear market, you can see specifically where the 3 counts diverge.

The red count has been my primary for some time. It states that we are in the (B) wave of a secular bear market. This should be followed by a large degree (C) wave that would retrace all of 2023.

My concerns with this count is that the (B) wave appears to be a 5 wave move. It can be counted as a complex corrective pattern (WXYZ); however, these patterns are rare on such a large time scale. Also, the (B) wave is now longer than the length of the (A) wave, which is also rare to see.

The blue count asserts that 2022 was a very deep and complex 4th wave, which followed a very shallow and simple 2nd wave in June of 2020. Though this interpretation is seemingly extreme, considering the length and depth of the 4th wave in 2022, what makes me seriously consider it is the pattern that 2023 has taken. It is a textbook diagonal pattern, which only shows up as either the 1st wave (leading diagonal) or the 5th wave (ending diagonal).

The rules that define an ending diagonals pattern are as follows: 

• It is a 5 wave move.
• The 4th wave is very deep, and tends to go into 1st wave territory.
• Each of the 5 waves is made up of smaller 3 wave patterns.

Image by FBS

Now, compare this template to what has unfolded in 2023 – 2024.

It is difficult to interpret this pattern in any other way. And, for this reason, I have been considering the blue count much more seriously.

I have struggled with the blue count because it seemed forced. In order to make it work, you would have to force the 2nd wave to be the June dip in 2020, when the first obvious correction was in September of 2020. Furthermore, it would require one to make the bear market of 2022 a small degree dip in a larger uptrend, which also seemed forced.

Neither of these qualms breaks any rules, it is simply rare to see the them in play on such a large degree. However, the obvious diagonal pattern began unfolding in late 2022 has me willing to look past this.

In conclusion, the red or blue counts best fit the price data going back to 2009. They both require one to accept rare occurrences, which spells out the complexity of the 2022 – 2023 market patterns. However, what they both have in common is what is important – heightened volatility should return soon, and be the norm for the next year or more.

How these two differ is also worth noting. The C wave in a correction is usually considered the crash. Waves A and B are the setup. So, if the red count is in play, I would expect 2024 – early 2025 to be the C wave crash. We will know this because the C wave will be a 5 wave pattern pointing down.

The blue count would be the (A) wave, which would be a 3 wave pattern pointing down. If this is the case, we should see a deep retrace in 2024, followed by a notable (B) wave bounce into 2025. This would put the start of the (C) wave crash into mid-late 2025.

Supporting Markets

There is always a market leading the one you are tracking. For example, the Canadian TSX tends to lead the US, while the German DAX tends to lead the Canadian TSX. For this reason, we track a multitude of markets that seemingly has no relationship to tech. However, they do when you see that all markets are interconnected, and some can provide clues to where our markets are heading.

NASDAQ-100 (NDX)

When we focus on the NDX chart, we can see a very mature pattern – 5 clean and full waves off the October 2022 low. Price is currently at our long-term target, and warning zones around 17735 – 18000 while providing another warning with internal momentum of this move higher. Note how the composite index has given us 3 lower highs while price made 3 higher highs. Now, look at how the final lower high in the Composite Index is below the moving averages. This tends to mark local highs, at minimum.

The best case scenario that I have for the larger pattern in NDX is that we are actually completing the 3rd wave, not the 5th. This would mean that we should see an 8 – 14% drop with one final swing higher into year-end.

In order to get an idea of what count might be in play, it will serve us to look into the leading constituents of the NASDAQ-100. This takes us into the FAANGs plus MSFT and NVDA, which have been deamed the “magnificent 7.”

Microsoft, Apple, Nvidia, Amazon, Google, Meta, Tesla collectively account for over 29% of the total weighting of the S&P 500 and 40% of the NASDAQ-100’s total weighting. Because of this rare concentration into only a handful of stocks, we can see important companies in other sectors continue lower while the broad market pushes higher. So, the health of these Big Tech stocks is crucial for a continued uptrend within the broader market.

Microsoft 

Microsoft is completing a very large 3rd wave, which started at the 2009 low. The halfway point of this move higher takes us right into the $415 region, which is where MSFT is currently stalling. If this count is accurate, then the coming volatility will take us back into the $310 – $190 region, which will set up a generational buying opportunity for the large degree 5th wave to follow.  Note how momentum and volume are both trending lower as price trends higher. This is classic 5th wave behavior, and supports the above thesis.

If we zoom into the final 5th wave higher that started at the 2022 low (bellow), we can see a very mature 5 wave pattern that has formed. Also, the final 5th wave of this larger 5th wave is complete, while momentum and volume continue to fade.

What I find interesting is that the midpoint of the final 5th wave move higher takes you exactly to $415. MSFT remains one of the cleanest patterns that I track, and it appears that we have a fully formed 5th wave of a 5th wave of a 5th wave. This is concerning, and tilts the balance of risk to the downside from these levels.

Apple (AAPL)

Apple’s monthly chart looks a lot like MSFT above. We have a completed 5 wave pattern that started in 2016. We pushed higher off the 2022 low with less momentum and less volume than prior swings, which further supports this being a 5th wave. The midpoint of this move is pointing to $197 – $200, which is where AAPL is stalling.

If we zoom into the final 5th wave of this large pattern, we can also see some interesting confluences. First off, we do have a full 5 wave pattern in place, which means any extension higher would be short lived. The mid-point of this 5 wave move also targets the $197 – $200 region, which further support the risk right here on the long-side of this market.

It’s worth noting that Apple has not broken above its December 2023 high. The rest of the market has moved higher without Apple. Considering that this has not happened since the new bull market started in 2022, and that it accounts for such a large portion of the major indexes, this is a warning. Apple has to reclaim $200 and hold this breakout for the market to see a sustained move higher from here.

Nvidia (NVDA)

The pattern is a clear 5 wave move that started in October of 2022, with the large gap in 2023 being the midpoint of this move. That puts us in the final 5th wave, which needs a smaller 4th wave drop and 5th wave swing to new highs in order to complete. Nvidia looks like it can push higher.

Amazon (AMZN)

We’ve been spot on with AMZN since August of 2023. It was one of the reasons we were heavy buyers in the fall correction last year, because it was an incomplete 5 wave pattern. Our target was $153 and we have stretched above this price point, while completing a full 5 wave move off the low.

I’m counting this 5 wave move as the C wave in a larger (B) wave. We should see a 5 wave drop form on the next larger correction to confirm this thesis. However, until it reverses, AMZN is still helping the broader market remain elevated.

Meta (META)

META has been one of the strongest FAANGs, as it continues to push higher. Like NVDA it is in the final 5th wave of a very large 5 wave pattern off the November 2022 low. Also like Nvidia, it still needs a 4th and then 5th wave higher to complete the larger pattern. META appears to have higher to go.

Google (GOOGL)

Google best counts as needing one more swing high to complete the 5th wave pattern. The gap down from its last earnings has put GOOGL back around it December 2023 high, with little buying interest since. Unlike NVDA, META, AMZN, and MSFT, it is not contributing to any further upside in the broad markets. A move below $135 will put the top in for GOOGL and take the final swing higher off the table.

Tesla (TSLA)

Tesla has been a large drag on the NASDAQ-100, as it has confirmed the large head and shoulders pattern due to the prior gap down after earnings. It continues to break key support zones and has increased the odds for a move back to $100. In order to confirm a bottom, of sorts, we need to see a move back above $220. 

In conclusion, the magnificent 7 in 2023 is turning into the magnificent 4 in 2024. With Apple, Google, and Tesla either well below their December 2023 high, or just above it, these names have not helped the broader markets push higher since. This is a divergence that is concerning to see, considering the importance of these stocks in the current environment.

Russell 2000 (IWM)

Small Caps stirred up a lot of excitement as they led the broader markets higher from the November 2023 low. However, since the December top, they have been lagging substantially. In fact, IWM is currently about 7% below its December high, while the NASDAQ-100 is about 7% above its December high.

Considering small caps are a risk-on play, this is not the type of divergence you want to see. At best, I can see IWM making a 5th wave push into the $210 region. However, if it breaks bellow $185, then the odds favor the top being in for small caps.

Ark Innovation Fund (ARKK)

Arkk is a fantastic proxy for high beta growth. When inflation is decelerating and growth is accelerating, we tend to see ARKK do really well. Like small caps, ARKK went vertical off the November 2023 low. The market was pricing in a soft landing, which included 6 rate cuts into expanding global liquidity. This is the perfect environment for beaten down risk-on stocks.

However, since the December 2023 top, ARKK is current 15% below that high, compared to the NASDAQ-100, which is 7% above its December high. Once again, high beta should continue to lead in a soft landing environment, yet it is back to lagging the broader indexes, which is concerning.

ARKK has the potential for a 5th wave swing into the mid-high $50s. However, if it breaks $44.75, then the top is in, as it will resume its leadership down. If we break below $44.75, I’m expecting it to be a vertical drop, which will further signal a top is in for this ETF.

Dow Jones Industrial Average (DJI)

The Dow has resumed a leadership role, as it is now pushing higher without the NASDAQ-100. If we look at the larger structure, it very much looks like we are in the final move of a large (B) wave.

Note the two distinct moves higher off the 2022 low and from the November 2023 low. These two clear moves higher punctuated an incredibly complicated and messy pattern that is clearly a B wave. Even though the Dow is making new highs, unlike SPX, I cannot count this as a 5th wave move. This means the Dow is leading SPX and NDX in the larger pattern, and it will be a primary chart that I plan to follow on any prolonged down move.

In conclusion, we continue to see concerning divergences between key markets. While risk-on markets like ARKK and IWM are lagging, notably, we are now seeing the NASDAQ-100 start to lag for the first time, when compared to the S&P 500 and Down Jones Industrial Average. Furthermore, within the NASDAQ-100 (and S&P 500), Apple, Google and Tesla are not contributing to this move higher, which is making this push to new highs risky, as fewer key stocks are contributing.

Time Analysis

W.D. Gann was the master of cycles. Through his methods, he was able to provide meaningful time analysis that can help investors track inflection points. Using his methods, we have been able to identify these turning points with a high degree of accuracy. No method is perfect, but Gann’s methods are more accurate than most techniques that I use. 

The major time factors (cycles) that are worth monitoring are below.

The first major time factor was late January, which is where the NASDAQ-100, so far, started lagging other markets. In this period, Apple made a lower high, as Tesla and GOOGL gapped down. 

The next one is around February 14 then late February. As stated before, we will likely continue to see a topping process, as seen in in the FAANGs above. In other words, markets will top one after the other, as we continue to see more markets top into the February time factors.

Regarding these time factors, what matters the most is how we are trending into them. They do not tell you what will happen, only that something will happen. The vast majority of the time we see a reversal of the trend moving into these periods.

The monthly Dow Jones chart suggests that January and February of this year will be important. The bellow chart tracks various cycles from extreme highs and lows. Gann noted that counting from these lows on the daily, weekly and monthly charts can indicate when a trend reversal will likely happen.

The numbers that tend to mark a meaningful time factor are 45, 49, 72, 90, 144, 180, 360. The chart below counts 180 months from the 2009 low, which takes you to right now. Also, 49 months from the COVID high and 72 months from the 2018 top takes you to right now, as well. This is lining up with a big cycle (the green symbol on the chart) that tends to show up at notable turning points.

Considering that we are trending up into this time factor with a large degree 5 wave pattern in place on the S&P 500, which is being accompanied with notable divergences, it looks like January/February of 2024 will be an important turning point to monitor.

I/O Fund Portfolio

We are continuing to raise cash in our portfolio, while positioning for a potential decoupling within the crypto complex. We have been taking substantial gains in CRWD, MSFT, and moderate gains in NET and AMD. We have also been layering into Bitcoin and adding another alt coin, Solana.

From a charting perspective, it appears that crypto is setting up for a continued push higher, which is strangely contrasted with many equity charts appearing to be completing very mature patterns. This means one of two things: 1) that one of these markets is lying, and based on our pivots, we will be able to make the necessary pivot if this is happening; 2) a catalyst will trigger a decoupling, which would cause crypto to push higher, while equities move lower.

As a practice, I prefer to manage each chart on its own. So, until crypto breaks a critical support zone, which would align it with the coming volatility in equities, we will continue to lean into the charts and what they are suggesting.

Hedge Signal

I asked the creator of our hedge signal, Vincent Duchaine, CEO of WelathUmbrella, to comment on the state of our hedge signal. Here is what he has to say…

The I/O Fund hedge signal is currently in risk-on mode. However, in the original design of the hedging strategy, one of the patterns we back tested was to hedge at a long-term market channel resistance and go long at channel support. For a visual, note the blue channel and how the market historically reacts at these levels.

The results were quite rewarding. However, the issue was that after 10 years of oscillating in this channel, the money that flooded the market in 2020 allowed the Nasdaq to break out of that channel, which is historically rare, and last happened in 1999. So, A new channel emerged around the time we started developing the I/O Fund signal.

If we look at history, there were so few instances of a market breaking out of its larger channel, that it was impossible to conclude that the market would settle back inside of it after breaking out. For this reason, we deactivated that line of code in the original strategy that used these channels to help layer into and out of hedges.

That being said, time has passed and the market has already reacted 4 times to the original channel resistance. This is not an incredible amount of data, but considering that these are lines where the market has reacted numerous times before 2020, I suggested to Knox to consider hedging at that line. We decided that if the market reacts again, we will reintroduce it in the code to the strategy.

When hitting the upper channel on the Nasdaq, there are usually two scenarios that unfold. In the first case, the market reacts instantly and goes down. This has happened several times, including at the end of July last year. In some other instances, like in early 2020 and in August 2018, QQQ slightly overshot the channel, giving time for SPY to reach its own resistance line.

At this moment, it seems that scenario 2 is unfolding and that the Nasdaq has slightly overshot its channel resistance line. Interestingly, SPY just hit its channel resistance yesterday and didn’t manage to break through.

In terms of the internal metrics that make up the hedge, the current market environment is one that tends to precede a risk-off signal. While QQQ sits at an all-time high, market breadth has not been very good since the beginning of the year.

As stated above, small caps and high beta stocks peaked around December 28th while the rest of the broad markets went higher. Internally, fewer stocks are participating as the market pushes higher, and this type of behavior tends to precede volatility.

We built this detection system into the signal, which is one of the reasons it has the ability to trigger relatively close to market tops. As the market breadth continues to degrade, regardless of price highs, the system will move closer to signaling a hedge.

There are other modalities that could trigger a hedge. For example, if we detect a significant defensive movement in the options market, or a sudden rise in volatility.  So, the signal is monitoring many areas of the market that tend to signal coming volatility.

One thing that is clear to me is that this market currently carries a high level of risk. Some statistical analysis we recently conducted suggests that, with some of the CBOE Skew readings we recently observed, we can expect (with an 82% historical chance) a correction on SPY greater than the regular 6-7% healthy pullback. More in the range of 10%, which should translate into something around 14% on the QQQ.

Advanced Micro Devices (AMD)

Prior to their earnings report, we had a very bullish count that we were tracking as a potential. This would have required a gap higher, which would have put us in a 3rd wave (halfway point) of the larger uptrend. Instead, the market reacted poorly, as AMD tested critical support around $159.

I’m leaving this bullish count on the chart in green. We would need to see a vertical move $190 for me to start considering it again. I find this count unlikely when I look at other charts, but the potential is still possible as long as we hold $159. Below $159, and the larger top will likely be in. If this is the case, for those that missed our large buying spree of AMD in the $110 – $90 range, will likely get a chance at the prices again.

Nvidia (NVDA)

*Please refer to the above analysis in the FAANG section of this report.

Super Micro (SMCI)

This chart is one of the more difficult ones I’ve had to map out. So, regarding SMCI, I’ll try to keep it to what I do know, which is the vertical moves on heavy volume and momentum are 3rd waves. The question that I have is what degree?

If we put the chart of linear scale, where the Y access is delineated with equal price movements, the below chart appears the be in a large degree 3rd wave. In other words, the move from 2022 – 2023 was wave 1, while the recent correction was wave 2. This would make the vertical move higher wave 3. If true, the larger 5 wave pattern should reach around $900 before completing. Note how this move higher is being met with max volume and max momentum. This is characteristic of 3rd waves.

Now, let’s look at the same chart on logarithmic scale. This is where the y access is delineated by percentage changes instead of equal price changes. 

Even though we are seeing max volume and momentum here, the pattern better fits as a 5th wave instead of a 3rd wave. This will also align SMCI with NVDA and META, both need a 4 and a 5 to complete the larger pattern higher.

So, both counts require a drop and push higher to complete either the 3rd or 5th wave move. Below $660 will be your first indication that this 4th wave is underway. A move below $440 will indicate that the larger uptrend is over, for now.

Bitcoin (BTCUSD)

*Please refer to the in depth crypto report here, which was posted last week.here, which was posted last week.

The only update that I have is that I have raised the breakout zone for Bitcoin, which will determine if the correction is still in play (green) or if we are taking the more direct path higher (blue). We need to go vertical over $49,360 in order to confirm the blue count. Below this level and the door remains open for a move back $38,000 – $36,000, which would complete this correction.

Netflix (NFLX)

Netflix looks like META and NVDA here. The gap higher was a 3rd wave, and it looks like we are getting the 4th wave now. What is missing is a final swing higher to complete wave 5, which is likely targeting $602. Look for divergences on this move higher for confirmation. Netflix needs to hold $525 if this 4th wave wants to extend lower. Below this level, and the odds will favor a top being in.

Crowdstrike (CRWD) 

CRWD is in the final moves of a large degree 3rd wave. The midpoint of this move higher could see it push into the $333 region, if we break above $320. However, note the volume and momentum is decelerating as price moves higher. Eventually, this 3rd wave will give to a deep 4th wave, which we will use to buy. Unlike many stocks that I track, CRWD appears to need a large 5th wave to new highs once the coming large 4th wave is complete. Look for a break below $292 to signal the larger 4th wave is underway.

Ethereum (ETHUSD)

*Please refer to the in depth crypto report here, which was posted last week.
here, which was posted last week.

Marvell (MRVL)

It’s difficult to see MRVL in anything other than a large degree (B) wave. Look at how overlapping and messy the uptrend has been since the 2022 low. In fact, while the rest of the market is in a vertical C wave, MRVL is in a diagonal for its C wave, which is a low quality uptrend pattern. If this is accurate, we should see one more swing higher into the $78 – $90 region before topping. If any further weakness breaks below $62, then the top is already in.

Chainlink (LINKUSD)

This is a perfect 5 wave move higher. The 5th wave, which we are in, is targeting $20 – $22. Note how the current push higher is on much less volume and momentum. This is classic 5th wave behavior. So, once it is complete, we should see a deep retrace, at least, back into the prior range we were just in.

Also, this completed 5 wave pattern means one of 3 things: 1) We are only finishing wave 1 of a very large 5 wave pattern with targets over $100; 2) We are finishing the A wave of a 3 wave pattern that is targeting around $60; 3) This is the final push in a very large correction, with targets around $2.

The key will be HOW we correct. Three waves down means the bearish count is dead, and we should buy heavily. Five waves down means that something more sinister is in play, and we need to clock our gains.

Microsoft (MSFT)

*Please refer to the above analysis in the FAANG section of this report.

Cloudflare (NET) 

NET appears to be in C wave within a larger (B) wave. It looks like it needs a 5th wave higher, which we are getting due to the current earnings report.  As we’ve seen several times, earnings can alter a count or confirm one. So, how the market reacts to the gap will help us determine if we are going higher.

Micron (MU)

The monthly chart of MU is interesting. Note the detrend oscillator is at the same amplitude that marked the 2022 high. However, price is lower and taking the shape of a very messy and overlapping uptrend. The pattern fits a B wave. The detrend oscillator on a 7 day period has a remarkable ability to signal topping/bottoming zones based on prior extreme highs/lows, so it is signaling a warning.

I do think MU has one more swing high in it, which would take us into the $92 or $94 region. If we instead break below $75 on any additional weakness, the top will be in. We need to see a vertical move over $99 in order to suggest something more bullish is playing out.

Solana (SOLUSD)

*Please refer to the in depth crypto report here, which was posted last week.here, which was posted last week.

Recommended Reading:

• Q&A Webinar Replay – February 8, 2024
• Big Tech Q4 Earnings: Capex Increases
• Special Webinar Replay – February 1, 2024
• Q1 Earnings Kickoff Webinar

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.

The Big Picture

Many are now calling for the start of a new secular bull market. The consensus went from being excessively bearish in early 2023 to now being excessively bullish. Some of the most prominent bearish voices are even flipping into a much rosier outlook for the coming years.

Though we are open to this scenario, and even game planning for what that would look like, our broad market technical analysis is suggesting caution, for now.  One of the primary tools I use to analyze the broad market is Elliott Wave. It is excellent at providing context as well as price levels that will confirm a thesis or negate it. You can read more about it to help follow along here; however, the foundation states that all markets move in 5 waves up in the primary direction, followed by a 3 wave retrace, which then repeats.

With that in mind, the below chart shows the S&P 500 starting from the March low in 2009.

The pattern this secular bull market has taken is a mature 5 wave pattern that has extended into January 2022. The 3rd wave topped where it was supposed to, and the 5th wave into 2022 even extended. From this analysis, the problem with the thesis that we are starting a new secular bull market is twofold:

1)    We have not had a sufficient 3 wave retrace of the secular bull market that started in 2009. This would take years to develop and likely take us back to the COVID lows. Though we have seen some sharp and complex drops within this large 5 wave uptrend, we have yet to see one sufficient in both time and price to constitute a legitimate retrace of the secular bull market.

2)    This means that is we are starting a new cycle within the secular bull market, we have to be extending the 5th wave that started off the COVID low. The problem with this thesis is that we are already very extended, and 2022 was simply too deep to suggest that we are going to extend too much higher.

This means that the secular bull market that started in March of 2009 likely terminated in January of 2022, or is close to terminating sometime in 2024. We have thus started or are close to starting a secular bear market, which would be the counter move to the 12 year secular bull market that started in 2009.

Where we will pivot, and instead plan for the continuation of this cyclical bull market is.

2024 Price Analysis

If we zoom in on the structure off the 2022 top, I’m counting 2023 as an extended B wave within a larger bear market. The only question is how much longer can this stretched pattern extend into 2024?

There are two interpretations on how I believe the price action can best be explained:

Green – The October 2022 low was the end of the A wave down, and start of the B wave up. The structure of this B wave is in the form of a very complex pattern that is rare to see on such a large scale. If this is playing out, we should see a top in January, followed by a deep retrace into February, which will be followed by one final swing higher into March/April. This will mark a major top.

Red – This count is the same as the above green count. The only difference is that we took a more direct path to the larger top, which would likely end sometime in late January.

2024 Time Analysis

If we analyze the cycles that are in play into the first half of 2024, we can get a good idea on when to expect a major inflection within the markets. These cycles continuously show up at major and minor turns in the market, and tend to have the most significance when they cluster together. Below is the NASDAQ-100, which shows four big clusters of cycles to look for as we in 2024. Two of these are in January and February.

1)    January 17 – 30

2)    February 15 – 29

More times than not, these cycles mark reversals in the trend. So, what is most important is how the market is trending into them. We monitor these dates closely and I discuss them in my weekly webinars as how we trend into them is key to interpreting how the market will play out in the weeks that follow.

2024 Cycle Forecast

W.D. Gann offered an annual forecast based on a combination of major cycles that tend to play out in the markets over time. Most are familiar with the 90 year cycle, for example, which is one of Gann’s cycles that he monitored, which lends credibility to his cycle research. For example, the panic of 1839 led to a painful depression in American economic history. Ninety years later takes you to the 1929 top, and 90 years after that takes you to the COVID top.

So, by combining the major cycles Gann identified into a weighted average, we can get a good approximation of both the trend and turning points within a given year. For example, the below image is a weighted average of these major cycles for 2022 (below), with what the Dow Jones did in 2022 on top. Note how the forecast mapped the major trends and turning points very closely.

If we take the same weighted forecast for 2023, note how closely it tracked both the trend and turning points compared to how the market traded.

So, using the same techniques, if we apply these weighted cycles to 2024, here is what we get:

The cycles forecast suggests a high in January, a low in March/April, followed by another low in May/June. This will lead to a bounce into the end of the year. Once again, what is important to note is trend and turning points.

These forecasts are not perfect, but they tend to help identify the major turning points and direction within the market. I always start the year with a weighted average of all major cycles, and then identify the one or two that are exhibiting the most influence. So, as we move into 2024, we will likely make adjustments as we go along to help us stay on the right side of these major market moves.

Supporting Markets

The markets that I am currently tracking to help us determine whether the red or green count is playing out are below. The below markets either have much cleaner wave counts, or are major markets that tend to lead tech.

NASDAQ-100 (NDX)

NDX has more room to run higher. My upper targets are 17737 – 18050. The main question in determining if it will run higher is dependent on where NDX bottomed. If it bottomed in October of 2022, then we should see a deep correction followed by a bigger push into these targets into late Q1 of 2024. This would be the green count.

If the low was instead in January of 2023, then this would be the top, with maybe one more minor push into late January. This will be the red count. The tell will be the nature of the drop. If it is a 5 wave pattern, then we are dealing with red; if it is a 3 wave drop, then we are dealing with green.

Microsoft (MSFT)

MSFT has a very clean wave count, and is currently trading at a risky spot. If the 2020 breakout was the halfway point for the 5 wave move off the 2009 low, then the $378 price range is the target for the final swing, which is exactly where price is struggling to break above.

What is concerning is that we have completed a full 5 wave move off the 2009 low, and hit our long term target. There is room for an extension to the $415 region, but the risk is elevated considering we are talking about the final 5th wave within a larger 5th

What this means is that the 2023 uptrend was the final 5th wave, which is still playing out. If we zoom in on 2023, MSFT appears to have room for another swing higher. If we are in the minor 4th wave, the minor 5th wave should take us into the $400-$415 region before terminating.

Ark Innovation ETF (ARKK)

Arkk’s structure is very clean, right now. I believe ARKK has one more larger swing higher, which will complete the large corrective bounce off the December 2022 low. If accurate, ARKK still has one more new low to complete the downtrend that started in 2021.

ARKK is currently in the final move of this corrective pattern, which is playing out as a 5 wave pattern. If you note the current uptrend, it looks like it still needs a 4th wave, which I believe we are seeing, and then should get one more 5th wave higher, which would be targeting around $59. As long as the current drop holds $46, then we should see one more swing higher in a final 5th wave push. Below $46, and the odds start favoring the top being in.

Amazon (AMZN)

Amazon hit our major target that we laid out in October. This stock, along with META and the NASDAQ-100, was the primary reason we were not calling for the top in July of last year. They were showing incomplete patterns and needed a final 5th wave higher, which we now have.

Now that we have this 5th wave, and it hit our target, we have a very mature pattern. Like MSFT, we could extend a little higher, but I will be looking for a reversal soon. How the reversal forms will be very telling – 5 waves down is bad, while 3 waves down suggests that we can push higher.

The Dow Jones Industrial Average (DJI)

Note the pattern off the October 2022 low. It’s hard to look at the messy, overlapping pattern as the start of a new bullish uptrend. In fact, it resembles a corrective, 3-wave pattern. This means that once the current 5 wave uptrend is over, we should see a sharp drop that breaks the October 2022 lows.

In order to negate this thesis, we would need to see a vertical break above 40,000. Short of this, the above scenario best fits the price pattern, which suggests that we have, at best, one more swing higher after a small correction.

The Japanese (Nikkei)

It may seem strange that a tech portfolio would follow the Japanese market, but this is a key market to track for tech. The reason for this is that the Nikkei has led the NASDAQ for many years, and it has a history of topping and bottoming just before the NASDAQ.

That being said, the Nikkei appears to need one more minor swing before completing its final 5th wave. If this happens, we will look for the Nikkei to make lower highs while the NASDAQ makes a higher high for the final confirmation that we are close to a major inflection point in the markets.

In conclusion, the above markets are some of the key markets that can help us identify what larger count in the broad market is playing out – green or red. It appears that stocks like AMZN and the Japanese Nikkei are very close, while MSFT, ARKK and DJI suggest that they have one more swing higher before completing their uptrend. Like all tops, I imagine this one will be a process. Look for divergences as some markets and stocks will top before others. If this happens and we see any continued push higher with fewer names making new highs, then we will have a strong early warning sign.

Macro

In November, the FOMC was steadfast on their stance that rates will stay higher for longer. In December, they shocked the markets with an about-face, claiming victory of inflation with the expectation of 3 rate cuts in 2024. This announcement sent markets vertical, as risky high beta stocks led the way.

What the FED and markets are pricing in is a true soft landing. In other words, inflation got out of control and the FED was able to successfully raise rates at the right speed to bring inflation down from the demand side, while avoiding a recession. Whether this will actually play out is yet to be seen. However, we thought it would be helpful to our readers to see what needs to happen in 2024 in order for this scenario to play out:

1)    Economic data needs to continue to soften. However, it has to soften into a sort-of goldilocks range. The balance will be weakening the employment market just enough to reduce core inflation, but not too much to cause a recession.

2)    Unemployment needs to go higher, but not too high. As unemployment goes higher, the historic disinflation that we have seen in 2023 will be able to actually reach the FED’s 2% target. As of now, core inflation is still at 4%, which is double what the FED is targeting. Rising unemployment will slow spending, and get core inflation back to the 2% target.

3)    Household checkable deposits are strong, and need to stay this way in order to propel the business cycle forward. Though the trend is down, the long-term trend suggests that households are still flush with cash, which is necessary to both avoid a recession and continue the business cycle.

4)    Energy has to stay within a sideways trend or continue to trend lower. This is key, as energy was the primary reason for the level of disinflation that we saw throughout 2023. Note below how core inflation has been stubborn between 5-4% throughout most of 2023, yet the headline CPI number kept moving lower.

The reason for this is because energy prices have been in a steep bear market since August of 2022. This has been the primary reason why the CPI number has continued lower, and it needs to stay this way in order for inflation to hit the FED’s 2% target, and therefore succeed in an actual soft landing.

History says this is a tall ask. There has never been an instance going back to WWII where inflation gets out of hand, and then gets back in line without a recession. However, so far, all the economic data in December supports the soft landing scenario. Corporate earnings have reaccelerated, and economic data remains non-recessionary. Households and businesses still have ample amounts of cash, and the employment market, though softening, still remains above the pre-COVID peak in many metrics. Energy prices are trending sideways, and have yet to breakout in a major way. So, until the data shows otherwise, we expect the market to continue pricing in the soft landing scenario.

I/O Fund Portfolio

We are still positioned defensively and will likely look to spread some of our cash into crypto positions as well some of our equity positions that have the clearest path higher. This will be dependent on whatever broad market count has the highest probability of playing out as we move into 2024.

For those wanting information from the analyst team on how we are positioned going into Q1, then keep an eye out for an invitation for two webinars: a 2023 Year in Review webinar and a Q1 Earnings Kickoff Webinar over the next 1-2 weeks. This is when the team will discuss in more detail how we are positioned in terms of fundamentals.

We are holding a defensive position in cash, and will be looking to our hedge signal to help navigate any coming volatility. As stated last year, we do not believe current prices justify a buy and hold mentality, so continuing to be nimble will be what guides any moves we make into early 2024.

Advanced Micro Devices (AMD)

AMD hit our target of $148, and has now seen a sharp decline. It’s worth pointing out the gap down from this region and vertical drop. This is most likely a 5 wave pattern, which is pointing down. For this reason, I am adding an alternative blue count, which has us starting a larger C wave that would retest the 2022 lows. This is not my primary thesis; however, due to the nature of this drop, I have to risk manage for it.

The blue count has a low likelihood as long as AMD stays above $130. As long as we stay above this region, we can see a local bottom and push higher towards $156. This would be my red count, which has us in the final dip before the final swing higher.

The green count would also see us bottom soon, followed by a push towards $158, and a final push into the $170 range.

Based on the AI trend, and how AMD has been overlooked until recently, we lean toward a variation of the red or green counts. This implies that the 2022 low was a major low, and any continued weakness will likely make a higher low. However, the nature of this larger, higher low must be a large 3-wave pattern. We are not seeing a 3 wave pattern from the $148 region, which needs to be monitored. As stated, above $130 and we do not see the need to de-risk.

Nvidia (NVDA) 

My long-term target for NVDA’s bullish path has been $575-$600 for many months. I’m still holding to this, and my red count has us in the final 5th wave push higher into this target.

The other alternative, which fits better with the current structure, is that we are actually in a 2nd wave retrace, with final targets around $640. This is my green count, and though it fits better with the move off the November low, the $640 target does not fit with the proportions of the larger 5 wave pattern that started in 2022.

How we will know which one is in play will require two things: 1) any remaining weakness must hold $420. Below $420 and both green and red are a risk of not playing out. Below $420 and the odds start favoring my alternative blue count, which has last August as a major top. 2) Then, we will need to see a breakout above $575 – $600 to confirm the green count is in play.

CrowdStrike (CRWD)

CRWD has likely put in a major low in January of this year. This is evident by the developing 5 wave push off of this low. Note the vertical push higher in the back-half of 2023. It is clearly a 3rd wave, and still needs a 4th and 5th to complete.  The question is – are we still in the 3rd wave, which is my green count, or are we starting the larger 4th wave, which is my blue count?

If we break below $225, then we are in the blue count. However, look at the composite index below. It is making a lower low, while price is clearly making a higher low. This supports the green count, for now.  I’ll be looking for a low this week, and push into late January to complete 3. Then we should get one final large swing higher after the 4th wave correction completes.

Bitcoin (BTCUSD)

Until Bitcoin truly goes vertical, there are many ways in which this new bull cycle can be counted. We are likely in one of the final dips worth buying, which is targeting $38,000 – $35,000. However, if we are in the start of a sudden 3rd wave, keep in mind that the nature of 3rd waves is marked with shallow corrections that leave investors behind. So, we will likely start adding in the $40,000 region, and layer in as we go lower, or if we bottom and breakout higher. Also, in order for this scenario to manifest, we have to hold $30,000 – $28,000.

Netflix (NFLX)

Sellers have clearly stepped in at the $480 – $495 region. This marked a double, and now triple top pattern, which does warrant caution. As long as this drop can hold $425, the green count is alive. This suggests that we are in a correction within a larger uptrend pattern. If we can hold $425 and turn back up in a 5 wave pattern, then the overhead target is $537-$577. If we go below $425, then the odds start favoring the red count, which has us starting the larger drop back into the $200s.

Microsoft (MSFT)

*Please refer to my section about MSFT in the Supporting Markets section of this report.

Aehr Test Systems (AEHR)

AEHR's technical pattern has always been a mess. If its earnings report is accepted by the markets, we should hold $20.45 and turn higher. If this happens, then the drop we just went through from its high was only a 3 wave pattern, and supports us pushing to new highs in a final swing higher. This is the green count in the chart, and once we break above $39, the odds will favor this scenario.

However, if we drop below $20.45, then we have a clean 5 waves down from the high, which will be concerning. If what follows is a 3 wave bounce, then we will be setting up for a bigger drop. If this happens, we will likely look to de-risk our Aehr position.

Ethereum (ETHUSD)

We now have three series of 5 wave pattern pointing higher, each followed with 3 wave retraces that made higher lows. If we get the vertical breakout after this correction, it will be quite bullish. We are targeting sub-$2000 for this correction. I do not want to see us go below $1850. If we do, the final support is around $1700, which coincides with the below trendline. These levels have to hold if this bullish count is going to play out.

Marvell (MRVL)

There is nothing clean about MRVL’s chart from a technical angle. We have a series of overlapping moves in both directions, which can be interpreted in many ways. For one, we have a crash set up that is active, and a break below $50 will start building the odds that this is in play. This is the red count in the chart above.  However, if we can instead hold $50, and then breakout above $61.75, then we can see a push into the $80 – $90 region before putting in a larger top, which is outlined by the green count.

Super Micro Computer (SMCI)

SMCI is a confusing chart to map. Ever since topping, we have been in a chop that has frustrated both bulls and bears. From a larger perspective, this is the count that I am tracking. The vertical move higher is a 3rd wave, and the only question to answer is whether we are still in it? If so, we will see a breakout above $329. If not, we will see a breakdown below $235. Until one of these levels breaks, we can continue to chop around with no discernable direction.

Cloudflare (NET)

So far, this drop is not concerning. It looks like a 4th wave in a 5 wave push into our overhead targets. These targets are $95, $98, $104. This is the zone that we would take gains. This drop we are in can go as low as $72 and still be valid. Below $72 and the overhead targets get invalidated, which will suggest a top is already in.

Chainlink (LINKUSD)

I’m starting to think that we are in the minor b wave drop that we have been looking for. The targets here are between $12 – $9. We have to hold $7.7 if the bullish pattern is going to continue. With an alt coin tracing a bullish path like above, it’s wise to take it one step at a time. The next major test will be holding the listed support zones.

Micron (MU)

MU did well after their earnings report with favorable forward growth meteics. Because of this, we began a starter position at 2%. The long-term technicals fit best with being in a large B wave that will likely target $97 – a triple top. How MU reacts here will be very telling. If we turn down in a 5-wave pattern, we may look to de-risk and target lower prices. If we instead breakout over $97, we will add to our position, as it will be suggesting something more bullish is developing.

What’s Next

Please join the I/O Fund as we hold two webinars in early to mid-January. The first will be a 2023 Year in Review and the second will be a Q1 Earnings Kickoff.

Recommended Reading:

• Positions Report – November 2023
• 2023 Chainlink Update: Interoperability for Blockchains, Bullish SWIFT Partnership
• Cloud Earnings Review: Signs of Stabilization
• Micron: AI Offers a Multifaceted Secular Growth Tailwind

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 (S&P 500)

In last month’s report, I discussed the importance of holding the 4163 SPX level. This level would be the deciding line between how we approach risk for the rest of the year. My primary view was that the S&P 500 (SPX) would see one more swing higher into early 2024 as long as we held this region. We have broken this level since and found a low, so far, at the 4103 SPX level. This move has altered how I view this market, and also how we plan to manage our portfolio.

Because of this, I am maintaining the two general counts; however, I am shifting my primary count to the Red count, and having the Green count as an alternative.

Red

The bear market that started in January of 2022 is still playing out. In Elliott Wave speak, 2022 was the A wave, 2023 was the B wave, and we are starting the final leg of this secular bear market, called the C wave.  In other words, 2023 was a cyclical bull market within a secular bear market.

C waves are relatively easy to track because they are always 5 wave patterns. Unlike a 3 wave pattern, they tend to follow set parameters, have little room for alternative interpretations and allow for precise targets. This is the good news. The bad news is that the C wave is the most dramatic and emotional part of a correction.

If this is playing out, then we are completing the 1st wave that makes up the larger C wave. What follows the 1st wave is the 2nd wave bounce, which I believe we are in. The 3rd wave drop is where the bulk of the destruction will happen. The fact that the drop off the July top is a 5 wave pattern, this potential is present and risk remains elevated.

As stated last month, I do not see a recession developing in Q3, and still do not today, based on the data. So, any top would mean an “event” would likely pull forward a recession, and therefore a market top. Since then, we have had another international event occur, which the market has used to push below our 4163 critical support, forcing us to alter our primary count.

Green

This is now my alternative scenario. It is still possible, especially after so many FAANGs reported favorable earnings. However, the only difference between the Red and Green count is how high this final bounce will go – the Green targets are anywhere between 300 – 600 SPX points above the Red targets.

 While I do think the odds of SPX reaching a new high has diminished due to the depth of this correction, I do believe the NASDAQ-100 and a handful of FAANGs will still see higher highs, while most stocks and indexes see lower highs (more on this below).  

2023 Uptrend and Top

If we zoom in on the structure of the 2023 cyclical bull market, there are a few visuals worth noting. For one, the depth of this drop has clearly broken through the trend channel that has held this move in place.

Fourth waves can, and sometimes do, break through the trend channel, but they need to reverse back into the channel quickly, which we have just seen. If this is a 4th wave, and it did temporarily break the trend channel, expect the 5th wave to be fast and nearly vertical. The next pullback will tell us more.

Secondly, note the structure of the drop from the July high. It is clearly 5 waves, which has decreased the probabilities in the Green count and increased the probabilities of the Red count. The reason for this is because it builds the case for the C-wave. These patterns are fractal, so a smaller 5 wave pattern builds into the larger. We now have what can be counted as a smaller 5 wave pattern in place, which is concerning.

The Last Bounce

The below image sums up where I think the next move will take us. My primary count is Red, which means we will see another drop then push higher into the 4400 SPX region. If this count is in play, the next drop should hold the below red trend line, or even a little lower towards 4238 SPX, at most. This would be the retest of the trend channel breakout.

If we instead break below it, the odds will increase that the correction that started in July is not over. This is marked in Blue and has us making one more drop towards the 4000 SPX region before completing the larger 1st wave pointing down. If this plays out, the Green count will get removed from the board.

If we are in the Green count, we will not know until we break above 4490 SPX.

In conclusion, I only see one more bounce in the S&P 500. Whether that bounce takes us to the 4400 SPX region or towards the 4700 – 5000 SPX region, will not change the likely outcome – any bounce we see will likely get retraced plus all of the 2023 cyclical bull market in 2024. Each investor will need to determine their own risk tolerance, time horizon, and ability to be nimble if they want to play this developing bounce.

Strong Supporting Markets

NASDAQ-100 (NDX)

While it is questionable whether the S&P 500 will push to new highs in the Green count, I think the odds are quite high that the NASDAQ-100 does. Note how NDX did not break below the trend channel. This was a prolonged and complex 4th wave, but it did not go deep enough to invalidate the larger count, which is pointing towards a 5th wave higher to complete large trend.

Amazon (AMZN)

Unlike many FAANGs, Amazon has, what appears to be, an incomplete pattern. It needs a 5th wave higher to complete the move off the January low. My primary target for this move is $155 – $160. Once Amazon gives us this 5th wave higher, it will be a big warning to the bulls, because it will have a complete pattern. If accurate, this should be followed by a larger drop.

Meta (META)

Meta is another FAANG that appears to have an incomplete uptrend. Note how the correction, so far, appears to be a 3 wave move that overlaps. This is characteristic of a corrective move, and also implies that we should see a 5th wave higher. Meta appears to have the most upside of all the remaining FAANGs.

Microsoft (MSFT)

MSFT is another FAANG that appears to have an incomplete uptrend. I’m showing the monthly chart here so you can see the larger trend in place. Many stocks within other sectors of the market have completed their very large 5 wave pattern off the 2009 low. A few, like MSFT, are behind, and still have one more high before completing this large pattern. My target for MSFT will around $378. Once this final leg is complete, I expect a deep retrace to begin.

The above charts in Big Tech are the clearest that I track. They have higher odds of making that final 5th wave move to new highs. Why this is important is because they can be our guides in better managing risk. Once these charts complete that 5th wave to new highs, the risk will be elevated for the bulls. On the other hand, if they instead fail, we will be able to pivot relatively quickly.

Weak Supporting Markets

Just as the above patterns can be a guide to help determine heightened risk, so can some of the weaker markets. The below markets have the same pattern is place – a large top (B wave), followed by a 5 wave decline from the recent high (early start of the C wave). So, these markets are farther along in their drawdown than the healthier ones above.

Equal Weight S&P 500 (RSP)

RSP proves that the weighting of the same stocks matters a lot. While SPX is a contender for one more high in 2023, RSP failed to break above the February highs. What’s notable is that we have broken through the lower trend line in a 5 wave move. The next bounce, which we are currently in, should be a 3 wave move that hits the above targets on the chart.

Transportation (IYT)

This index has also broken the major trend line in a deep 5 wave move. We should see one minor drop followed by a final push higher. This index, along with many of its constituents, looks quite unhealthy and tends to lead the market.

Regional Banks (KRE)

This index is the cleanest. We have a clear 5 wave drop, followed what looks like the start of the 2nd wave bounce. We will likely see a little more downside before getting that final push higher into our wave 2 targets.

Ark Innovation (ARKK)

Though ARKK has the same 5 wave pattern from the recent high, it isn’t as clean as the above charts. There is the potential for a bigger move higher, which would line up with the SPX Green count. This ETF will help determine where the broader market goes, and the next pullback will tell us a lot. However, even if we do see a bigger move higher, this ETF has topped and it will be years before it sees new highs.

In conclusion, the bifurcation in this market is only growing. While some stocks have incomplete uptrends, suggesting one more high, others have topped and are looking to make another lower low soon. All provide key clues on when this already risky market will approach maximum risk. As stated before, we are already quite defensive and ready to hedge 100% of our portfolio when our signal flips, but we will use the above patterns to help us de-risk even more in the coming weeks.

Macro

We have warned our members all year that the fight against inflation is far from over. The disinflation that we saw was not only historic, but it was driven predominantly by a deep deceleration in energy prices, as noted by the 3-month annualized readings below.

Note how Core Inflation stayed within the 4%-5% range through most of 2022 and 2023. Instead, we saw food and energy decelerate, causing the disinflation that rallied equities into 2023.

As we warned since June, energy was putting in a big bottom, and it should put pressure on inflation numbers. This is exactly what has happened. We have seen the headline CPI numbers bottom well above the FED’s 2% target, followed by 3 months of reacceleration.

What’s concerning is that not only has energy prices reaccelerated, but so have core prices. Even though we believe the FED has paused their rate hike campaign, like in all instances throughout all of modern market history, a recession is needed to truly tame inflationary pressures. I do not believe this time is different.

However, the economy is not in agreement. While we are seeing some soft spots, employment remains relatively strong to claim an imminent recession is underway.

For one, continuing claims for unemployment are staying stable. Once we see a sharp jump here, it is a warning sign. Also, some other key employment metrics that I tracks – Private Sector Quits Index, Employment Cost Index, and Job Openings/Total Unemployment – are all well above the pre-COVID highs. Though they are weakening, they are still quite strong relative to the pre-COVID levels, suggesting that they are not recessionary, yet.

Heightened unemployment is necessary in recessions. Though we are seeing a resilient employment market, it’s worth noting that some of the leading indicators for employment are flashing warnings.

For one, Total hours Worked is trending down and now noticeably bellow the pre-COVID highs. Also, one of the first metrics to drop for employment is temp hours worked. This metric is seeing its fourth month of deceleration to the downside.

So, while the overall employment market is showing resilience, under the hood, we are starting to see cracks form. This further confirms that we are on the clock for a coming recession.

Another point worth mentioning is the relationship between Japan, Oil, and the NASDAQ-100. Next to the NASDAQ-100, the Japanese Nikkei is one of the strongest markets in the world. Interestingly, the Nikkei has been leading the NASDAQ-100 for some time. The below chart shows this phenomenon – the Nikkei is in red while the NASDAQ-100 is in blue. Note how the Nikkei tends to bottom and top before the NASDAQ-100.

The reason for this is academic. What really matters is that the correlation is still intact, as the Nikkei is also working on an incomplete uptrend pattern.

The drop in the Nikkei is quite a mess. Note the overlapping waves with no clear direction. This is typical of 4th waves, and supports that the Nikkei is setting up for that final swing higher.

 Japan also imports all of their oil, which also supports this thesis. If oil prices continue higher, this will compress Japanese margins, and likely cause their stocks to go lower. The current state of oil appears to be in the sharpest part of its current correction. My targets for this drop are around $76 – $70.

If the current drop in oil holds $70, and then starts turning back up, it will also signal that we are close to the end of this push higher in equities. Note how the larger pattern is a 5 wave move off the low, now followed by a 3 wave retrace. This is threatening the return of a large uptrend in oil, as well as many other commodities, which will increase inflationary pressures.

So, how oil reacts around the $70 region will be very important. Though most investors are starting to accept the sticky inflation theme we have been warning about, few are aware that oil is setting up for a potential move to new all-time highs. This needs to be monitored daily for risk management purposes. If oil can push below $70, then this thesis will be negated. This will be very bullish for equities, and potentially be the catalyst for the Green count in SPX

In conclusion, while the market is starting to accept that inflation is stickier than previously thought, few are talking about some of the setups in key commodities, like oil, that have the potential to push to new highs. If this happens, it will catch the market off guard, as most expect a softening economy to lead into a recession, which will pull down commodity prices, and therefore inflation. The implication, if accurate, is a true stagflation environment, which would be the catalyst for the larger C-wave drop to fresh lows. A lot is riding on how oil trades over the coming weeks.

I/O Fund Portfolio

We are currently sitting on about 25% cash. This is very defensive, and if we continue to see the above markets and stocks hit their targets, we will continue to raise cash. The below pie chart is how we are allocating the other 75% of our funds. This represents all funds invested.

Advanced Micro Devices (AMD)

AMD has broken out above the downtrend channel. This further supports the Green count that has the $130 region as a final target before putting in a larger top. AMD is due for a pullback – note how the detrend oscillator is at the same amplitude that saw the 2018 and 2020 tops. Prior tops tend to mark current tops with this oscillator. As long as the pullback holds $93, I expect the $130 target to be met in the coming weeks. Below $93 and this thesis will be threatened in favor of the Red count below.

Nvidia (NVDA)

NVDA appears to be one of the stronger FAANGs, like AMZN, META, MSFT above – it appears to be working through an incomplete uptrend, suggesting a 5th wave higher is needed. What is concerning is that the red count provides that 5th wave higher, which suggests a bigger top is already in. This would support some of the institutional activity in the $440 region, which suggests selling.

As usual, the upcoming earnings report will be paramount to deterring what count is in place for NVDA, and the larger market. As long any further weakness holds $380, the green count is still active. Any move below $340 will fully confirm the top is in.

Microsoft (MSFT)

MSFT is very close to the upper targets we laid out weeks ago. At $378 and we should see a pullback. If that pullback is a 5-wave drop, it will signal a larger top is developing. However, it still needs a higher high to complete that 5th wave. Until we get that, this could play out in many ways. Any imminent drop below $324 will be concerning. Below $307 and the top is in.

Bitcoin (BTCUSD)

Bitcoin’s correlation to tech stocks has completely detached. It is on its own path, which seems to have more of a correlation to global liquidity as well as banking concerns. I’m not sure what the catalyst for this bullish count will be, but so far, it is still valid and playing out. We need to see a fresh vertical move up from here to further confirm this count. If Bitcoin instead gets below $30,000, it will get concerning, and put the below bull path in jeopardy.

CrowdStrike (CRWD)

So far, CRWD is following the bullish count we laid out months ago. It appears to be tracing a leading diagonal pattern for its 1st wave. If true, we still need a 4th wave drop and 5th wave push higher to confirm it. I’m looking for a top soon, followed by a 4th wave pullback to $166 – $150. As long as this pullback hold $147, I’m leaning into the bullish path, which has us targeting $215 before the bigger pullback takes hold.

Netflix (NFLX)

I’m still considering the July high as a bigger top. This doesn’t mean we can retest that level and even push slightly higher in the coming weeks/months. This would be my Green count below. Note how the drop from the July peak was a 3 wave pattern, followed by what looks like another 3 wave bounce. This lines up with the big picture that we are tracking, which is that NFLX is in a large degree 2nd wave retrace. If the next drop is a 5 wave move, it will line up with this thesis. If instead we get a 3 wave retrace, it will support the Green count. So, the next decline in NFLX will be very telling.

Aehr Test Systems (AEHR)

The one thing this drop does have going for it is that we only have a 3-wave drop from the high. If we see a bounce back into the $26-$28 level (4th wave), followed by another drop lower (5th wave), then we have reason to be concerned. If this happens, it would be the larger 1st wave pointing lower, which should be followed by a 2nd wave bounce. This would be used to de-risk. If the Green count has any chance, AEHR needs to get back above $35 and not make another low.

Ethereum (ETHUSD)

The bullish structure in ETHUSD continues to build. I wouldn’t be concerned about Ethereum not breaking out with Bitcoin, yet. It’s due for a slight pullback, which should hold $1635. Below here is concerning. If we do hold this support zone, the next move will need to be a vertical breakout.

Super Micro (SMCI)

SMCI continues to frustrate and confuse. The patterns are messy, and just when I think a have a handle on it, it gets more confusing. What I do know for certain is that the move down from the October high is a clear 5 waves. Either this is all of the C wave of the 4th wave correction (Green), and we are setting up for new highs, or this is the 1st wave of a larger C wave pointing down (Red). The bounce, so far, appears to be corrective, which elevates the risk here. A break below $230 – $222 will confirm the red count. We need to get above $275 to confirm the Green count.

Marvell (MRVL)

Once MRVL broke below the $52 level, the risk became elevated. What’s frustrating about the chart is that we have overlapping waves up and down. The current drop cannot be counted as the start of a larger drop, yet. If we get one more drop towards $46-$44, then we have this confirmation, and the top will likely be in for MRVL. If this happens, the next bounce is where you de-risk. If the Green count has any chance, this has to be a low, and we need to turn back up from here.

CloudFlare (NET)

This Gann chart tells the current story with NET. It’s in a very large resistance zone. The 1×1 line (45 degrees) from the top is around $64-$66. Also, two difference techniques that I use to find support and resistance confirm the same level, and all three of my moving averages are also in this zone. If NET can break above this zone at $66, retest it as support and hold it, I’d consider that quite bullish and would look to add. Instead, if we see a strong reversal here that takes us below the $54, I’d start getting concerned.

Chainlink (LINKUSD)

This is my general roadmap for LINKUSD. We should see some type of top around $14-$18. If the following pullback is a 3 wave move, then that will confirm the blue count presented. We would use that drop to add more to our position. If instead, we see a 5 wave drop from that high, it would be concerning, and we may use that to reduce our exposure. As of now, I see no reason to be pessimistic, as the next drop will tell us everything.

Recommended Reading:

• Positions Report – October 2023
• August Positions Report
• July Positions Report
• POSITIONS REPORT – JUNE, 2023

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.

Recommended Reading:

• AEHR Fiscal Q1 Pre-Earnings: Rapid Growth Up Ahead
• Palo Alto Networks: “Firmly” GAAP Profitable
• Enphase: Price is Low for a Global Solar Leader
• CrowdStrike: Steady Growth, Strong Bottom Line
• August Positions Report