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 count are meant to provide context. There is a pattern unfolding in real-time, one of which will play out. By monitoring price levels that are held/broken, it will help us figure out which one is in play

Big Picture

Below is a weekly chart for the S&P 500, so each bar represents one full week of price action. From this larger perspective, there are three general paths that we are tracking.

• Blue – The bull market that began at the COVID low completed in early 2022. What has followed has been the start of a secular bear market with one more leg lower. This would make the current bull market a cyclical bull uptrend, within a secular bear downtrend.
• Green – This is a variation of the Blue count above. This count has us making one more swing higher in a larger B wave.
• Red – The 2022 bear market was a large correction in an on-going uptrend that started at the COVID low. This pattern would have us around the halfway point in the final 5th wave, which should take us to new highs into 2024.

Where we are now is determining whether this correction is the start of something much worse than most expect (blue), or an excellent buying opportunity (red, green). There are two determining criteria I am looking out for in order to position our portfolio correctly:

• Is the structure of this drop a 5-wave pattern or a 3-wave pattern? A 5-wave pattern will be more vertical and direct in nature. If so, it will support our blue count. If it is a 3-wave pattern, it will have many overlaps and appear to be quite messy. If this manifests, it will support our red or green counts.
• Will the drop hold our critical support at 4315-4275? If we break below this pivot, it will strongly support our blue count. On the other hand, if we are in a minor correction within a larger uptrend to new highs, this level needs to hold.

It is worth pointing out that the likely catalyst for the expected top is the start of a recession. The green count coincides with a Q4 recession, while the red count coincides with a Q1 recession. Based on current economic data, as well as inflation data, the odds of a Q3 recession are quite low. So, if the blue count is in play, it will have to be the result of broad market price action picking up on an unforeseen event.

Planning for an unknown event is not an investable strategy, as they are rare. However, the vast majority of events occur within a rising rate environment, which does increase the odds that one could happen. In almost all instances, if we go back in time, broad market price action gave advanced warnings of something brewing. For this reason, we put an outsized weighting on price patterns to help manage risk within the current macro environment.

5 or 3 Waves?

We are looking for early clues to help us get in front of either the start of a new leg in the secular bear market (blue count), or a buying opportunity on our way towards 4800 SPX (red, green counts). The blue count will unfold in a 5-wave pattern, while the red/green counts will unfold into a 3-wave pattern.

It’s important to understand that these patterns are fractal in nature. So, a small 5-wave pattern develops into a larger one and then a larger one. This happens until the pattern runs its course, and a counter rally unfolds. So, when at major inflection points, analyzing the micro pattern off of the high will give us an early warning on what to expect.

If we look at the micro structure off the recent high, we do have what can be counted as a 5-wave pattern from the high. This keeps our blue count alive, and is worth watching closely.

In order to confirm this scenario, there are three things that I look for that tilts the probabilities towards a near certainty: 1) do we have what can be counted as a 5-wave drop from a high? The answer to this question is, yes; 2) has the 5-wave pattern developed into a larger 5-wave pattern? This has not happened yet. This will take time; 3) After we get two degrees of 5-wave patterns pointing down, do we have a 3-wave retrace? The answer here is also, not yet.

So, patience is crucial right here. All counts that I am tracking suggest that after a bounce, we should see another low, at minimum. The nature of this bounce, as you’ll see below, will help determine the actions we will take in the coming weeks.

Supporting Markets

It’s important to see what other markets are telling us at this critical juncture. They often provide early warnings and clues on what is unfolding.

NASDAQ-100 (NDX)

NDX topped nearly two weeks before the S&P 500. This has been a consistent pattern for most of the year – NDX leading the market. Because of this reason, I expect it to lead either into a buyable low (green) or into a bigger breakdown (blue).

This chart has similar counts as the S&P 500 above. It’s worth noting that the structure of NDX does not suggest a push into Q1 of 2023 (SPX red count). For this reason, I’m only charting the blue and green counts within NDX. What the green count has going for it is that we only have a 3-wave drop from the high. This suggests, so far, that what is unfolding in the broader market is setting up for a buyable low.

Apple (AAPL)

We were warning our members about Apple going into earnings. From a technical perspective, Apple’s long-term chart was at a significant resistance level. If we place a Gann Fan at the 2003 low, which is just a sequence of important angles that stock prices tend to respect, the red 1×1 line is the most important angle to monitor. This angle is a true 45 degree angle, at which, big reactions tend to happen. Note the last time that Apple’s price touched this angle from the 2003 low. It marked the 2022 top. Interestingly, AAPL was testing this angle again going into earnings.

Further warning could be seen in AAPL’s forward valuations. Going into earnings, not only was AAPL’s price at a significant angle, as shown above, but its forward Price to Sales was trading above the 2022 high.

Apple is the largest stock in both the NASDAQ-100 and in the S&P 500. The direction it goes, so goes the market. For this reason, we put an outsized amount of analysis into this stock. We are not surprised by the market’s reaction to AAPL’s earnings. Now, we’ll address the most important question – is this the start of a significant top, or is it a pitstop on its way to fresh highs?

In the chart below, I have two general counts that we are tracking based on the current price information:

• Blue – This count suggests that we are ending a large rally in an on-going bear market. Regardless, the structure of the next leg lower would have to be a 5-wave pattern, and ultimately break below the $154 critical support. If this happens, we will retest the January lows, at minimum.
• Red – This count suggests that we are in a correction within a larger uptrend, which would ultimately take us to new highs. The key indicator of this scenario playing out would be a 3-wave drop that holds the $154 level. If this happens, Apple, and the market, would be providing an excellent buying opportunity.

Also worth pointing out, note the gap down on heavy volume. Gaps are important markers in a trend. More times than not, they tend to start counter moves, which is why this needs to be watched so closely. Reclaiming this gap will be challenging, and supports the blue count while it remains open. 

However, if we zoom in on the structure of the recent drop, as bearish as the current drop looks, we only have a 3-wave drop, so far.

For this pattern to morph into a 5-wave pattern, and therefore provide early warning of a bigger drop developing, we need the coming bounce to hold the $184-$186 resistance, then turn down to make one more low. This will provide us with a clean 5-wave drop from the high.

On the other hand, if the coming bounce breaks above $186, the odds will start favoring the red count, and setting up a great buying opportunity on the next drop. 

Anything can happen, but it’s worth pointing out the probabilities strongly favor any coming bounce will eventually get sold to make at least one more low. If this bounce does break above $186, then the drop that follows is a buyable event, from our analysis.

Small Caps (IWM)

We’ve been tracking IWM for a while. It has completed what looks to be a large degree triangle pattern. These are common patterns in B waves, which is what I believe is going on. If IWM can break below $179, then we have confirmation that a large degree C wave is unfolding to new lows. This will be a large tell for the rest of the market, so a close eye should be kept on this index, for now.

Like the stocks indexes above, the setup is there for a large decline, but we do not have the follow through, yet. IWM has only given us a messy drop, which can’t definitively be counted as a 5-wave move.  In short, we are not seeing the required follow through to make the above blue count a high probability.

In conclusion, the odds favor that this correction is not over. Even if we are in the red/green counts, I’d expect another leg lower after we see a sizable bounce. We should, at minimum, see another drop lower. Whether this is a buyable dip or start of a new leg lower is yet to be seen. If we are starting a fresh move lower, it will show up in the markets discussed above. The current 3-wave patterns will morph into 5-wave patterns, providing an advanced warning. Until then, we will need to see what develops before shifting into cash raising mode, or stock buying mode.

Macro

The economic data that continues to roll out supports a resilient US economy that is not moving into an immanent recession. This is happening while inflation data continues to decelerate and surprise to the downside. This has put us in the Big-Growth Quadrant over the last couple of months, which tends to support high beta/risk-on assets.

Though the recent top-down economic environment has been supportive of risk-on assets, we do not believe this trend will continue within the economy moving into 2024. Rate hikes take time to filter into economic activity. The speed at which rates were raised in 2022, we believe, can provide a false sense of security. For this reason, it is likely that growth continues to slow into a recession.

This is not happening now and the likely timing for a recession, based on the historic lag between a yield curve inversion and the start of a recession, puts us into mid Q4 – late Q1. Though the growth we are seeing is not characteristic of early stage bull markets, and continues to drift lower, it is simply not the type of data we see with an immanent recession on the horizon.

The chart below supports this, as the job market continues to accelerate, along with heavy truck sales, home prices and retail sales. According to the economic trends we are seeing, there is simply no evidence of a recession brewing in Q3 of this year.

However, what the market may not be pricing in, and could cause a roadblock in the near future, is the theme we continue to repeat – with stubborn growth will come stubborn inflation.

This is an important theme because equities are rallying under the assumption that the FED has dealt with inflation, and can therefore pause and even lower rates sooner than most think. So, if inflation starts surprising to the upside again, this will throw a wrench into this assumption, and force equities to reprice a new FED time line.

The inflation data in the same chart above breaks down the disinflation the market is celebrating in the headline CPI numbers. The question is – will this trend continue, and further support the bull market?  What becomes clear when you look at the pattern is: 1) Core inflation remains sticky, and still notably above the FED’s target 2% target; 2) the reason for the CPI data’s deceleration is because of energy prices. We just saw crude oil go through a +1.5 year bear market that appears to be stabilizing. I do not believe energy commodities will be able to support further CPI readings into the future.

Crude Oil

Crude is not only working on its first higher high in over a 1.5 year time frame, but it is also working on a developing 5-wave pattern off the low. If this bounce can hold the $76.30 support and then turn towards $89, then the next few months could put pressure on equities as oil continues higher.

Gasoline

Gas prices are one of the most significant elements within an inflationary environment. The reason is because it is so closely followed by all consumers. You can’t drive more than a few miles without seeing gas prices advertised on the road. Because of this, they have a strong psychological effect on the consumer’s behavior.

The below chart is not encouraging. We have an incomplete 5-wave pattern in play, which suggests one more push to new highs before completing. Furthermore, note the inverse head and shoulders pattern developing below the $2.8-$3 pivot. If price breaks above the $3 pivot, we should see a sharp rise that will only put pressure on future CPI readings, as well as equities. 

So, with energy not able to do the lion’s share of the deceleration within the CPI data, this leaves core inflation to pick up the slack. As stated, many times before, we’ve never seen an instance going back to the 1940s where core inflation got out of control and went down without the help of a recession. So, in order for this to be the case, it will literally be the first instance in modern market data.

Furthermore, with the consumer sentiment hitting a 20 month high, real disposable income staying positive for over a year, and employment compensation accelerating to a 9 month high, it is unlikely that the consumer will slow spending on discretionary items.

In conclusion, the economic data does not support an imminent recession, and suggests a continuation of the current rally. However, the primary risks are: 1) a cavalier attitude towards the on-going rate hike campaign and the damage it will eventually cause in the economy; 2) the increased odds that the ongoing rate hikes will trigger an unforeseen event; 3) the likely return of upward inflation surprises while growth trend slow down.

Sentiment

Regarding market sentiment, we are seeing some of the most bullish readings that we have seen since late 2021. Within recent AAII investor sentiment reports, we’re coming off of bullish readings that have been in the 90th percentile of all readings. The NAAIM survey, which measures fund managers’ exposure to equities had a reading in the 97th percentile in late July. The reading was 101.82, meaning that the fund managers surveyed were 101% exposed to equities. In other words, they are levered into equities, which is usually not a good sign for equities. 

I/O Fund Portfolio

We have been patiently waiting for the current pullback to get a better idea of how to deploy some of our cash, if at all. As of now, we are a highly concentrated portfolio for a few reasons: 1) the current list of stocks that we own are the only ones that we can find that fit our criteria; 2) we have stopped out of other positions, and have not found any alternative options. As a result, our cash positions continue to build, which we believe will offset our portfolio concentration.

Advanced Micro Devices (AMD)Advanced Micro Devices (AMD)

AMD is at the same important juncture as most stocks. Is this the start of a significant bearish leg, or a pitstop on its way to at least one more high? It’s worth noting that the 2nd largest trade in AMD’s history came around the $108 level a few weeks back. Considering that this occurred around a relative low, I’m inclined to think this is a buy. If this is true, this level will be defended and likely not break to the downside for any significant period. So, I’d be concerned if we see a sizable break below this level for an extended period.

This also lines up with the price analysis. So far, the drop appears to be a 3-wave, messy drop, which suggests a correction in a larger uptrend. If we do drop to the $100 level, it needs to get bought up quickly, and push us back above $108 to confirm this. If we stay around $100, and drift lower, it suggests the large trade was a sell, and will firmly support the blue count.

Nvidia (NVDA)Nvidia (NVDA)

As long as NVDA stays above $340 on any further weakness, the green count remains my primary. This supports the green count in the broader market, suggesting another push higher into the fall/early winter. Furthermore, the drop from the recent high looks to be corrective – 3 waves. We will want to see a 5-wave rally off of this low – or a future low above $340 – to support the next swing to new highs.

It's also worth noting that NVDA is trending down into a time factor, which tends to mark the end of a swing. It’s doing so with the downward momentum at a rare extreme. This, at minimum, leads to a notable bounce.

Aehr Test Systems (AEHR)Aehr Test Systems (AEHR)

AEHR appears to have another swing higher in it. The question is – do we see a notable correction back into the $30s before a bigger push higher? This is yet to be seen, and as long as we hold $41.60, I’m leaning into the blue count, which suggests a low and fresh high soon. Below $41.60 and the odds start favoring the green count, which has a buy target in the mid-$30s.

Bitcoin (BTCUSD)Bitcoin (BTCUSD)

Bitcoin continues to consolidate at its highs. It ignored the large run-up in equities and is now ignoring the drawdown. The setup in place is one of the more bullish setups I look for. We have two sets of 1st waves followed by 2nd waves. What should follow is a large 3rd wave breakout. This remains my primary count as long as $20,000 holds.

Microsoft (MSFT)Microsoft (MSFT)

The daily RSI is below the bull market support zone. This supports any bounce in MSFT should be sold, with at least one more low to come. The critical support is $280 for the green count and holding this is critical for any chance at one more high. 

Ethereum (ETHUSD)Ethereum (ETHUSD)

ETHUSD has the same setup present as Bitcoin. We must hold $1,450 for this setup to remain active. If it is confirmed, like Bitcoin, the next move higher should be sharp.

Marvell (MRVL)Marvell (MRVL)

MRVL very clearly looks like an incomplete 5-wave pattern up. This would put us in wave 4, which is still playing out.  Look at the current correction. It appears to be a very standard flat pattern and looking for the final swing in the c wave. If this happens, we’ll take that buy. MRVL needs to hold $53 for this next swing higher to manifest.

Netflix (NFLX)Netflix (NFLX)

Looks like NFLX has a high probability of moving down into the $380s. If that next drop breaks below $376, then the Blue count will be my primary, and we will start setting up downside buy zones. If it can hold $376, then I’d expect another high.

Super Micro (SMCI)Super Micro (SMCI)

We were sounding the alarm bells on SMCI weeks before their earnings call. It was trending higher on weaker momentum, into very strong resistance and into a cycle cluster.

If we zoom into SMCI’s pattern off the high, it is a clear 5-wave drop. I’m willing to bet this is a zig-zag corrective pattern (5 waves down, 3 up, 5 waves down). These types of corrections tend to be quick and intense. It’s as if the stock is trying to get the correction over with quickly so it can get back to the larger trend. If this is true, we should see a slight retrace followed by another swing higher into the $283-$295 region. If this bounce breaks above $314, something else is likely going on.

Google (GOOGL)Google (GOOGL)

GOOGL is interesting. It looks like it needs one more swing higher to complete the entire pattern off of the January low. If this is true, how we retrace from that high will be very important – 5-waves down is bad, 3-waves will setup a buying opportunity.

Taiwan Semiconductor (TSM)Taiwan Semiconductor (TSM)

TSM is another interesting chart that leans towards the blue count. I was looking for another swing, but we broke below the gap on the recent move higher. The only other bull count I see suggests two more large swings higher, while the rest of tech suggests only one more. This makes me think the high is in for TSM. If we get below $90.50, it will be strong evidence that the larger C wave to new lows is gaining ground. This is one to watch closely.

Tesla (TSLA)Tesla (TSLA)

Like most stocks, the next bounce will determine a lot. If it is a 5-wave bounce, we can easily make it to one more fresh high (green). Above $272.85 and this will be my primary count. Below this level, and we will be looking down.

Chainlink (LINKUSD)Chainlink (LINKUSD)

The only hope for the low being in is if this move off the low is a diagonal. So, we must get above $8.5 to complete the 5 waves up, then get a 3 wave retrace for confirmation. If we fail to get above $8.5, and instead break below $6, then $3.5 is our next target to accumulate.

Recommended Readings:

• Broad Market Webinar Replay – August 10, 2023
• Super Micro Q4 Earnings: Half of Revenue is from AI
• SuperMicro Pre-ER Fiscal Q4: Momentum Continues
• AMD Q2 Earnings: ETA for AI Ramp is Q4 & 2024
• July Positions Report
• Q3 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 count are meant to provide context. There is a pattern unfolding in real-time, one of which will play out. By monitoring price levels that are held/broken, it will help us figure out which one is in play

Big Picture

Back in March, we laid out an alternative count that the market could take. In this report, we stated:

“Alternative (Red) – We have just completed the 2nd leg within a larger B wave (bear market rally). This will lead to the final 3rd leg of the bear market rally, which is targeting +4400 SPX.”

This count was based on the fact that the market would shrug off the bank failures and push higher into the 4280 – 4420 region before topping out. The market has now powered into this target region, and even punched through the upper boundary of this target zone, momentarily. Here are the most probable paths the market will likely take next based on current price action:

• Option 1 is noted in Blue below and is my primary count – Corrective Pattern: The biggest tell that this pattern is playing out will be a clear 5 wave drop from current levels that breaks below 4225 SPX. 
• Option 2 is noted in Red below and is my alternative count – We are at the halfway point on a path that will lead to new highs. The biggest tell that this pattern is playing out will be a 3 wave drop that holds 4225, and turns back up to make a fresh high. If confirmed, our targets will be around 5000 SPX.

Breadth is weak and there are other factors that make the Red scenario less probable. On the other hand, price action has moved above our upper target range, and in a direct fashion. As a technical analyst, I have to respect price action, which is why we are starting to game plan around the potential for this playing out. 

If our new alternative red count becomes more probable, we will further pivot our portfolio and use our cash to go extra long for a blowoff top. However, as I will discuss in the macro section, there is no liquidity cycle and an impending credit cycle that is likely to be troublesome in the near future. Therefore, I want to be clear on the distinction between a “blow off top” and a “new bull market.” I will be firmly positioned for a blow off top until breadth improves.

This means if the red count is confirmed, you can expect the I/O Fund to move heavily into AI stocks and then we will plan to take gains as the market marches higher. What will invalidate the blow off top and confirm a bull market is if breadth improves. For our purposes, breadth is too weak to go long indefinitely. The time will come for this, but for our investment goals, that time is not now.

Regarding the blue count, which today is my primary expectation (note: this can change quickly and be replaced by the alternate red count), we will hedge to protect our AI positions if the blue count materializes. As you already know, we have been positioning for AI for many years – since 2018. Our plan is to remain in these positions even if a worst-case scenario plays out. The I/O Fund’s hard-won analysisThe I/O Fund’s hard-won analysis points toward AI being the correct microtrend to participate in for our eventual retirement (roughly 10 years from today). It’s easier to hold these positions and put a single hedge on, then remove this single hedge, than to time many entries and exits on stocks we have a very high conviction on.

To review our most up-to-date theses on our I/O Fund portfolio positions, please click here – we highly recommend newer Members browse this list of our previous analysis listed by Portfolio Position. For existing Members, this pinned post will serve as a new table of contents and reference point for the most pertinent thesis for each position we own.To review our most up-to-date theses on our I/O Fund portfolio positions, please click here – we highly recommend newer Members browse this list of our previous analysis listed by Portfolio Position. For existing Members, this pinned post will serve as a new table of contents and reference point for the most pertinent thesis for each position we own.please click here – we highly recommend newer Members browse this list of our previous analysis listed by Portfolio Position. For existing Members, this pinned post will serve as a new table of contents and reference point for the most pertinent thesis for each position we own.

Major Inflection Point

What will help us determine what count is playing out can be best seen on a smaller time scale.

The brief answer is what happens at 4225 is key. If we see a 5 wave drop that breaks below 4225 SPX, then the odds will start to greatly favor the blue count, and a top being in place. If we see a 3 wave drop that holds above 4225, and then turns back up sharply, then the odds will favor the alternative red count.

Supporting Markets

NASDAQ-100 (NDX)

The bifurcation in this market continues, with many stocks and sectors still below their February high, while the NASDAQ-100 took back that high and continued to power higher. Regardless, NDX appears to be in a 4th wave. The question I have is that this all we are going to get before we resume higher in a 5th wave, or will we get one more swing lower?

JapanJapan 

While many global markets are not supporting a long-lasting uptrend, and some, in fact, appear to have topped, we can still see the red count in SPX play out. This is supported by the Nikkei, which has historically led the NASDAQ for many years. The Nikkei looks a lot like the NDX above. 

When we move to the rest of the US market, we continue to see warnings against the narrative that a multi-year bull market is starting. At best, they suggests any continued push higher will likely be a continuation of the same leadership we are seeing now.

Small Caps (IWM)Small Caps (IWM)

Small Caps are more economically sensitive than large caps who can diversify their revenue across multiple products, as well as geographies. Because of this, we usually see this segment of the market lead us into a bear market and out of one. This is not what we are seeing today. Small caps have remained very weak, relatively, and appear to be tracing a large degree triangle pattern. These patterns are typical in B waves, and once completed, we should see a push to new lows follow. In order to invalidate this pattern, I’d like to see IWM push above $205. If this happens, it could be suggesting a much bigger uptrend is unfolding in the markets.

Equal Weight S&P 500 (RSP)Equal Weight S&P 500 (RSP)

There are roughly 8 stocks pushing the S&P 500 higher. Big Tech, especially Big Tech that has a focus in AI, is up significantly this year, while many sectors and stocks outside of tech are between barely up to barley negative. In an expanding economy coupled with an expanding liquidity cycle, your more economically sensitive stocks tend to lead on the way out of a bear market, which is just not the pattern we are seeing in 2023.

Because the equal weighted S&P 500 index gives the same weighting to Apple as it does to stocks like Under Armor and Autozone, it tends to outperform the market cap weighted Index in a healthy economy. For this reason, I tend to focus on this index in the macro environment we are in. Either the equal weighted index will play catch, or Big Tech/AI will eventually stop holding up the market and push lower.

As of now, the equal weighted S&P 500 has a very risky downward setup in place. Note the blue count below. There is a clear 5-wave drop from the February high. This is now being followed by a 3 wave bounce. So, this means waves 1 and 2 pointing down are in place. If RSP can get above $156, then this setup will be invalidated, and it would support the continued push higher.

Financials (XLF) 

I continue to believe the forgotten financials sector is leading the market. Like RSP above, note the 5-wave drop from the February high, followed by the clear 3 wave retrace. It also has a the same high risk setup in place. This setup will be confirmed below $31.25. We need to see XLF move above $36 to invalidate this setup, which would also suggest higher levels into late 2023-2024.

Regional Banks (KRE)

The regional bank ETF is working on what looks like an incomplete downward pattern. If accurate, we just finished the 4th wave and should be starting wave 5. This should break the long-term trend line that started in 2009 before a bigger push higher begins.

Macro

We will position for either the Blue Corrective Count above or the Red more Bullish Count listed above based on what happens during the current pullback. However, with that said, it is our stance that a recession is inevitable due to the fact that strong/stubborn economic growth means strong/stubborn inflation. The chart below compares the 3-month annualized growth in various economic metrics as well as inflation metrics. What’s notable below is that core CPI remains elevated, and have been elevated for over a year at 5%. My thoughts are there will need to be more progress on core CPI if the United States is going to avoid a recession. In fact, going back to the 1940s, the only event that reverses Core CPI has been a recession.

All lasting bull markets have been accompanied with an expansive liquidity cycle. Because core inflation has remained around 5% sequentially for nearly a year, the FED is unable to start this liquidity cycle, and instead is forced to maintain a restrictive liquidity stance. 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.

In the meantime, a lot can happen with equities prior to a recession getting priced into stocks. 

The Bond Market

The market is very forward-looking, and therefore it has rallied in anticipated of a pivot far in advance of the FED’s actual pivot. Based on where inflation is, the FED may not pivot as soon as the market hopes.

The reason for this is that from the FED’s perspective, the bigger risk to the economy is not equities taking another hit, but the FED losing control of the bond market. The last time the FED started a liquidity cycle too soon was in the late 1960s. They lost control of the bond market for over a decade, as rates remained very high due to ongoing inflationary pressures. Higher rates compound into lower growth. This is a much bigger risk to the economy than equities continuing lower, especially with the level of debt in the system.

The below chart compares when prior bear markets have bottomed in relation to the FED’s pivot, which is the start of a new liquidity cycle.

What the above chart shows is that when the FED starts a new liquidity cycle, the market tends to bottom within a 1-2 month spread of the actual pivot. There are instances where the FED’s pivot is not enough to offset the credit cycle within the recession, like in 2008, 2001, and 1981, and a bottom isn’t found in equities until the credit cycle ends. However, there is no instance in time where the market bottoms more than 1 month from the FED’s pivot, which starts a new liquidity cycle. 

For there to be a new bull market, the market would have had to bottom +8 months before a FED pivot. Per the data above, this would be an extreme statistical outlier that has not occurred at any time in the past.

From my perspective, the more likely scenario is that the due to the speed of the hikes, it has taken longer than normal to filter into the economy. We do not believe an upcoming rally will mark a new bull market, so some of our long positions will have stops while other long positions will be geared only toward our highest convictions. Notably, our highest convictions have been and will continue to be AI-related where demand is much healthier than the weak pockets in tech.

I/O Fund Portfolio

We have added some of our cash back into the market. We recently sold ENPH and trimmed NFLX, then waited for weakness and added those funds to our AI portfolio – SMCI, AMD, MRVL. We are also targeting NVDA, AEHR and GOOGL.

Advanced Micro Device (AMD)Advanced Micro Device (AMD)

AMD’s uptrend off of the 2022 low is an overlapping pattern that looks corrective. Our red count has this pattern as a large degree leading diagonal as a 1st wave with a large 2nd wave that will likely line up the credit cycle downturn. We’re also moving our upper target to fall in line with what a blow-off would look like. This correction in AMD, so far, looks to be corrective, which supports the red count. AMD has to hold above $88 for a continuation higher.  As long as this holds on any weakness, a push to new highs is expected.

Nvidia (NVDA) Nvidia (NVDA) 

Our blow-off target is in the mid-$550s to low $600s. As long as NVDA stays above $340, this is our expectation. Below $340, and we will start identifying lower levels to target. Also, this little dip, so far, is just not enough to be all of our 4th wave. It should last longer and deeper, which we are using to identify a good buy spot.

Bitcoin (BTCUSD)Bitcoin (BTCUSD)

It’s do-or-die time for Bitcoin. We bought at the lows on this dip, and price is now consolidating at the highs. For this to be a 3rd wave, we need to see a very sharp move higher from here. Until then, we are leaving the red count on the board. $19,600 continues to be the critical support for our bullish blue count.

Netflix (NFLX)Netflix (NFLX) 

NFLX bottomed many months before the rest of the market in 2022, and has continued higher in what appears to be a very large leading diagonal. The good news is that this move would only be the 1st wave in a very large 5 wave uptrend. The bad news is that we need a large 2nd wave retrace next. We are waiting for this larger 2nd wave to manifest before adding back to our position. Regarding current price levels, as long as any weakness holds $370, then we expect NFLX to make another swing higher into the $450-$500 region. Below $370 and the larger 2nd wave pullback is underway.

Aehr Test Systems (AEHR)Aehr Test Systems (AEHR)

The fundamentals and techncials seem to be at odds on AEHR. While I have us moving towards a larger top, the fundamentals suggest AEHR could take off from current levels and never look back. When this happens, we tend to lean into the fundamentals. Technically, we appear to be in a small b wave that could see one more low into the high-mid $30 before resuming up. If we see this, we will add. On the other hand, if AEHR punches above $42, it will signal a break out buy for us, as we start to target the $58 region next. If AEHR breaks below $29, then the odds of this swing higher will go down and we could be looking at a bigger top taking shape.

Microsoft (MSFT)Microsoft (MSFT)

We’re raising the target box for MSFT. Like many stocks, the current dip is too small to be the 4th wave we are looking for. If we get one more high, it will likely be setting up for a bigger drop into the summer, which would be buyable. If MSFT breaks below $322, then the larger pullback is underway, and we will target $310-$290. If MSFT does see this deeper pullback and then makes one more high, the low is likely in, and we will be expect a higher low in the coming credit cycle.

Ethereum (ETHUSD)Ethereum (ETHUSD)

In the bigger picture, ETHUSD is moving in lockstep with Bitcoin. This is not true for most alt-coins. On a smaller time frame, ETHUSD is diverging from BTCUSD. Note how ETHUSD is not as close to making a new high as Bitcoin is. We really need to see both ETHUSD and BTCUSD move sharply higher above their April highs to confirm our bullish count. If Ethereum instead breaks below $1370, we could be setting up for fresh lows.

Marvell (MRVL)Marvell (MRVL)

So far, we caught MRVL at the recent lows, as it appears to be setting up for another swing higher. Also, worth noting, the 3rd and 8th largest trades in MRVL’s history also happened around the levels we recently bought. This supports our general thesis about AI and specific thesis regarding MRVL. As long as MRVL holds above $50, we expect this uptrend to continue.

Tesla (TSLA)Tesla (TSLA)

TSLA is shrugging off its earnings report and participating in the AI trend. What concerns me is that the move off the low is a clear 3 wave move. This tends to suggest a corrective move in a larger downtrend. So, if the next bigger drop that is coming is also a 3 wave move down, it could be setting a potential buy. If it is a 5 wave move down, then our original targets sub-$100 will come back into play.

Taiwan Semiconductor (TSM)Taiwan Semiconductor (TSM)

TSM’s pattern off of the October low appears to be corrective. Note the overlapping uptrend. As long as TSM holds $81, we expect to see a continued push into the $120-$138 region. Below $81 and a bigger top is in.

Super Micro (SMCI)Super Micro (SMCI)

SMCI is avoiding the obvious head and shoulders pattern, so far. When these patterns fail, they lead to sharp rebounds. We added some at the neckline and will add the rest on a breakout or a breakdown. If we see a further breakdown, below $215, then the $191 price will be the region we plan to buy. If our bullish count is validated, $325 is not an unreasonable target for the next swing higher.

Chainlink (LINKUSD)Chainlink (LINKUSD)

Not much to add. We saw a breakdown below the critical support zone with a moderate rebound. I expect us to hit $3.5, which is where we are targeting our next buy. I won’t consider the low being in as long as we stay below $9.6

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