For reference to terminology used, please look at technical analysis under our resources section here. Regarding the charts below, the vertical tan shades represent time factors. These are inflection points where we have high odds of something significant happening. More times than not, (3/4 of the time), they mark a turning point in the trend. So, what matters is the direction we are trending into these periods. Regarding the vertical lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.here. Regarding the charts below, the vertical tan shades represent time factors. These are inflection points where we have high odds of something significant happening. More times than not, (3/4 of the time), they mark a turning point in the trend. So, what matters is the direction we are trending into these periods. Regarding the vertical lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.

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

Broad Market

My primary perspective is that we are continuing to trace a complex corrective pattern in this ongoing bear market. For the non-Elliott Wavers, all that you need to know is that this pattern is not complete until we get a sharp 5 wave drop towards the SPX 3050 region. The only question I have is determining if we topped, or will we have one more push higher?

Do you see the wavy/overlapping pattern inside the red box? That could be counted as a corrective pattern in an ongoing uptrend. This would imply one more push to at least 4275 before the wheels fall off. If this plays out, we will remove our hedge (more below), and hold a high cash position.

1-2, i-ii

In Elliott Wave analysis, the 3rd wave is typically the largest and most powerful move in a trend. This is what you want to capture on the upside, and really avoid on the downside. That being said, there is a phrase called a “1-2, i-ii setup." This simply means that waves 1 and 2 are in place, and we are setting up for the heart of the 3rd wave move, usually on some gap. If you’ve ever heard of a cup and handle pattern, this is just a simplified version of a 1-2, i-ii setup.

Keeping that in mind, let’s take this one step at a time. In the picture above, look at the structure of the move off the October low. It is clearly 3 waves up. Whenever you see a 3 wave move, the vast majority of the time it is a corrective move in a larger trend; in this case, that trend is down. What follows a 3 wave bounce (B wave) is a 5 wave drop (C wave). So, this C wave will be a 5 wave move, which will necessarily develop into a 1-2, i-ii setup before really letting go.

Well, that setup is in place.

The above chart can be counted as a 1st wave down, 2nd wave up; followed by another 5 waves down and 3 waves up. I cannot stress the level of risk this setup presents us right now. Just because this setup is in place does not mean the market will take it. As long as price stays below the 4035-4067 region, this window will remain open. So, below this level and the risk in the markets remains quite high.

To simplify the risk levels, there are three final supports to monitor before the blue primary count is fully confirmed: 3902, 3835, 3808. Each level that gets taken by price increases the risk in the markets. Once we go below 3808, we should be in the heart of the 3rd wave drop pointing us towards the 3050 SPX region.

On the other hand, if the bulls can muster a rally that takes us through 4035-4067, then this window pointing us down will be closed, for now. What this means is that in order to drop us back towards that region, a new setup will have to develop, likely after we move to the 4275 region.

Now, let’s look at the red alternative scenario where we do break through the 4035-4067 region. The only structure that will take us there has collapsed into a low-quality pattern called a leading diagonal. Remember how I said that when you see a 3 wave bounce, the odds greatly favor it is a correction in a bigger downtrend? Well, look below at the bounce we are in. It’s only 3 waves.

The only bullish alternative is a rare pattern called a leading diagonal pattern, which is a messy, overlapping 5 wave pattern. The rule with leading diagonals is that you should not believe them until you get all 5 waves in place, and then see a bigger pullback that holds the low. So, this pattern, if it is playing out, has a lot to prove.

Macro

With the recent fall of Silicon Valley Bank (SIVB), followed by Signature Bank (SBNY), we saw the 2nd and 3rd largest bank failures in US history. In fact, the run on SIVB was the largest bank run in US history, with $2 Billion withdrawn in one day. Prior to this run, Washington Mutual was the largest run, with $16.7 Billion over 10 days.

According to the markets, the problem is not localized. The below chart is a handful of larger regional banks in the S&P 500 as well as the SPYDR Regional Bank ETF (KRE). This type of drop off is not the sign of a healthy stock, and we are seeing them across the board.

However, we learned over the weekend that the current banking crisis is not limited to US regional banks. Credit Suisse, one of the largest international banks, sold to their Swiss competitor, UBS, for a little more than $2 Billion (or $0.54/share). On Friday, it was priced more than $7 Billion dollars (or around $3/share). This will mark Europe’s largest bank merger since the 2008 financial crisis.

Regardless of the details, what this signals is that the current banking crisis is not a US problem, and not just a regional bank problem. This is more than apparent when we look through various charts within the financials sector.

Bank of America (BAC)Bank of America (BAC)

BAC is being portrayed in the news in a position of strength. It was one of a handful of banks that bailed out First Republic, and has recently been mentioned as a potential buyer of Signature Bank. However, if we look at the chart below, this is a very concerning pattern unfolding.

First off, BAC is below its October low. More concerning, we can count a 5 wave drop from the 2022 high, followed by a 3 wave retrace that ended right before the current drop. If BAC breaks below $22.70, the COVID low will be in discussion.

Metlife (MET)Metlife (MET)

MET is one of the largest insurance companies in the US. The chart below is telling me that this banking crisis is not localized to just Banks.

The above chart is showing zero bids as MET is in the process of breaking a major support zone. What is concerning, which can be seen on many charts right now, is that this drop is preceded by a clear 5 wave uptrend from the COVID low. We are at the completion of a large degree 5 wave pattern and are beginning a large degree correction.

Morgan Stanley (MS)Morgan Stanley (MS)

MS is a very large investment bank as well as a robust wealth management firm. They recently acquired ETrade, which gets them into the retail space. Their chart is also closing on the lows after completing a clear bear pennant from the October lows. At best, this should play out as an A,B,C pattern, where the C wave that just stated is equal in length to the A wave.

If we are in the beginning stages of something larger unfolding, we would expect the FOMC to drop rates and begin a fresh QE program to support equities. However, considering all the problems unfolding, the FED Futures on what this week’s decision is sitting at 63% chance of raising rates by 25 bps!

This is probably quite shocking to most, considering the headline CPI number was celebrated by the equity markets. However, the bond market sold off sharply on the CPI news. What the headlines were not discussing was that the CPI print was actually much hotter than the YoY print was suggesting. Inflation is best measured on a sequential basis, not a YoY basis. What matters is the trend, not annual comparison. It’s much more important to see if inflation is improving from month to month, not year over year, when tracking the trend.

I prefer to take the 3-month annualized readings to get the best feel for the actual trend. When you add up the prior 3 month readings and annualize them, the number comes out to 4.08%, compared with last month’s reading at 3.4%. This is a concerning rate of acceleration, and marks the 2nd month in a row of an accelerated trend within the CPI data.

Even more concerning, we are seeing a similar acceleration in energy, core prices, core goods, shelter, as well as services, which has been the biggest concern regarding inflation. The reason why services is so concerning is because it accounts for ~85% of the US GDP and it is still expanding above its 12-month trend.

With an on-going economic expansion comes inflation, which continues to show up in the CPI numbers. There is no question the FED, short of a banking crisis, would have to increase their terminal rate well above 5%, considering both the resilience of the US economy and the stubbornness of inflationary pressures in the services sector.

So, if the FED does drop rates prematurely, we risk a replay of the 1970s, when that FED also dropped rates due to market pressures, leaving inflation intact to roar back repeatedly for over a decade. In light of this history, which Powell has alluded to multiple times as the primary guiding force behind their decisions, if they decide to drop rates soon, investors should be concerned.

I’ve been discussing the bullish posture in various futures. Another interesting chart to monitor is the 10-year yield. Remember, if the FED is about to drop rates, and a banking crisis is upon us, then bonds would be one of the primary assets to own going forward. This would mean that yields would fall, as inflation is no longer as much of a concern as deflation.

According to our analysis, the 10 Yr. Yield’s uptrend looks incomplete. The current consolidation looks like a 4th wave with a 5th wave targeting just over 4.5%. This would imply, like various futures, that inflation is not behind us.

Hedge

Our hedge signal flipped to buy on last Thursday’s rally. We decided to follow our risk levels to put the hedge back on while the signal is in buy. If we break above last week’s high, we will remove it and go in line with our signal. Considering the risk in the market, we are being more cautious. If our worries are justified, the signal in bear mode is quite sensitive, so it should flip back relatively close to where we are.

I/O Fund Positions

We added some cash back into NFLX, ENPH and TSLA. These are attempts to position for the possibility of the above red count playing out, so these new entries have stops. However, we are currently tracking crypto to add a heavy allocation towards (more below).

NVDANVDA

NVDA found a way through the $241 resistance. However, it still appears to be closer to the end of a move than the beginning of one.

NFLXNFLX

If NFLX breaks below $285, we’ll stop out of our 2% allocation from last week. Also, it will change the count, as one more high will become less likely.

AMDAMD

This move up in AMD has completed what can be counted as a leading diagonal. As a rule, we now need to see a 3 wave pullback that holds the October low. AMD is now a candidate for a stock that has bottomed, no matter what plays out. It is now over 80% off its low.

ENPHENPH

Enphase is a play on energy. Its breakdown last week was in line with the breakdown we saw in crude and natural gas. We are early to this thesis, but we still believe it is likely to play out.

Crude OilCrude Oil

GasolineGasoline

MSFTMSFT

That's quite a key reversal candle in MSFT from a key resistance level. This has given us 5 waves up in an ugly C wave.

TSLATSLA

This correction is starting to get too stretched to be a 4th wave. However, the count works best, like NFLX, with one more high. My primary analysis is that TSLA will go towards $92 before the larger drawdown is over.

BTCUSDBTCUSD

This chart is interesting. I’m counting this as a large degree 4th wave with a move towards $13,000 in the future. However, we also have 5 waves up off the low and an interesting divergence from equities. Our original thesis that Bitcoin is a path out of a failing centralized money system could be finally playing out, so we will give this thesis a chance. What we want to see from this high is a 3 wave retrace, not 5 waves down. If we see 3 waves down, we will likely add aggressively to Bitcoin, with a stop in place.

AEHRAEHR

ETHUSDETHUSD

ETH has a very bullish posture, which we will give the benefit of the doubt. The next pullback should be a small 3 wave retrace then a very big breakout to confirm

TSMTSM

MGNIMGNI

ChainlinkChainlink

Pretty clear level here on the next bigger move.

Regarding the charts below, the vertical tan shades represent time factors. These are inflection points where we have high odds of something significant happening. More times than not, (3/4 of the time), they mark a turning point in the trend. So, what matters is the direction we are trending into these periods. Regarding the vertical lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.

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

Broad Market

Last week we saw the market in extreme oversold conditions. As a result, we were expecting a short covering rally to target 4040 SPX, which is what we saw. However, what we were not expecting was a 125 point rally in two days that exceeded our target. Furthermore, the structure of the rally is a rather clean 5 wave move, which has added an interesting layer of complication into where this market can go.

As a result, I’m adding an alternative scenario to the larger picture, which we will start game planning for in this report. Before I dive into these scenarios, I want to be clear. Short of the FED starting a new liquidity cycle, which I see very unlikely considering the inflation data, coupled with the bullish posture in various food/energy commodities, I simply do not see the necessary support needed for a new multi-year bull market playing out. Long-term risk (6 months+), we are still quite defensive and will remain this way until new data changes this view. However, intermediate term risk (1-3 months) is quite different. There is now a potential +300 point move that could play out over the coming weeks-months, which we will likely position for, if confirmed.

– Primary (Blue) – we have either topped or are within 200 points away from topping. This will lead to a fresh leg in the bear market with a downward target towards SPX 3000.

– 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.

If we zoom into the structure of the bounce off the October 13th low, you can see on multiple time frames 3 wave moves in all directions. We assumed that the January rally was the C wave, which appeared to collapse into a weak diagonal pattern. However, the 5 wave rally off of last week’s low has opened the door to this alternative scenario potentially playing out. Over the next 2 weeks, I expect one of the 3 scenarios below to be confirmed. This wil define the intermediate-term risk. What will matter most of all will be HOW the market retraces in the coming days – 3 waves down or 5 waves?

If we retrace in 5 waves down, and take out last week’s low, then either blue or green is playing out.

– Blue – we have topped, and will continue to trend down until the selling pressure gives way to a strong trend.

– Green – we bottom before breaking below 3765, then turn back up in a 5 wave pattern. This will imply that we are going to the 4200 region before a bigger top triggers.

If we retrace in 3 waves down, then red will start moving into position.

– Red – The overlapping mess of a market we have experienced since the December top has been part of a very complex B wave pattern. B waves (and 4th waves) are treacherous, as they tend to whipsaw emotions, grind down investment plans and wear down investors. We typically do not see B waves take such a complicated form, but considering that sentiment is in the basement, as well as the resilient credit cycle in the economy (more below), this scenario should be taken seriously.

Let’s zoom in a little more to a 15 minute chart. This will help us set up parameters and expectations for the week.

Note how the 5 wave move off the low started from a slightly lower low than the previous drop. This could easily be an expanded flat correction, which would support the blue/green above. However, because it started from a fresh low, we have to consider red, and the potential for a large push higher before we see a bigger top.

We topped today right into our minor time factor (6-7). We were trending up into it, and so far, the drop is only 3 waves. This can easily morph into a 4th and 5th down, which should be settled tomorrow/Wednesday. If this 3 wave pullback holds, and we push to make another high, the red count will then become my primary, as we set up a buying plan for the following 2ndwave pullback.

Our Updated Game Plan

We currently have about 30% cash and are 100% hedged. If we see this 3 wave drop hold, we will look to remove some of our hedge for a gain. Also, if the odds start favoring the red count, we will look to deploy some of our cash. As of now, ~ 2.5% in NFLX, ~ 2.5% in TSLA, 1.5% in ENPH, and ~10% in QLD once we close our hedge, and the rest in cash. For long-term investors who do not want to be this nimble, nothing has changed. Whether we see a top already in, or one that happens within the next +300 points, we believe that this bear market is not over. This will remain our outlook until we see evidence to the contrary.

Macro

The Liquidity Cycle

The phrase, “wall of worry,” continues to get thrown around in 2023. The new bull market, like all bull markets, is climbing a wall of worry. This phrase was golden in the last 12 year bull cycle, as stocks shrugged off countless events that pundits were certain would end it all – Downgrading US debt, Brexit, Grexit, Global Slowdown, China Collapse (1 and 2), Taper Tantrum, The 2016 Presidential Election, COVID, etc. Nothing serious manifested, as all drops were quickly brought back to new highs, leaving bears in the dust.

However, the one common thread within all of these events that allowed for equities to shrug off the news and continue higher was that we were either in the expansive part of a liquidity cycle (2011, 2015-2016), or the FED started a fresh liquidity cycle (2019, 2020), which saved equities.

How important is the liquidity cycle for stocks? After the COVID collapse, we saw some of the most abysmal economic data on record. Literally, high frequency data was off the chart, and appeared to only be getting worse as we entered a recession. In response, the FOMC started one of the most aggressive liquidity cycles on record. In 2020, stocks went on to have a record year, while economic data continued to shock investors. Without a new liquidity cycle, I simply do not see a new bull market starting up, which is why this is so important to track.

The below chart compares liquidity to the S&P 500 over the last 15 years. When liquidity is being pumped into the economy, stocks are able to shrug off terrible events, even contractions within the economy. On the other hand, when liquidity is being drained, we tend to go through periods of volatility – 2018-2020, 2022-present – until a new liquidity cycle starts back up.

The Credit Cycle

Recessions happen when banks shut the credit window. As the FED increases rates to slow inflation, the cost to buy homes, cars, business expansions, remodels, etc. all go up as well. This is why manufacturing sees a relatively quick reaction to rate increases. Like dominoes, layoffs lead to less spending, which leads to more layoffs. Banks increase their standards for loans, making it more difficult for struggling businesses and consumers to stay afloat. This eventually gives way to a recession, which destroys inflation, allowing the FED to lower rates. We then start a new credit cycle.

The question we have to address today is – how close are we to a recession? Manufacturing is clearly in a deep contraction and has been for several months. However, 85% of our GDP comes from Non-Manufacturing (Services). Unlike Manufacturing, this segment of the economy is continuing to expand.

If we dive down into Non-Manufacturing reading from last week, it did tick down to 55.1, beating the consensus expectation of 54.5 (any reading above 50 marks expansion, while below 50 marks contraction). New orders, which measures future demand, increased to 62.6 from 60.4 a month prior. Within the report, inflation concerns continued to be the predominate theme. This can be seen clearly in the prices index, which ticked down to 65.6. This is clearly off the peak, but still very elevated.

A basic metric that I use is measuring the trend in ISM numbers to their 12 month exponential average (in blue below). The below chart blends the ISM number along with the new orders number. Note how Services is back above this moving average for the first time since later 2021. This is great news for those worried about an imminent recession, as the credit cycle appears to be more resilient than most expect.

This is not only a US story, as recent global PMIs show the exact same scenarios playing out. All major countries are showing a contraction in manufacturing; however, the only major country that is showing a contraction in services is in Brazil. In other words, the likelihood of a H12023 global recession is unlikely. Why this matters for equities is because equities tend to bottom while in the middle of a recession. This further supports the red or green counts from above.

Why This Time is Different

The credit cycle is ready to extend, while the liquidity cycle continues to contract. Without the liquidity cycle, it is only a matter of time before credit, equities and the economy continue to contract into a recession. Why we think it is a pipe dream to assume the FED will pivot and start a new liquidity cycle to support equities? In one word – inflation.

We’ve been conditioned to expect the FED to save equities when they go down too much. Many, including myself, were shocked to see the most dovish FOMC in history pivot into becoming one of the more hawkish in recent history. This is because of how harmful inflation is to an economy. There is a reason that inflation pressures are more important to fix over decreasing asset prices.

Most investors have never experienced inflationary environments, while very few have experienced inflation of this caliber. We have entered a new macro regime where systemic global inflation is at odds with one of the most indebted global economies on record – global debt-to-GDP ratio of 338%.

As inflation builds, the fixed yield on bonds becomes less attractive. So, yields go up until buyers are satisfied with the new fixed yield relative to inflation. This will increase the cost to service debts, which is bad news for countries with a debt-to GDP ratio over 100%. If this cost goes too high, the bond market fails to believe that the debt will ever get paid back, which can cause a fiscal spiral. This is what we saw in England in late 2022, and this is what we want to avoid in Japan in 2023.

Furthermore, while a bear market in equities affects some members of a society, inflation affects all members of a society, especially the middle and lower classes. And, if the 1970s taught us (and the FED) any lesson about inflation, it is that once the genie is out of the bottle, it is very hard to get it back in. So, addressing inflation is the primary concern of this FED. They have stated this time and time again, and we do not believe the story with inflation is over, yet.

The below chart shows the 5 year breakeven rate. This is the difference in yield between the inflation projections 5 years out and the 5 year nominal yield. In other words, it’s a market-based gauge of where inflation will be in 5 years. Since January of this year, the 5 year breakeven is up 60 bps.

This is further backed up by the breakout in the 10 year yield. The bond market is diverging from equities, which will require a resolution.

This makes sense considering that the Services segment of the economy continues to expand in light of an aggressive FED. It also makes sense considering the “Super Core” segment of the economy, which we discussed last week, has been barely affected by the current rate cycle. What concerns me is that the 5 year breakeven is up this much while energy and food prices remain subdued. This, in my opinion, is not being priced into the markets, except maybe the bond market, which is very bearish right now.

The below charts are the price action in crude and gasoline. They are weekly charts, and appear to be consolidating just before a bigger breakout.

Gas

Crude

Furthermore, food prices appear to be setting up a fresh push higher. Cattle prices have been in a sharp uptrend and not far away from making new highs. Anecdotally, most carnivores have probably noticed the increased price of steaks, hamburgers, etc., as a result. This has been offset by wheat prices going down. Wheat appears to be putting in a bottom, as we trend down on decreased momentum, and into a major cycle cluster this week.

So, my concern is where will the breakeven go if energy and food make a new leg higher? What will the odds be that the FED starts a new liquidity cycle if the above futures do breakout? Can the rally ignore a higher terminal rate and continued draining of liquidity from the markets? How likely will the consumer be to increase discretionary spending if we do see another leg higher with inflation, and another leg lower in equities?

We are seeing a resilient credit cycle at odds with a decreasing liquidity cycle. It is my belief that the liquidity cycle is the most important element to justifying a new bull market. Without it, the current uptrend is on shaky ground. The FED has more than enough data without energy and food prices to continue draining liquidity from the system. It has to get inflation from 6.5% down to 2%, and the Services sector is making this goal very difficult with the current rate in place. This is without food and energy prices breaking out.

Hedge

The hedge is trending close to a flipping to a buy. We will likely close some of the hedge for a gain after we see weakness into this week. There has been a stark difference between the signal’s performance in 2023 and my manual performance. We continue to believe the signal, though will drag on returns in choppy markets, will help any that follow it avoid deep draw downs like we saw in 2022. This signal will help us to invest for a shorter time period and still find the necessary protection from another drop – whenever that happens. We plan to close some of our hedge in the coming weeks for a gain, and the remainder when the signal flips.

I/O Fund Portfolio

We are still holding about 30% cash, which we will likely deploy half if the coming pullback is 3 waves. These will be temporary allocations, until the market can prove to us that a new bull cycle is starting.

NVDA

The divergences are quite strong on the larger time frames. However, when you look at the daily chart, note how the Composite Index found support above the moving averages, that are starting to point up. This supports another push higher, but a limited one. No matter what, we still only have 3 waves up off the low, so any breakout should be bought with a stop that increases with price. This is not where a LTBH portfolio goes in.

NFLX

This chart is the most supportive of the OMH red count. A move to $300 will trigger a buy from our end. A push to new highs will also more than confirm NFLX has put in a major low back in May of 2022.

AMD

AMD is not as strong as NFLX. If we do see another leg in the bear market, we will likely see a fresh low here, but not in NVDA. The upper targets are listed as we complete 3 waves up off the October low.

ENPH

This one continues to trade like an energy commodity. If energy breaks out, I expect ENPH to have another stellar year. We will likely add to this position, as its posture is much more bullish than many of the other names we track.

MSFT

This stock is key for me. Some FAANGs have topped – GOOGL, AMZN. MSFT is the 2nd largest weighting in the S&P 500, and the jury is still out on whether it has topped. As of now, it is about 7.5% away from making new highs. Also, this rally is giving a strong sell signal. If we break below last week’s low, then we can see this market get ugly.

Now, if we compare this chart to APPL, you can see more divergences. AAPL is currently 2.5% away from a new high. So, if in the coming (potential) rally, we see AAPL make a new high without MSFT, this is a big warning. But, if MSFT can breakout to new highs with AAPL, this supports the larger red count where we can push towards 4400+ SPX.

AEHR

For AEHR to get another high, it cannot break this channel to the downside. That’s a lot of room to drop, and could set up a great buying opportunity.

TSM

TSM is 12% away from new highs. The same divergences with the FAANGs should show up in semis if/when we do top out in a larger B wave.

TSLA

TSLA could be in a 4th wave that’s targeting $180. This will be one of the places we park cash if we get more confirmation.

MGNI

Crypto

Can we get one more high? The setup is there as long as we hold $20K

In conclusion, I remain in the long-term bear camp based on my technical and macro analysis. I simply do not see a FED chair who is so obviously concerned about his legacy starting up a fresh liquidity cycle in light of the recent inflationary data just released. If energy and food do breakout, this will likely be the catalyst to push the 10 year yield to new highs, and finally align the equity market with the bond market.

However, this does not mean the equity market is seeing something 9 months in advance that I am not. Maybe the recession will be shallow, maybe energy does not breakout and continues lower? Or, maybe sentiment needs to be fully reset before we drop to new lows. This is why I always say, “price is king.” It is the only metric that makes you money, and if it is running counter to a great macro thesis, I will abandon that thesis to follow price.

The set-up is there in the stocks presented for another push, some to new highs and some not. If the red count is confirmed, or looks like it is getting confirmed, we will close some of our hedge (wait for the signal on the rest), and deploy some of our cash for this move. If not, we are hedged and will continue looking down for better buying opportunities.

For reference to terminology used, please look at technical analysis under our resources section here. Regarding the charts below, the vertical tan shades represent time factors. These are inflection points where we have high odds of something significant happening. More times than not, (3/4 of the time), they mark a turning point in the trend. So, what matters is the direction we are trending into these periods. Regarding the vertical lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.here. Regarding the charts below, the vertical tan shades represent time factors. These are inflection points where we have high odds of something significant happening. More times than not, (3/4 of the time), they mark a turning point in the trend. So, what matters is the direction we are trending into these periods. Regarding the vertical lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.

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

Broad Market

The major US markets continue to trace the complex corrective pattern we outlined weeks ago. What this pattern calls for is a final 5 wave drop to new lows. For SPX, the downward targets are 3295, 3150, 2940. If we get confirmation of this pattern playing out, we will look to remove our hedges and commence buying around these key price targets.

From an Elliott wave perspective, the structure of the bounce from the October 13th low warrants caution. Anytime we see a 3 wave bounce, the odds favor this pattern being a correction within the larger trend, which is down. The above chart is clearly 3 waves up.

This is backed up by various supporting markets that are important. In short, for a major bull market reversal to be underway, we need the below markets to participate. Instead, they seem to be confirming the bearish setup.

Financials (XLF)

The Banks have been very strong since the October low. However, the structure of XLF off the low is also an overlapping 3 wave structure. Note how this 3 wave bounce has retraced the majority of the 2022 drop. Also, note the weakening momentum as price moves higher. This pattern may have one more high in it, but it is clearly a B wave until proven otherwise.

Transports

The Transportation sector is also flashing similar warnings.

Canada

The Canadian TSX is an important market to track for US equities. More times than not, it leads the US. When these markets diverge, it is a big warning of an imminent trend change. This is not what we are seeing. Note the bear pennant forming. This triangle pattern is common with B waves, which the TSX appears to be tracing.

If we zoom in on the bounce off the October lows, the S&P 500 appears to have an incomplete uptrend. The 3 wave bounce is marked by an A wave up, B wave down, and C wave up, which completes the 3 wave pattern. The C wave always plays out in a 5 wave pattern, and it appears that we only have 4 waves in place. This suggests that we see a final run towards a double top, or 4225 SPX in the coming weeks, but this is not guaranteed.

The above blue count has been my primary analysis for several weeks. In fact, we removed some of our hedge and have gone net long (25%) in an attempt to capture some of this potential move. This move needs to manifest this week, or it is in danger of not playing out.

My alternative count (red), which is quickly becoming my primary. This suggests that we already topped and are almost done with the 1stwave down in the final move towards the 3000 SPX level. If we push towards 3920 before breaking out over 4040, then this will become my primary, as we look to fully hedge on the 2nd wave retrace. In both cases, we should see a larger bounce before the wheels fall off.

Futures

It may seem odd that a tech service covers futures; however, I am always looking for clues in many markets so that we can properly position. Futures are very important right now because they track commodity prices, which is the underlying pressure within inflation. The most important to monitor is food and energy, both of which are suggesting higher prices into the near future.

Wheat

Wheat prices look to be completing the 5th wave in this large correction. It is trending down into major support with a cluster of cycles coming into play between Feb 28-Mar 3. Once we see a bottom, a large degree bounce should follow. This means food prices are likely going up.

Energy

Gasoline looks very similar to oil prices below. This very much looks like a consolidation before the next move higher. The next major cycle is in late April (this is a very big time frame to monitor). I doubt that we consolidate above the 1×2 line for that long. Look for energy prices to move higher in 2023, which will only put pressure on inflation.

Macro Analysis

Recent data growth has opened the door to the prospect of a “soft landing” or “no landing.” We discussed what a soft landing looks like last week – manufacturing contracts while services does not contract too much more. This last happened in 2014-2016, and most famously in the mid-90s. The idea of no landing means that we just continue to expand from here, avoiding a recession all together.

We would be onboard with this rosy outlook if it wasn’t for one key data point – inflation. All prior soft landings going back to the 80s had one factor in common – a supportive liquidity cycle. With inflation under control, the FED was able to allow the continuation of a supportive liquidity cycle (2014-2016), or start up a new liquidity (mid-1990s).

With talking heads focusing on stronger than expected growth metrics in the economy, they fail to acknowledge what this means for inflation. In short, inflation may have peaked, but the real battle will be getting it from 6.4% to 2%.

If you pay attention to what the FED is saying, they are now tracking something they are calling “Super Core” Inflation. This metric excludes food and energy, like regular core inflation, but goes one step further to exclude all other goods as well as shelter. Because the US GDP is ~85% tied to services, this gives the FED a look into how their policies are affecting the largest segment of the US economy.

In January, the Super Core prices rose at a 7.4% annualized rate. This is the fastest increase for any month since 2021. These prices are up 4.6%, which is just off its peak at 5%.

It is alarming how little effect the current aggressive rate campaign by the FED is having on services. While manufacturing remains in an on-going contraction, services continues to expand, proving that the economy is much more resilient than expected. This also means the FED will likely have to hike higher and for longer than the equity markets are pricing in.

So, the only questions an investor needs to ask – is it more likely or less likely that the FED will start up a new liquidity cycle soon, based on the overly resilient services segment of the economy? Will starting a new liquidity cycle hurt or help their primary goal to get inflation back to 2%?

Counter Analysis/Bail Out Levels

My current outlook for 2023 has evolved (or devolved) since the start of the year. I have grown more bearish as time has progressed, and would rather remain cautious until we get evidence that the above analysis is being shrugged off. The levels I need to see reverse, which would have me reverse my analysis is below.

Dow Jones Industrial Index (DJI)

The consolidation pattern in DJI broke to the downside, as it suggests a continuation of selling before a low takes hold. I’ve stated before, and will repeat, as long as the DJI holds its October low, no matter what else happens, it will set up a great buying opportunity. This still holds. However, for me to reverse course, the Dow needs to reclaim its December high.

Financials (XLF)

I’m adding XLF to the mix. Like the Dow, it needs to reclaim its February high.

Caterpillar (CAT)

I’m also adding CAT to the mix. CAT is a key stock to track for early signals. It put in a major top according to Gann – multiple time clusters coming together at the 1×1 line off the 2016 low. If it can reclaim its February high, then I will start looking to buy.

Bonds

I’ll also want to see TLT take out its December high.

It may seem like I’m adding more criteria to my reversal pivot; however, if we are entering new bull markets, all of these markets will confirm it in unison.

Hedge Signal

Our signal nailed this swing in both directions. We remain in the basement, and a long way from turning back to a buy.

Time Analysis

These are the dates to monitor for a trend reversal/big break put. The most important aspect of these dates is how the market is trending into them. These dates will be inflection points that can help determine swings.

• Small Cycles in March: 6-7, 15-17
• Medium/large Cycles: February 27 – Mar 3. Note how we are trending down into these dates. It should mark a low in red 1 or blue 4.
• Notable Events: March 22-23 is the next FOMC meeting.
• Late April will be one of the biggest time factors of the year.

I/O Fund Portfolio

Though it may seem that we are heavily concentrated, as of now, our biggest position is really cash, which nearly double the percentage of NVDA.

NVDA (17%)

NVDA tagged the 100% extension (this is where the length of the C wave is identical to the length of the A wave). This is the most common spot that a 3 wave bounce terminates. It is now struggling to break above this level, while momentum continues to fade at these heights. This is not where you buy a stock. After this 3 wave pattern is complete, we should see a drop back towards our target region. We plan to make NVDA a larger position, so expect buys in the coming months.

NFLX (14%)

I’m starting to question the below bullish count. I’m looking for a big drop in equities, while NFLX is close to the lower trend line. Another 16% drop towards $270 is as far as I would give NFLX. If we do see a more bullish outcome in the markets (my red count, where SPX tags 4225), then NFLX can complete the large degree diagonal for wave 1. That would make more sense, but that’s a big ask. Long-term, I believe NFLX has put in a major low, but we could see a deeper pullback in the coming months than previously expected.

AMD (13%)

The top is in for AMD. One more low and we have 5 waves down from the high. There should be a larger bounce that follows, for anyone looking to hedge/unload. We will plan to buy more at lower levels.

TSM (9%)

A crash scenario for TSM would likely be due to geo-political tensions. This would create a great buying opportunity, as this company is likely not going anywhere. Like all semis, it has completed a 3 wave bounce up, and now we get to see how deep the pullback takes us.

AEHR (9%)

Look for us to take more gains in AEHR on the next bounce. My confidence in the chart is fading.

ENPH (9%)

Without question the most interesting chart we track is Enphase. It continues to trade like an energy commodity. In other words, it appears to be bottoming while NDX/SPX appear to be topping. If correct, we could see a repeat of 2022.

MSFT (8%)

Regarding the FAANGs, first Google topped, then AMZN, NFLX, MSFT, and AAPL is now hanging on by a thread. MSFT is the key, right now. It looks like it has a 4th wave then one more drop to complete the larger 1st wave of the larger C down. We should see a corrective 2ndwave bounce before the wheels fall off.

TSLA (5%)

The 1st buy zone will be between $160-$140. My primary is that we visit $92, but we will begin layering in based on the red count. When technicals are calling for a drop that appears to be dramatic, especially when it runs counter to a recent positive earnings report, I prefer to set up buying plans based on both scenarios playing out.

MGNI (2%)

The top is likely in for MGNI. We need to get back over $14.30 to change my mind.

Crypto (14%)

One more swing high is possible from here, but that should be it. Then we have a very full pattern, which should lead to a deep retrace that holds the lows, at minimum. The next deep pullback should set up the buying opportunity we have been waiting for. Late March and late April will be the time cycles to monitor for Bitcoin.

For reference to terminology used, please look at technical analysis under our resources section here. Regarding the charts below, the vertical tan shades represent time factors. These are inflection points where we have high odds of something significant happening. More times than not, (3/4 of the time), they mark a turning point in the trend. So, what matters is the direction we are trending into these periods. Regarding the vertical lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.here. Regarding the charts below, the vertical tan shades represent time factors. These are inflection points where we have high odds of something significant happening. More times than not, (3/4 of the time), they mark a turning point in the trend. So, what matters is the direction we are trending into these periods. Regarding the vertical lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.

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

Broad MarketBroad Market

I am updating the current counts to fit the most likely interpretation of the price action of the 2022 bear market. The blue count is the same, and I consider to be a low probability, while the red count is favored for several reasons. For those that have not seen my most recent webinar, I encourage you to listen, as I go into detail why the macro and technical information that we have supports this thesis. You can listen here for I/O Premium, and here for Seeking Alpha.

The NASDAQ-100 (NDX) offers the most pronounced version of this structure in red below. In fact, it was the only structure that accounts for the price data, while the blue count feels forced.

Red – The reason I’m moving away from the standard A,B,C structure is because the current 3 wave bounce would have to be the B wave. B waves tend to retrace the majority of the first leg down. This would mean that we make a run to new highs well above 4400 SPX. This is simply not true in this case. The B wave is making a lower high in price, while extending longer in time than prior attempts at a bounce.

The only structure that accounts for this type of behavior is a complex corrective pattern called a W,X,Y pattern. This is characterized by downward trending 3 wave patterns in all directions (sound familiar?), where the structure gets more extended towards the end. If true, we should drop in a 5 wave pattern into the 9000 NDX region to complete the bear market. This level would be around 3000 SPX.

Blue – this scenario has us bottoming in a rather exotic structure. The C wave plays out as a very extended diagonal pattern, while the A and B waves are rather short. It fits, but is more rare to see a correction unfold with such disproportionate waves than a W,X,Y pattern. To make this scenario more improbable, the fact that we only have a 3 wave bounce off the October low means that if this is a new bull market, it would have to unfold as a diagonal pattern. More times than not, 3 waves tends to be a correction than the start of a new trend.

Daily Chart SPX

Shifting back to SPX, which has the same W,X,Y pattern unfolding, if we analyze the 3 wave bounce off the October low, it appear to be incomplete. C waves are always 5 wave patterns, and this one only appears to have 4 waves in place. This would imply a run to new highs in the coming weeks, which will target 4225 – 4275.

15 Minute Chart15 Minute Chart

If we zoom in on the ongoing 4th wave of the larger C wave, it also appears to be incomplete. I suspect we will see early weakness into this week, which would be a buyable low for anyone trying to play the ~200 point bounce that the coming 5th wave implies.

The lower support region is 4025 SPX and must hold 3985. We will likely remove half of our hedge and go net long to play this move. The R/R levels are quite attractive – stop below 3985 with a target of 4225. However, please keep in mind, the odds favor that we will be picking up quarters in front of a steamroller, so being nimble is crucial. For this reason, if we break back below 3985 and sustain below this region, any hedge that we log a gain on, will be put back on.

MacroMacro

The blue count would imply a soft landing is more than possible, as the FED maintains a terminal rate of around 5%. The February FOMC meeting had a tone that implied this was possible, and that after a few more hikes, we would hold ~5% Fed Funds rate into 2024. Though cautious, the market seemed to agree that peak inflation was behind us and that the actions taken by the FED are working. The problem with this narrative is that equities bought it and bonds did not. In fact, the February FOMC meeting marked the high in bonds, as the downtrend continues into this week.

What the bond market is likely picking up on is that the economy is quite durable, and declaring victory over inflation is not a probable outcome at this point. The recent CPI and PPI readings confirmed that inflation is re-accelerating, proving that the battle against inflation is not over. Peak inflation is likely behind us, but the real battle will be getting it back to the 2% target. Considering the extraordinary actions taken to quell inflation, it is concerning that we are starting to see inflation re-accelerate, even slightly.

This is further shown in the recent PMIs. Regarding the PMI readings, anything above 50 indicates an expansion, while below 50 indicates a contraction.

For one, manufacturing is currently at lower levels than just before the February high in 2020. This is a notable reading, as prices are much higher than in the 2019 downturn. Manufacturing is in a recession, and due to its sensitivity to interest rates, it is always a leading indicator of a slowing economy. However, if you look at services PMIs, which accounts for about 86% of the GDP in the U.S., it has re-accelerated into expansion territory. 

This is ultimately what a soft landing looks like in the US, where manufacturing contracts while services stays resilient. We saw similar soft landings in the mid-80s, mid-90s and most recently in the 2014-2016 slowdown. So, it seems plausible that this could be playing out again, and all the recession talk is overblown.

The one common thread between all the prior soft landings was the liquidity cycle. The FED was either still in the expansion part of a liquidity cycle, or started up a new one, which diverted services from following manufacturing into a contraction. The current liquidity cycle is below in black and put up against the S&P 500 for reference.

There is a stark divergence between liquidity continuing to trend down and equities trying to recover. The bet that the bulls have to make, which would bolster the trend in equities (blue count), is that the FOMC is about to start a new liquidity cycle, or at the very least, stop QT and allow liquidity to stay flat to trending slightly up based on other metrics. So, the question one has to ask is – with the current new data in CPI and PPI, with pockets of strength in non-manufacturing and employment, is the FED more likely to start a new liquidity cycle, which would push asset prices higher, along with wealth and discretionary spending power? The bond market has answered with a resounding no. In fact, for the first time in this cycle, the bond market as well as institutional analysts are projecting a higher terminal rate than the FED, which is concerning.

Bail Out LevelsBail Out Levels

I have stated before, and will continue to state that my bearish outlook has an expiration. If TLT and the DOW can break back above their December highs, I will abandon our bearish thesis and flip back into the bull camp. I will also want to see DXY (the US Dollar) commence its downtrend. Short of this, I consider the current rally in equities to be running on fumes.

Hedge SignalHedge Signal

We will continue to lean into our hedge signal to tell us when to hedge/not hedge. Our cash raises are determined by our tech/macro outlook. As of now, the hedge signal is not close to flipping back into a risk-on mode. We are in bear market mode, which uses 3 data points to capture bear market bounces (compared to the normal signal that uses ~ 7 data points).

I/O Fund PositionsI/O Fund Positions

NVDA

NFLX

MSFT

MSFT is pennies away from closing the 3rd wave gap. Below $255.40 and it gets closed, as does the hopes of another 5th wave run higher. MSFT has clearly only given us 3 waves up off the low, and this wave, maybe, has one more high in it. As of now, NFLX, AMZN, GOOGL have likely topped. MSFT looks to be next.

TSLA

Here’s a big picture view of TSLA. Technically, it appears to have an incomplete correction. One more wave towards $92 would set up a phenomenal buying opportunity. However, if we get there, the fear surrounding that move would make one not want to buy. The coming pullback needs to hold $138 or this becomes the likely scenario. We will likely buy assuming both scenarios are playing out, and buy in layers.

AMD

My guess is that AMD has one more run to new highs in it. However, this drop needs to reverse soon. Below $75 and the odds start shifting towards the top being in.

TSM

Only 3 waves up, and right at the symmetrical price level (A=C). This type of pattern is usually bearish. The coming pullback needs to hold $70, or we could be in for new lows.

AEHR

MGNI

ENPH

I continue to signs of bottoming while NDX shows signs of topping. We’ll take a shot with some of our cash that the best ER of the year is holding its inverse correlation to NDX.

Crypto

Be open to this count. Bitcoin is completing 5 waves up off the low. How can it continue higher while risk assets push lower? Either the red count thesis is wrong above (we are very open to this), or Bitcoin is tracing a 4th wave. that would mean we are in a nasty, expanded flat correction with $13K on deck. Like with every position, the coming pullback will tell us everything.

Time AnalysisTime Analysis

We have many stocks and indexes showing a time factor coming up this week/next (Feb 20 – March 2). As always, depending on how we trend into it will be the most important piece of information. The NDX shows 2 cycles coming together in the chart below (20th-28th). If we see a sharp drop and reversal early in the week, it could signal the 4th wave low. If we see a move back towards 4200+ by next week, it will be a big warning.