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
Weekly Chart
My perspective remains unchanged – have we topped, or do we have one more rally before a major top gets put in place? What has changed, which I will go into, is the possibility for a multiweek rally that could put my original target ~4400 SPX back on the table.
Please note the weekly RSI above. It is still within a bear market internal range. More times than not, the weekly RSI tips its hat first. We have clear price levels as well as RSI levels to help us determine what count will unfold.
Daily Chart
If we zoom in on the structure from the October low until now, we clearly have 3 waves up off of that low. This greatly supports that a bear market rally, to some degree, is developing.
The two counts I have in play are below:
Blue (Primary): we have topped and are working on a deep 2nd wave pullback. The higher this goes, the less likely that it is playing out. We have blown through the 4067 resistance and are now working on the 4118 region. Above the 4118 region and the odds of blue playing out go down substantially. We need to go above the start of wave 1 to completely invalidate it.
Red (Alternative): We have only completed two of three waves in a large degree bear market rally. This would have us in the early stages of the final push higher. From an Elliot Wave perspective, this final push higher will be a C wave, which always takes the form of a 5 wave structure. Wave 1 of 5 is complete, and April will be a 2nd wave retrace. The problem with this count is that wave 1 is relying on a rare pattern (discussed below) called a leading diagonal. These are not very common, and more times than not, fail, leading to a continuation of the predominant trend, which is down.
15 Minute Chart
If we zoom in closer, we can see the leading diagonal pattern as wave 1 of the final C wave pushing higher.
What is interesting is that the pattern is complete. We have a 5 wave pattern that is very overlapping, and stays within a defined trend channel. In order to fully confirm that the red count is in play, we now need a 3 wave pullback in April that holds 3838, then a 5 wave uptrend that breaks above the 4118 level. We still have a lot to prove, so patience is required.
Price levels to monitor: Above 4118 favors Red. Below 3838 favors blue. Expect April to be bumpy.
Supporting Markets
NASDAQ-100
On a shorter time frame, note the termination wedge for the 5th wave, which is happening on decelerating momentum. This is clearly an end move for the uptrend in place, and it is clearly a 5th wave, which will be followed by a drop. How we drop will be very important, and probably the ultimate theme of this report.
If we see a 5 wave move from this top, it will support my blue count. If instead we see a 3 wave drop that holds the bear market trendline, then the red count, or some variation of the red count will become my primary, and we should have a large push higher into late Spring.
The only count that does not feel forced on NDX is the same complex bear market pattern playing out in SPX. However, I also cannot deny that a potential leading diagonal is in place for a larger 1st wave up. The parameters are in place to help us get on the right side of what follows – 5 waves down and the bear market continues; 3 waves down and we can start putting more cash to work.
Dow Jones Industrial
I have not talked about this index for some time. However, it was the leading index off the October low, and my larger count still suggests one more high is needed to complete the final 5th wave off the COVID low.
Note how messy the correction has been so far. We have not seen a clean 5 wave drop from the February top, which supports the scenario where we see a bigger uptrend over the next several months.
Also, note how the current bounce has only given us 3 waves up. If this morphs into 5 waves up, it will signal that the first wave of the larger C wave is in place. This will be a strong clue that we could be in for a bigger bounce, which supports the Alternative Red Count in the broader market.
Financials
XLF continues to be the most important chart in the market. I believe it is leading the rest of the market. So, any new uptrend will likely only be temporary, which is supported by the macro environment.
XLF looks like it has given us a sharp 5 wave drop after breaking down from a large degree bear pennant.
This would line up with the SPX red count, in that a larger 2nd wave rally would unfold that fails to make a new high. As long as no more issues unfold in the banking sector, we could see this larger rally unfold.
However, it should be very clear that this rally would lead to large divergences, and likely not be the start of a new bull market. As long as XLF stays below the breakdown levels we saw just prior to SIVB collapsing, expectations for a new bull market should be muted.
Conclusion: if the SPX blue count gets invalidated, and we are setting up for a larger push into the 4275-4500 region, expect this rally to be limited in time, price and sectors that fully participate. We could see indices like the Dow make a push to all time highs, while the Russell 2000, S&P 500, and possibly the NASDAQ-100 make lower highs. The divergences will be key, if this plays out.
More Evidence to Support the SPX Red Count
Most readers prefer a strong thesis, and unwavering support for that thesis regardless of what unfolds. This would be similar to buying a stock based on a story and holding it without a stop. Investing is never that easy, and one lesson I learned throughout 2022 is to hold a strong thesis loosely.
As a portfolio manager, I am always asking myself where I am wrong, what will it take to flip, etc.? We are not in the business of being right, but in the business of maximizing profits and reducing risk.
Therefore, what you are seeing in this report is an active thought process that lays out levels, and markets that would determine us flipping to my Alternative Red Count discussed above in the Broad Market section.
I’ve been discussing how bad the banking sector looks through various charts. It is my belief that the banking sector has put in a major top and is coming close to bottoming out in the 1st large degree wave pointing down. This should give way to a rather large rally in the form of a 2nd wave, where we see many lower highs in the sector.
However, what cannot be ignored is that the rest of the market is NOT crashing with the banks. In fact, some sectors and stocks have moved higher while banks continue to crash. This coupled with the extreme bearishness that we discussed last week could be setting us up for a bigger rally into Spring.
Improving Breadth
We’ve seen some bullish signals with improved breadth in the markets. While MSFT and AAPL were holding up the indexes for the last couple of weeks, we are now seeing an expansion of buys throughout the market.
The below chart tracks two of the three breadth indicators that I like to tracks. The one on the bottom is called the McClellan Summation Index. It’s a slow moving index that measures breadth within the broader markets. What is important to note is that it bottomed in an area that has led to many bounces, and it is clearly pointing up. An uptrend in this oscilator from these levels can lead to a bounce that lasts between 4-6 weeks, on average.
The second indicator is a volume oscillator that measures buying/selling volume within the NYSE. I use many techniques to gauge cycles and inflection points, Gann’s Time Factors being my primary. However, one that I pay attention to when it triggers is known as T-Theory.
The basic idea is here that we should see equal periods in time of cash leaving the markets as we do with cash entering the markets. This creates one cycle, and has an eerie accuracy on helping determine periods of strength into the future.
For those interested in the subject, the inventor of the theory, Terry Laundry, has years of his analysis and use of the theory on line here. I’ve also found this blog helpful in understanding more modern applications of the technique.here. I’ve also found this blog helpful in understanding more modern applications of the technique.
That being said, note how the volume oscillator has moved beyond the prior peak and into positive territory. This implies a period of strength into the May 19th region. As long as the prior low in the oscillator holds, this will remain intact. Below that low, and we tend to see sharp reversals in the price trend. If this happens into the April time factor, we will know what to do.
Dow Cycles
At the beginning of the year, I laid out a general path using an amalgam of various Gann Cycles. They are weighted towards the more important cycles. These roadmaps have a history of providing key dates as well as general paths throughout the year. This is what we posted at the start of the year for the Dow.
I put this roadmap in the background because the rally in January was muted on the cycle. However, it called for weakness in February and a low in late March, which has been shockingly accurate. If this roadmap is playing out, we should see the April Time Factor that I have been discussing as a 3rd wave breakout with a topping pattern into late -May/early-June. Note how the top here lines up with the top in the T-Theory chart above.
SPX Time Factors
Without question, one of two of the biggest time factors for 2022 is April 12-28 (August being the next big one).
You can see the stacked cluster of cycles in the chart above. These stacked cycles tend to mark major inflection points. In short, they tell you when to look for something important. The "what" is always determined by how we are trending into the time factor. So, if we are trending down into that cluster, then we should look for a low, or vice-versa.
There is also a single cycle for SPX in late May that lines up with the period outlined above. I have a hard time imagining the mega cycle cluster in April will not be as important as the lone cycle in May. But, let’s say that we do see a 3rd wave breakout in April, or some kind of a 2nd wave low taking shape into the April time factor. We will then know that, with high odds, the SPX red count is likely taking us into late-May/early June. So, unbiased, we have to be as objective as possible as we move into April. Knowing when to look for a big inflection point is very valuable information to have.
Macro
OPEC announced a surprise cut to the world’s oil production. We have been talking about the bullish setups in Crude as well as Gasoline for many weeks. These bullish setups have been developing in light of very deflationary forces hitting the market, and we may be getting the trigger needed to confirm this thesis.
Crude
Today’s gap should mark wave 3. We need a 4 then a 5 to new highs to fully signal a low is in. If this happens, then my lone thesis that oil is setting up for a push to new highs is likely in its early stages.
Gasoline
This would line up with Gas breaking above the $2.8 barrier.
If these two things happen, expect an inflation impulse to return, and at exactly the worst time for the FED. The market is rallying on a pivot with a terminal rate below 5%.
The FED decided in their last meeting that banks are sound, and inflation is still too high. There was a split tone in a hawkish FOMC statement and a dovish speech by Powell that followed. James Bullard, President of the St. Louis Federal Reserve Bank, and voting member of the FOMC, stated last Friday the need to increase rates along with the terminal rate by year end. If energy does break out, coupled with the Wednesday PMI Services coming in too hot, along with a jobs report on Friday, we could see equities get hit, especially high beta stocks.
Furthermore, of the 14 countries that reported manufacturing PMIs for March, 10 countries slowed, and 7 were in contraction. For those arguing that a China reopening will offset global monetary policy, this data is not encouraging. Eventually, the recession in global manufacturing will spill over into services, which will trigger the recession being told in the bond market.
It’s also worth noting what is happening with the M2 money supply. First off, we are seeing the largest drop in the money supply since 1930. M2 has gone flat and had minor dips, but it has remained relatively consistent in how it has expanded. So, to see any contraction is quite concerning, especially one as large and consistent as the current one.
Milton Friedman taught us that inflation is a monetary phenomenon, and that the M2 layer of the money supply is arguably the most important for tracking inflation, disinflation and deflation.
The FED controls bank reserves, not deposits. In order for bank reserves to become bank deposits, which is one aspect of M2, banks have to loan money out. The COVID rescue plans, were fiscal injections directly into the M2 money supply. We saw M2 increase by 40%, which has never happened in modern market history. This led to a sizable increase in money market funds, bank deposits, as well as brokerage accounts. This is liquid money ready to be used within the economy.
The interesting aspect about M2 is that it is a leading indicator. We tend to see the increase long before we feel it in the economy. Note how M2 began increasing a full year before it showed up in the CPI print above. Also, as we are learning the hard way, it takes a lot of time for this increase to work its way through the economy.
Once the decelerating M2 hits the economy, we should see it affect business fundamentals in a noticeable way. This should lead to unemployment as well as revisions downward. It is not the type of macro factor that has historically led to expansions, and is one more factor among many that has painted the worst macro environment in decades.
I/O Fund Portfolio
Please keep in mind that our largest position is currently cash. Though we have reduced our cash positions from 30% – 22%, we do not plan to be fully allocated if the SPX Red Count plays out. We will stay in an elevated cash position until we see evidence that a new bull market is starting through: 1) favorable price action in global markets; 2) a new Liquidity Cycle is starting (discount window borrowing is NOT QE); 3) an averted Credit Cycle within the banks. As of now, neither of these things are supporting a new bull market.
Hedge Signal
Our hedge signal remains in Bear Market Bounce mode. So, expect more whipsaws than normal, as we lean into it to tell us when to get more cautious. The positions we have purchased over the last month all have stops that will move up with price.
NFLX
Between $379-$420 will be the high risk zone. Do not be shocked to see us cut NFLX in half if we get into that zone.
NVDA
We’ll step back on NVDA. I’m still counting this move as the A wave of a larger 5th wave. The pattern since the 2018 low has been a large degree ending diagonal. So, this move will be a 3 wave uptrend. So far, we only have the A wave in place. We will look to add on the B wave retrace. If the retrace is a 5 wave pattern down, then the red count will become my primary.
One of my favorite cycles is coming up with NVDA – green vertical line below. It tends to create strong swings in this stock, and NVDA has another cycle stacked on the same day – blue. Look for a top/low of sorts in late April for this stock.
AMD
If the coming pullback breaks below $69, we will have an excellent opportunity to buy at new lows. If this does happen, as will be true for all stocks, buying at new lows will be emotionally very difficult.
ENPH
Very clear parameters. We should know very soon the direction ENPH will break.
Bitcoin
Consolidating at the high is rarely a bad thing. We have our levels, as well as the WealthUmbrella signal to guide us on this move.
AEHR
Either we’ve topped or we have one more large push to new highs.
April 18 – 22 will be an important time factor to watch for AEHR. Either we break below that 1×1 line around $26, or we’ll see a blow off top.
TSLA
We’re adding due to fundamental reasons as well as the prospect of the 4th wave being shallower than expected. If we see a 5th wave higher, we may reduce our position.
MSFT
The theme is clear for most stocks – if April’s volatility is a 3 wave drop that holds the downward trendline, it’s very bullish. If it is 5 waves down, we are going to new lows. It’s hard to get super excited over such a messy/overlapping structure. We need to see follow through on the coming drop – i.e., 3 waves that hold the low.
Ethereum
There is an explosive setup in place here. We have 3 degrees of 1st and 2nd waves. A setup like this, if it triggers, tends to result in a big push higher from here. We’ll see if ETH takes the setup or not really soon.
TSM
Chainlink
The consolidation in LINKUSD is approaching 1 year in length. This is a lot of pressure building. Whatever way we break, expect a big move.
