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.
