For reference to terminology used, please look at technical analysis under our resources section here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.
Elliott Wave counts are meant to provide context. Each colored count represents the most probable paths given the current price data. There is a pattern unfolding in real-time, one of which will play out. By monitoring price levels that are held/broken, it will help us figure out which one is in play, so that we can better manage risk.
I/O Fund Positioning
Over the last couple of months, we have held a healthy defensive posture while adding to strong strategic positions. We closed two stocks, and greatly reduced three others. We then continued to rotate that money into fundamentally sound companies that are in the middle of the AI trend, as well as crypto. This has netted us a lower cash position than last month and more market exposure.
Regarding the changes we have made since the last report, we closed Super Micro for an average of 275% gains across all entries and exits. We also closed Netflix for an average of 98% gains across all entries and exits. We cut our Lam Research position down to 1%, having to log an 8% loss, as the earnings call signaled that we are too early to this play. This followed further reductions in CrowdStrike and Cloudflare in April, for sizable gains.
We then added exposure to our crypto positions since our last report. We set up predetermined targets, and once these targets were it, we went on a buying spree, which included Bitcoin at $59,000, Chainlink at $12, Ethereum at $2,900 and Solana at $153.
We also added to our AI positions since the last report. We built out Micron, Broadcom and AMD positions around the late April lows. We then followed up with breakout buys in Dell and AVGO, which have since reversed.
Regarding these stocks, we have little to no concern with AVGO; however, Dell’s margins shrunk, which puts it outside the boundaries of our current fundamental process. We believe their margins are bottoming, as the technical picture also supports this being a correction, for now. If the tehncicals devolve from here, we may lower this position into a 2% holding, or even cut it all together. However, we have no plan to add until we get more clarity.
The below pie chart represents our invested assets, not including cash or hedges. As of now, we are about 60% invested in AI stocks, 30% in crypto, with small allocations to various tech trends. We do have a sizable overweigh to AI while still counter balancing this exposure with a healthy cash position. The market is at an inflection point, and if it decides to take the more bullish path, discussed below, then we will continue adding our cash into key positions on pre-determined breakout.
Nvidia (NVDA)
I will spend extra time on NVDA, considering it is our largest position. The smaller time frame seems to be quite clear – we are trending up into the $1050 – $1315 target zone that we identified in our April report. The developing pattern is 5 waves, which means that we now have a fully formed 5 wave pattern into the target zone. This should set us up for some type of a reversal.
While a pullback from the current swing high appears to be reasonable, the question is what degree of correction will this become? When we zoom out to answer this question NVDA’s chart provides two potential answers.
When charting, there are two scales to measure price – linear scale and logarithmic scale. In linear scale, the Y axis has the same division in price from top to bottom. So, if the division is every $100, then a move from $100 – $200 is a 100% move. However, a move from $1000 – $1100 is only a 10% move. This gives the appearance of small moves at the based on the trend and dramatic moves the higher we go.
The other option is logarithmic scale for the Y axis. The measurements here are divided by equal % gains, not equal price measurements. This gives a more balanced account of historic trends up into the current one.
There are no rules on what scale to use. Some analysts prefer one over the other, while I tend to use both. I have found that some stocks tend to work better in one scale vs. the other. With Nvidia, each scale is telling us to wait to buy. Where they differ is the size of the drop that is likely building.
When we put NVDA is linear scale, it appears that we are completing a large degree 3rd wave, which could keep extending. The coming 4th wave would retrace the prior swing, before bottoming and starting a new large degree 5th wave higher. The targets for this 3rd wave are in the $1200 – $1300 range. A breakdown below $1035 will signal that we are in this correction, which we would use to setup buy targets.
When we put NVDA in logarithmic scale, it appears that we have a fully formed 5 wave pattern, where the 5th wave extended. The targets overhead are roughly the same and the break down price point remains $1035. However, this count suggests that we would see a deeper pullback than the count in linear scale.
Interestingly, the fundamentals simply do not line up with either of the counts, especially the one suggesting a deeper pullback is coming. The valuations are not exorbitant, as price would suggest. With each report, forward sales have continued to accelerate higher, and in some instance cases more than price increased.
A move to those levels would require deep revisions, or an unforeseen macro catalyst. This has been a fundamental story, as I have been forced to re-write this chart several times throughout the uptrend. So, we do not plan to take drastic measures now that NVDA has hit our technical targets.
Since 2023, we have seen three greater than 20% drawdowns in NVDA. Our plan will be to buy on these ~20% dips, and if we see an even deeper one, as outlined by these two counts, we will buy more. Until the story shifts and the fundamentals get reversed, we see no reason to not buy the dip on NVDA as it remains our top position, and will likely hold that spot into the foreseeable future.
Micron (MU)
In our last report, we were targeting a 4th wave pullback into the low $100s. So far, this is exactly what we have seen, as we used our targets to pick up shares of MU around $110 on April 24. It is clear that we have been in a 3rd wave (note the vertical move higher). If accurate, we still need a 4th and 5th wave to complete to the larger pattern.
The current dip is simply not big enough in time to constitute a 4th wave of this degree. If we see one more drop back into the low $100s, then we will certainly have a fully developed 4th wave pattern. This is demonstrated by the red count in the chart below.
Note the decelerating momentum in the composite index on the weekly chart. This is happening while price is making a higher high. To me, this looks like a B wave. A drop below $120 will signal this count is in play.
On the other hand, if we simply breakout over the $134 high, then the odds will start building that we are still in the larger 3rd wave. This is my blue count below, and it will mean that the 4th wave will likely happen later this year.
Bitcoin (BTCUSD)
Bitcoin hit our $57,000 target and has bounced back to retest the highs. I still think we are going higher; the question is if it will be directly from here or after we make one more drop into the high $40,000s first? If we break out to new ATHs, then we should see the $83,000 level next.
There is an important cycle cluster coming up in late June. How we are trending into these cycles is what is important. If we are trending higher into ATHs, then we will likely see some type of a reversal. If we are trending lower, then we will likely see some type of low.
Advanced Micro Devices (AMD)
The size of the bounce off of the May low tells me that the 38% drawdown from the March high is likely over. The question I have is what type of bounce are we in? My green count has us in the 5th wave in a large degree diagonal pattern, which would target new highs in the coming months. Diagonals are characterized by large swings in both directions that tend to overlap with one another.
The red count will look similar to the green count; however, we should see an overlapping uptrend that fails to make new highs. This would have us in a large degree B bounce within a larger correction.
If we zoom in on the current bounce, keep in mind that both counts are expecting a 3 wave uptrend for both counts (A wave higher, B wave lower, and then C wave will be the most bullish portion of this move).
It looks like AMD has completed the A wave higher and is still in the B wave contraction. If we breakdown below $158, the final move of this B wave should hit our target box at $152 – $148. On the other hand, if we instead breakout over $174, then I’d consider us being in the most bullish portion of the bounce, which is the C wave. This would likely push toward $195. If this happens, we will reassess what count is in play, as both will point to the same general target. The type of pullback we get from this region will tell us if we are going higher.
Broadcom (AVGO)
AVGO is a new addition and one that we plan to continue to buy on further weakness. The long-term trend appears to be quite bullish; however, we will need to contend with some volatility along the way. If we zoom in on the current uptrend that we are in, we are either in the final swing lower in the 4th wave correction, or still in the larger 3rd wave higher.
If we see a breakdown below $1305, we will be in the 4th wave and target the $1100 region for bigger buys. If we are still in the 3rd wave, then we should see a breakout to new ATHs (above $1450), followed by one more swing higher to complete the 3rd wave. This would mean that the larger 4th wave pullback would happen later into the year.
Ethereum (ETHUSD)
I’ve been reworking the count on Ethereum to fall in line with the Bitcoin count. I still think we are in a minor 4th wave and need one more drop to complete the pattern. Note how we got 3 waves down from the March high, which was followed by 3 waves higher off the April low. I think we need one more small push into the low $4000 region to complete the B wave. If we see any sizable drop from this high, and it is in the form of a 5 wave pattern, then we know that this thesis is correct. If we instead breakout above $4,259 then the 4th wave is over, and we will continue higher in the larger 3rd wave.
Dell (DELL)
Like Micron, Dell appears to be tracing an incomplete 5 wave pattern. Note the vertical move higher on heavy volume and max momentum; this is what 3rd waves look like. If accurate, this drop should only be a 4th wave, which could take a month or more to play out. The current drop should be the A wave, and we should see a B wave bounce soon.
The $135 region has proven to be solid support, so far. The below levels to monitor are $121, $116, $106. If we see any further weakness below $105, the 5 wave pattern will be in threat of invalidating, which means a bigger top could be developing.
Chainlink (LINKUSD)
We only have a 3 wave drop from the high, so far, followed by another 3 wave bounce. This is what we wanted to see, and further supports the bigger move higher that we have been preparing for. However, we are now watching for the potential for one more drop to complete the bigger B wave, which is the green count below.
If the next drop is a 5 wave pattern that breaks below $14.15, then we will be in the green count, and target the $10 – $9 region for the next buy. As long as any further weakness holds over $7, we can keep looking higher; however, below the $7 support and the uptrend is in threat of getting invalidated.
If instead, we drop in a 3 wave pattern that holds over $14.15, followed by one more high, then we have strong evidence that the drop to $11.75 was all of the B wave, which is shown in the blue count below. We will continue to buy the dip in this scenario until we reach our targets overhead, or break below a critical support.
Solana (SOLUSD)
Solana is in a large 4th wave. What we are trying to determine is when that 4th wave will turn lower and complete the pattern around the $100 – $90 level. The red count has us in the early stages of the final leg lower. A break below $159 will confirm this, and we will likely setup more buy targets in the low $100 region. On the other hand, if we can keep trending higher, the B wave can extend to the $209 – $230 region, which is shown in the green count below. If this happens, we will likely start taking gains in Solana.
Crowdstrike (CRWD)
CRWD is still in its large degree 4th wave. After giving us a double top, which counts best as the B wave in this larger 4th wave, we then got a direct drop that followed. It’s a 5 wave pattern. This is important because the final leg in all corrections is a C wave, which is always a 5 wave pattern.
As long as we see a bounce that holds the $350 region, I’m still expecting CRWD to drop into our target zone, which has been on our charts for months. If this happens, we will buy more. The levels to monitor are: over $365 and the 4th wave is over, as we target new highs; a breakdown below $304 will signal the C wave drop is developing and we will setup buy targets.
Baidu (BIDU)
BIDU still appears to be in a consolidation pattern. Our purchase was on a false breakout, and we are hanging on until the downward wedge pattern fails to the downside. This will be somewhere between $90-$85. These momentum plays are risky, and always come with stops. We prefer to layer in small and set a wide stop, while some prefer a tighter stop. We’re going to give this one some more room to develop before bailing. We will need to see the low hold and a breakout above $116.50 for us to add to this position.
Tencent (TCEHY)
Tencent is a lower conviction momentum play, but this is what a breakout from a falling wedge looks like. TCEHY should be in a minor 4th wave. If true, then we need to hold the $45 – $43.30 region. Below here and the uptrend pattern we are tracking has failed. If it continues higher, we will continue to raise our stop along the way.
Microsoft (MSFT)
The monthly chart from MSFT is flashing a warning. First off, we have a fully completed 5 wave pattern off the 2009 low. I think this is a 3rd wave within a larger 5 wave pattern, but it is still setting up for a reasonable 4th wave pullback. The symmetry of the move is also signaling the double top at $432 is the final target for this very large 5 wave pattern.
To further back the claim, look at the momentum indicators below. The composite index is flashing negative divergence (making lower highs while price makes higher highs). It is rare to see a monthly chart provide divergence, and when it does, it tends to precede a turning point in the trend. The detrend oscillator is also in a precarious spot. It is at the same amplitude as the 2022 top.
If we zoom in on the final 5th wave of this large 5 wave pattern just discussed, we can see a very mature trend. All 5 waves are in place, which has led into the March 21st top.
If we zoom into the current correction, what is interesting is that we are in what looks like an expanded flat correction. The B wave made a slight new high, and what has followed is a clean 5 wave drop followed by a 3 wave retrace.
So, the down side setup, from the monthly to the hourly charts are in place. If MSFT breaks below $404, then it will be confirmed, as the next drop targets $365 – $325. If it can instead break to new all-time highs, it will invalidate this setup, and it can keep pushing higher in an extended B wave or 5th wave.
Lam Research (LRCX)
LRCX looks like it is still in a correction. Note the 3 waves down and 3 waves up into a lower high. The red count suggests that we will see the final leg of this correction into the $827 – $750 region. This would set up a nice push higher for the final swing in this developing 5 wave pattern. The alternative scenario in green suggests that the correction is over. This means that we will breakout over $1007 and continue into the $1160 – $1350 range.
Cloudflare (NET)
Our decision to exit NET with a +60% gain has proven to be the right call. Since our last report, which warned readers that the $90 support was failing, NET has dropped over 25%. As of now, there is a path higher; however, it will need to hold $59 on any further weakness.
If we instead break below $59, then we are in the red count, which suggests that we should retest the 2022 lows. If we can hold $59 and turn higher, then we are in the green count, which suggests we will see a 5th wave within a large leading diagonal pattern. Because the pattern higher will look identical to a corrective bounce pointing lower, it will be tough to gauge what count is playing out if $59 holds and we do see a bounce.
Hedge Strategy and Underlying Data
This section was a contribution from the creator of our hedge signal, Vincent Duchaine of WealthUmbrella. He provides an update on the I/O Fund hedge as well as the internal components that push the signal from buy to sell and also gauge the health of the market.
As the market is making new all-time highs this week, it would be tempting to conclude that we should not be concerned with the hedge strategy triggering a sell. However, the on-going volatility we have experienced since May has brought several of the internal metrics within the hedge strategy to their key thresholds, signaling that the market is unhealthier than most suspect.
When designing the hedge strategy, one of the objectives was to find the optimal threshold for each indicator that historically distinguished between a correction and larger bear event. This implies that in many instances we should see a reversal, or bounce, just before these significant separation points. This is exactly where the internal metrics are. The good news regarding the signal is that price is only 1 of many metrics that we use to determine if we hedge. This allows us to raise our shields relatively close to the market highs and reverse around lows in these bigger bear events.
Market Breadth
One of the most important inputs for the hedge is related to market breadth. Over prior decades, this data set usually does not trigger often. However, since 2021, it has provided an unusual amount of sell signals due to several periods of narrow leadership.
Outside of its use within the hedge signal, the indicator alone is helpful in identifying unhealthy markets. When the indicator is moving higher, it is signaling that market breadth is fading. This is even more concerning when the indicator is moving higher while the market is at all-time highs. This pattern is what triggered the hedge signal in November 2021, a month and a half before the 2022 bear market started, and it is starting to play out right now.
While the trend is worth monitoring, we are not yet at the threshold that will trigger the hedge. This reflects an unhealthy market, but the current position of this indicator is not yet at a decision point. If it starts to fall, and breadth starts to improve, this will likely be a headwind for stocks and potentially justify another leg higher. However, if it resumes ticking up, indicating breath is deteriorating, while the market continues higher, this should quickly reach the point of telling us to exit the market.
Options Market
When the price action started to go sideways around May 16th, one of the things that struck me was that the options market was not positioned in a way that would usually allow the market to fall at a high velocity. As you probably know, although the options world is a separate market from the stock market, some of the bets that investors take in this arena force them to buy or sell the underlying assets, particularly the market makers. This creates selling or buying pressure that usually pushes the market in one of the two directions.
Two weeks ago, the options market was relatively bullish while the real market was taking a breather. Today, our assertion is that this market is now sending mixed signals.
One of the most bearish signals is our Options Model, which is presented below. The Options Model is not directly part of our hedge signal (probably in the next version), but it is a model that has a very good historical hit rate (around 78%) and often has the advantage of leading the market. Look at how often it led the market in 2023.
This signal is now on the brink of flipping red, which is usually not a good sign, and in fact did flip red through today’s trading day.
While the above two indicators are weakening, the one indicator that is still hearty is our Vix Ribbon. This measures various VIX contracts of different durations – from 9 days to 1 year. This is, in essence, how the futures market perceives the potential for volatility over these durations. The lower it is, the more confident and clam the markets react.
While the VIX 9-day contract is still in backwardation with the VIX 1-month contract (blue moving into orange), the overall ribbon is healthy, as it is historically low and trending downward. This is what we want to see, and as long as this trend holds, we should be in an environment that has low volatility, which is usually favorable to the market.
Another interesting signal that came from the options world was from our indicator that measures at-the-money (ATM) and outside-the-money (OTM) puts and calls. It is based on the CBOE SKEW data, which is a robust way to measure sentiment and perceived risk in the markets.
When the market is nervous and uncertain, OTM put options are used to protect portfolios, because they are relatively cheap. This increased demand for options having strike prices below the underlying asset drives up these options' implied volatility. The SKEW index detects this increase in profitable downside protection or lack thereof, and our indicator detects anomalous spikes within this data.
On Friday, May 17th it triggered a rare spike that tends to precede uptrends in the market.
The spike signaled a significant change in how investors were positioned in the options world in terms of ATM and OTM puts and calls.
As you can see on this graph, an impulse of that magnitude is usually followed by good times in the market, even in a bear market. This was actually one of the signals I was looking for, along with the phase angle, to gain confidence in re-entering the market during the 2022 bear market.
In conclusion, many of the hedge signal’s inputs are at a decisions point. Based on our experience it could swing either way, as there is ample evidence to support both cases. We will monitor some of these key data points to rapidly assess in which direction the market is heading. At this moment, if I had to bet, I think that this data could swing either way, but is slightly more bullish, at the moment, than bearish. I could be wrong, and the good news about the mixed data is that our hedge is currently not far behind and should rapidly tell us to exit the market in case the wind turns. We will keep you informed.
Broad Market Technical Analysis
We continue to track the secular bull market that started in March of 2009. Instead of 3 counts, as discussed in the April report, we are now only tracking 2 counts.
- Red – The secular bull market that started in March of 2009, completed its final 5th wave in early April of 2024. We are now in the first corrective pattern of this new secular bear market. We should trend side-ways to down until early 2025, which would then see the larger drop.
- Green – This count relies on an extended 3rd wave that pushed into the 2022 top. The 2022 bear market was the 4th wave, and we are in the final moves of wave 3 within a large 5 wave pattern. We should see a break above 5465, which would signal that we can see the bull market extend into 2025.
These two counts differ on where the large degree 5th wave in the secular bull market started. the red count has this 5th wave starting on the COVID low. This would make the 2022 bear market a 4th wave within this larger 5 wave structure.
What’s important to recognize in this count is the structure of the final 5th wave within this larger 5 wave pattern, which started in October of 2022. It is a common pattern for 5th waves, called an ending diagonal pattern. I discussed this pattern in great detail in the February Report. In short, it is a choppy, 5 wave pattern that has large swings in both directions, some overlap between each wave, and tends to operate within a defined trend channel.
This pattern best completed in early April. This would then put the current push to new all-time-highs as an extended bounce within a larger correction, and should give way to a sharp drop once completed.
The green count best fits as a much larger ending diagonal. While the red count has the final 5th wave of the secular bull market starting off the COVID low, the green count has the final 5th wave starting on the October 2022 low. While the pattern is the same, the green count has it playing out on a larger scale.
This would have us still in the 3rd wave of this larger ending diagonal, which would need to tag the 5750 range.
If we zoom into the ending diagonal that is currently playing out, we can get more context on the levels that we need to monitor for confirmation of a future direction in the market.
If we can see a push above 5465 in SPX then it will confirm that the green count, or some variation, is likely playing out. This means that we will be targeting the +5700 region more directly, which will be followed by a large correction into year-end. On the other hand, a break down below 5255 in SPX will confirm this the red count is in play. This means that the early April high was the top for the secular bull market that has been playing out since 2009.
Supporting Markets
There are only four basic corrective patterns markets take. This is true for a decade-long secular bear market or a small correction throughout the trading day. These patterns are repeated in all markets and all time frames, over and over again. The type of correction that the above red count is suggesting is what is known as an expanded flat.
What is unique about this type of corrective pattern is that the B wave will go above the start of the A wave. This is typically followed by a rather sharp C wave, which is always in the form of a 5 wave drop.
The most famous expanded flat correction was in the S&P 500 is 2018 – 2020. The C wave was 200% the length of the A wave, while the B wave went just past the 1.618 extension of A.
The current price action we are in does resemble a potential expanded flat, yet on a smaller time frame. Note the 3 waves down for A, and another 3 waves up for B. The B wave in SPX appears to still be pushing higher, and is targeting the green box in the chart below.
The final drop in a correction is a C wave, and they are always 5 wave moves. What is key to understanding this type of analysis is that these patterns are all fractal. So, a small 5 waves will turn into a larger on until you hit your target. If we can find evidence of a smaller 5 wave pattern developing where a C wave should be starting, then we have strong evidence that we are heading lower.
Equal Weight S&P 500 (RSP)
The Equal Weight S&P 500 appears to be in a standard correction, called a Flat corrective pattern. These are the most common corrections that we see. This is when the B wave retraces most of the A wave drop but does not make a new high. It is then followed by a C wave, which more times than not, makes new lows.
That being said, we have a very clean 5 wave drop from the B wave top in the equal weight S&P 500. While SPX is making new highs, RSP noticeable bellow it’s high. Instead, it is giving us a choppy and messy bounce higher, indicating that it is at risk of moving lower. Unlike SPX, which is still pushing higher, RSP appears to be in an on-going correction.
Dow Jones Industrial Average (DJI)
The DJI looks similar to RSP. We have a vertical drop from what looks like a B wave bounce. This vertical drop is best counted as a 5 wave pattern, which lines up with us being in a C wave down. While we are tracking SPX making a new high, DJI is clearly following through with a C wave lower. It has retraced most of the bounce that started in late April in a vertical fashion and is giving us a choppy bounce higher.
New York Stock Exchange (NYSE)
The NYSE has a similar setup as the above major indexes. After completing a 3 wave bounce that made marginally new highs, we have seen a vertical drop that resembles a 5 wave move down. This, as stated prior, lines up with the C wave portion of the correction. The 5 wave pattern has also been followed by a choppy, 3 wave bounce, signaling that waves 1 and 2 of the C wave are potentially in place. If this is playing out, the 3rd wave will break below the end of the 1st wave and we will continue lower
Financial (XLF)
Financials is also looking like the above indexes. We have a clean 5 wave drop for wave 1, followed by a 3 wave bounce for the 2nd wave. We then have what looks like another small 5 wave drop, which is threatening more downside. XLF appears to be in a developing C wave, and as long as it stays below its May highs the risk remains.
NASDAQ-100
Now, let’s compare the above markets to the NASDAQ-100, which is heavily weighted toward tech. It looks identical to SPX. The price action best counts as a B wave in an expanded flat. If we see a larger 3 wave drop from the next high, it would be an indication that tech is going higher, and an early warning that the green count in SPX might be what’s developing.
In conclusion, not all markets are in sync. Divergences like this tend to precede trend changes, which is why we are cautious right now. The S&P 500 and NASDAQ-100 are heavily weighted toward Big Tech and AI. In fact, over 28% of the S&P 500 is focused in the biggest 7 tech names. So, Big Tech, especially the stocks tied to AI, are why SPX and NDX are making new highs.
However, when we take the same 500 stocks and weight them equally (RSP), which gives the same weighting to Home Depot as Microsoft, we have an entirely different picture unfolding. This same downside setup is present in the New York Stock exchange, which has 1897 stocks, and the Dow Jones Industrial Index, which has 30 stocks, and the Financial Index, which has 71 stocks. These indexes are not making new highs, and simply not participating in the recent rally we are seeing in the S&P 500.
So, once again, we are at a point where Big Tech, specifically AI, is hanging in, while your more value oriented names are notably correcting. What is different this time is the amount markets and stocks giving us a 5 wave drops from B wave highs. In order to break these setups, we need to see SPX break above 5465, while the above indexes invalidate the developing downside setups. In order to do this, they need to push to new highs. We are open and prepared to pivot completely out of a defensive posture if this happens.
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