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.
Broad Market Technical Analysis
Price Analysis
When you funnel the global community of investor into a quantifiable arena, like the stock market, interesting and repeatable patterns emerge. These patterns are the basis of technical analysis, and are used by analysts to predict market trends and establish risk parameters. The discipline of Elliott Wave analysis is simply an in depth study of these repeatable patterns, which provides the best context to market behavior that I know of.
For those new to this analysis, I have written up a detailed introduction here. The fundamental idea is that markets move up in a 5 wave pattern, and once this 5 waves pattern completes, we then see a 3 wave retrace/correction, which will make a higher low. This simple movement is not only happening on all time frames, and in all markets where people interact to find price discovery, but it is fractal. So, a small 5 wave pattern develops into a larger one, which then develops into a larger one, and so on.
Because of the fractal nature within market patterns, we are able to fit the entirety of price information into a cohesive pattern. This means that the price action from the 1929 top, and 1933 bottom has an effect on the current 2024 price action. The below chart is the entirety of the Dow Jones Industrial Average’s price information, which is organized into an on-going Elliott Wave pattern.
The reason that I am providing this chart today is because I want our readers to understand the larger backdrop of the current market. Within this context, the 1929 top to the 1933 bottom, was a very large degree 2nd wave. What followed has been a 3rd wave within the same large degree time frame. When you analyze the internal wave structure, it appears that we are coming to the end of this large degree 3rd wave, which is suggesting the start of a secular bear market. This secular bear market would constitute the large degree 4th wave.
Furthermore, what this pattern is telling us is that the secular bull market that started in 2009 has actually been the 5th wave of this very large degree 3rd wave pattern. The below chart outlines this 5th wave, and organizes it into a its own 5 wave pattern.
We can further dissect this analysis and focus our attention deeper. According to the wave pattern above, the COVID low started the final 5 wave pattern within the larger 5 wave pattern above. As stated prior, these patterns are fractal, which allows us to organize each move into a cohesive pattern.
The below chart focuses on the smaller 5 wave pattern that started at the COVID low. With the above information in mind, we are able to have the proper context when trying to understand the current market. As of now, I have 2 potential scenarios on how to understand the final push in the secular bull market that started in 2009.
Blue – This count has the 2022 bear market as a 4th wave within a larger uptrend. What this means is that the 2023 bull market is the final 5th wave, which is taking the shape of an ending diagonal (I discussed this pattern in last month’s report here). This is an overlapping 5 wave pattern that is characterized by large swings in both directions. It is very common to show up as a 5th wave. Considering that the pattern is almost complete, if not already, the risk within this market is greater than many believe.
Red – This count is based on the secular bull market ending on January 2022. What this means is that 2022 was the A wave of this new secular bear market, while 2023 was the B wave bounce. In other words, 2023 to now is a cyclical bull market within a secular bear market. If accurate, the next larger drop will take the shape of a vertical 5 wave pattern pointing down. This 5 wave pattern would retrace the entirety of cyclical bull market that started in October of 2022.
If we zoom in on the ending diagonal pattern that started in October 2022, we can get an idea of how much farther this market can stretch. We are currently in the toping zone between 5145 – 5345. As long as we hold 5090 SPX, we can keep pushing higher. Below 5090 will be the first warning to the bulls. A break below 5050 and then 4945 SPX will confirm that a larger top is in.
Once a top is in place, we can then get a better idea of whether the red or blue count is in play. The red count will be a large degree C wave, which always takes the shape of a 5 wave pattern. It would be a more direct path to our final downside targets. The blue count would be less of a direct path, which would have large bounces followed by breakdowns to new lows. It would be messier, and characterized by a multi-month rangebound market.
In conclusion, if we are entering a secular bear market, this does not mean we should leave the markets. It simply means that we will have a period line 2000 – 2013 where the market goes sideways. These sideways periods have bear markets that are punctuated with multi-year bull markets. It is a period where buy and hold tends to struggle, and where a more active approach with a risk management focus could potentially navigate it profitably.
Supporting Markets
No one doubts that tech has been leading this uptrend higher. Since bottoming on October 13th 2022, the S&P 500 is up just over 40%. During the same time frame, small caps are up only 20%, while the tech heavy NASDAQ-100 is up over 70%, and The PHLX Semiconductor Index is up over 115%.
The consensus belief is that tech is leading the weaker markets, like small caps, higher. If true, then buying these weak markets appears to be a winning strategy, as they have a long way to go in order to final catch up with the market leaders.
However, when we view these markets through the lens of technical analysis, I believe that the stronger markets, like tech, are the ones playing catch-up, while the weaker ones, like small caps, are leading the larger trend. That being said, there are two types of markets – the ones that have topped, and the ones that are close to topping.
Small Caps
The Russell 2000 (IWM) is the most obvious pattern to track. From the 2009 low, we have a very clean 5 wave pattern into the 2021 top. Note how small caps have been trending sideways since the 2022 low, and they are substantially below their 2021 top. This looks like a large degree correction that has one more large leg pointing down before completing.
When we zoom into this sideways pattern, it appears to be tracing a B wave bounce within a larger decline. The key is the final move of the larger (B) wave being a 5 wave push higher. Note how we have a clear 5 wave pattern that tagged our $210 target (below).
Further, the 5th wave is taking the shape of a clear ending diagonal pattern on decelerating momentum. If the next larger drop is a direct 5 wave move, then we have confirmation that we are setting up for a push below the 2022 lows.
There are several markets that resemble the small cap index above. In other words, they have been trending up from the 2022 lows in an overlapping pattern that resembles a bounce within a larger correction. The key is that these markets have trended sideways to up and are well below their 2021/2022 highs. Here are a few examples:
Consumer Discretionary (XLY)
Retail Sales (XRT)
Financials (XLF)
The 2nd type of market is the one that is still in their secular bull market. In other words, while the above markets ended their bull market in 2021/2022, the bellow leaders are completing their final 5th wave of the secular bull market.
Technology (XLK)
The tech sector has the 2022 bear market as a 4th wave drop within a larger uptrend. This larger uptrend is coming to an end soon. Note now clear the 5 wave pattern is off the 2022 low. This 5 wave pattern is mature and full, as we push slightly higher on less momentum.
Industrials (XLI)
Interestingly, Industrials appears to be completing a large 3 wave push to new highs. This appears to be within the context of a large degree ending diagonal pattern.
Home Builders (XHB)
This market looks a lot like the S&P 500. It is completing an ending diagonal pattern for wave 5. Once complete, this should end the secular bull market for home builders.
In conclusion, from a basic understanding of technical analysis, one can see tech leading, with industrials and home builders breaking out to all-time highs and conclude that the weak markets will follow. This is simply not the type of market behavior we see going into a recession. Further, we are in a roaring bull market that seems to have no end, so it’s no wonder we see investors touting these weaker markets, like small caps, as the ones that will start playing catch-up.
However, within the context of Elliott Wave, these breakouts to new highs appear to be in the form of 5th waves, which are close to ending. What this means is that the weaker markets topped first in 2021/2022, while the stronger markets are the ones playing catch-up. This is also why there is such a bifurcation amongst analysts trying to put a cohesive narrative to this strange market behavior.
Divergences
When markets are moving in unison, you have a strong trend. However, when markets start diverging, we tend to see this behavior at the end of the trend. This is what is happening now.
There is no question that big tech has been the market leaders throughout the entirety of this bull market that started in 2022. This is evident by the name given to these leaders – the “Magnificent 7.” However, what we are now seeing is that these market leaders, which were once moving in unison, are now starting to fall like dominoes.
First, Tesla topped in July of 2023, followed by Apple in December of 2023. We then saw Google top in late January of this year, followed by Microsoft in mid-February. What was once the Magnificent 7 is now the Magnificent 3, as the majority of past market leaders are now in a notable downtrends.
One could easily claim that we don’t need these stocks to move higher, obviously. However, when prior market leaders start to fall, more times than not, they are signaling exhaustion in the broader trend. What makes this instance so notable is the extreme weightings that these 4 stocks take up in the S&P 500. Together, they account for ~17% of index weighting. This is a large weight around the broad market, which should not be ignored.
Regional Banks are also diverging with the larger banks. These markets historically move together, and when they start separating, something isn’t right. Regional banks have made a series of lower highs while the bigger banks have gone to test all-time highs. One of these markets is leading, and until regional banks start making new highs, I do not trust this move higher with the big banks.
The transportation sector is also signal a similar warning. The Dow Jones Transportation index is comprised of standard transportation stocks, while the iShares index has the same stocks, except with a higher weighting in the tech focused transportation stocks, like UBER and LYFT. Like the banks above, these two markets tend to move in unison. This is not the case today, as we see a sizable divergence that is not healthy.
The most notable divergence is between long-dated bonds (TLT) and the equities. Bonds tend to top/bottom long before equities get the message. Today, TLT is making a series of lower highs, while equities continue to power higher. The bond market is simply not buying this move higher, which is typically a harbinger for equity volatility.
Time Analysis
Elliott Wave analysis can tell you when a trend is coming to an end. It can also provide levels that must hold or break in order to confirm a pattern will extend or a counter pattern is emerging. Gann analysis provides you with time analysis. Markets move in cycles, and these cycles tend to create inflection points. More times than not, these inflection points mark trend reversals, and on occasions they mark large breakout/breakdown moves. I went through the Elliott Wave analysis for some key markets above, this section will look at the time analysis. Together, they are signaling caution.
Russell 2000 (IWM)
We discussed the concerning price analysis above. This market appears to have reached our target in a fully developed 5 wave pattern. This 5 wave pattern, I believe, is the final swing in a large corrective bounce that started in 2022 and is part of a larger bear market.
When we add the time analysis, we can see another layer of risk. The below chart tracks 3 cycles that have an effect on the price of IWM. Note how price tends to reverse its trend when it moves into one of these cycles. The most important piece of information regarding this cycle analysis is how price is moving into them. As of now, IWM’s price is moving up into all 3 of these cycles clustering right now.
Furthermore, when we place a Gann Fan at the 2018 low, note how the following price patterns reacted to these angles. Today, price is hitting against the most important angle in red. This is the 45 degree angle, and we tend to see strong reversals at this angle.
So, we have a significant confluence of price and time, which in Gann’s world tends to mark a meaningful trend reversal. When we factor this information in with the Elliott Wave analysis showing that we are in an ending diagonal pattern in the final 5th wave, it warrants caution.
Dow Jones Industrial Average (DJI)
I’ve discussed the Dow’s price pattern in several prior reports. No matter how you count this, the uptrend pattern off the 2022 low is setting up for a large pullback. The below chart shows various long-term cycles that have had an effect on DJI’s price movements. Note how we are seeing a cluster of these cycles show up now. When cycles cluster, it tends to mark a meaningful inflection point. For example, the last time these cycles clustered was around the 2020 top.
The NASDAQ-100
This index looks very similar to XLK above. It is completing a large degree 5 wave pattern off the 2022 low, and setting up for some type of trend reversal. Furthermore, it is trending up into a cluster of long-term cycles and hitting the 45 degree angle from the 2018 high. Much like other key markets, there is a confluence of price and time, which tends to mark trend reversals.
In conclusion, we are seeing several key markets trending up into a cluster of key cycles. Many of these markets are also hitting important angles from key inflection points in the past. These angles, along with the cycles tend to mark meaningful trend reversals. When we factor in price analysis, we can see that these same markets are in the final moves of very mature uptrend patterns. Price and time are coming together right now in a way that warrants caution until we see a resolution. If the market instead ignores these angles and cycles, it will be a show of strength that we will factor into our portfolio management.
What If We Are Wrong?
I’ve laid out a strong position for an imminent market reversal. Both time and price seem to be suggesting this is the case amongst multiple key markets. However, all positions must have a point at which they are scraped and a pivot has to happen. Since our inception there have been a handful of pivots we have had to make, once a thesis appears to not be playing out. That being said, my alternative count is below. We would need to see SPX hold 4775 on the coming pullback, followed by a direct, 5 wave push to new highs.
Further, the divergences that I discussed prior would need to resolve. We would need to see all sectors in the S&P 500, along with the lagging FAANGs, resume their uptrend and make new highs. If this happens, you ‘ll will see us layer back into the market for the resumption of the larger bull market as we. Extend this bull cycle into 2025. I find this hard to believe, as most markets, like IWM, simply do not have an alternative interpretation that lines up with the above chart. However, we are prepared to pivot if this analysis is proven wrong.
I/O Fund Portfolio
Because of the warnings stated above, the I/O Fund has taken a barbell approach to our portfolio in 2024. On one end, we are maintaining a defensive posture within our portfolio by holding a sizable cash position. On the other end, we are highly concentrated in market leaders such as NVDA, AMD, and Crypto. This strategy has worked out well for us this year, so far, as we continue to show relative outperformance while also being prepared for a sizable trend reversal.
Regarding our risk management, we have been very clear with the risks we see in this market. As a result, we have gone from being 85% net long in early November 2023 to 30% net long today. We are currently 35% hedged and waiting for our hedge signal to tell us when to go 100% hedged, and thus move toward being market neutral.
The below pie chart is the percentage allocation of our invested assets, not including cash.
Hedge Signal
The below is an update from Vincent Duchaine of WealthUmbrella, who created the hedge signal that we currently use.
Since the start of this year, market breadth has been considerably deteriorating. While some stocks continued their parabolic move higher, several stocks, including high beta stocks have declined considerably since their peak at the end of December 2023. Tesla is probably the most well-known example, being approximately down 35% from its July 2023 peak.
Market breadth is one of the primary components of the hedge signal. The on-going deceleration in market breadth has led to this component rising above the zero line for the third time since the beginning of this year.
This may seem insignificant, but just having a signal above 0 is something we typically do not see in strong uptrends. For example, during the bull market between June 2020 to December 2021, the signal stayed below 0 the entire run, and only rose above zero at the end of that bull market, just before the start of 2022.
Moreover, when the breadth component of the hedge signal rises above the zero line while the market continues to push higher, or even goes sideways, it has a high correlation with abrupt corrections. Though breadth is moving closer to a sell signal within the hedge, it is still in buy, for now.
Another way we could see the hedge signal trigger a sell would be if the VIX rises drastically and enters full backwardation. Some components of the VIX ribbons are already in backwardation, so this scenario is a reasonable assumption to track.
The other component of the signal that could trigger a sell is the options market. This component is less likely to trigger a sell, considering how the market has continued to defy gravity for so long now. This behavior is filtering into sentiment within the options flow. I think the option market is as confused as everyone else, so it will likely not lead to a sell signal.
Regardless, one interesting aspect of the current state of options dynamics is in the SKEW. The SKEW printed a record high a few weeks ago. This is highly correlated with a more a pronounced drop in equities and something we are tracking closely.
Furthermore, with our proprietary market risk indicator comfortably in the red, we believe a more cautious stance in warranted.
Nvidia (NVDA)
Nvidia has either topped, or will see one more swing to, at least, the $1025 level. Price is in a wedge pattern and how it breaks will likely be the deciding factor. If we do break lower, the odds will favor a top. However, as long as it holds above $785, and then breaks above $915, we could see a new pattern develop that can take us higher in an extended 5th wave. Below $785 and the top is in for NVDA.
Advanced Micro Devices (AMD)
AMD appears to be at odds with NVDA and the rest of the market. The count below is what makes the most sense from the price action; however, it is suggesting a much larger uptrend is underway. I could see something like this happen as the broad market stays within a 5 – 12% range for the remainder of the year. As many stocks and markets make lower highs, AMD will go on to make higher highs, and thus complete the above pattern. I’m willing to hold onto this count as long as any weakness holds $159. Below this level and larger uptrend fails.
Another point of concern, AMD is now below $191. There was substantial institutional activity at this price level. For AMD to move higher, this level has to get reclaimed. We simply do not see block sales of this caliber and price continuing in a 3rd wave. So, as long as we stay below $191, we remain cautious.
Bitcoin (BTCUSD)
There is no reason to doubt the above uptrend pattern in play as long as critical support holds on any weakness. The higher Bitcoin goes, the higher this critical support is raised. Today, the level that must hold in $42,500.
We are do for a pullback, which would be wave 4 of 3. These targets are around $57,000 – $48,000. Remember, $57,000 was strong resistance, and it is now strong support. If we get back to this price, we will likely add. However, we are in a 3rd wave; one we have accumulated for going back to late last year. Third waves tend to be marked with shallow pullbacks that leave investors behind. So, if we continue to see a push over $70,000, the odds will start shifting that the low is in for this drop.
Netflix (NFLX)
Note the bearish engulfing candle from last Friday. Netflix started the day green and then ended the day deep in the red. This happened on heavy volume, and it is what is called a key reversal candle. In other words, the type of candle that tends to happen close to a trend reversal. Netflix is completing the 5th wave of a larger 5th wave, so any additional upside should be limited from here. Below $544 and the top is in.
Ethereum (ETHUSD)
Ethereum is setting up for a bounce. Look at how deep the composite index went on this drop. This is typically where bounces occur. I’m expecting a b wave and final leg lower, but we may not get that if the next bounce is a 5 wave move higher. If this happens, it suggests the low is in for this drop.
Ethereum’s uptrend should continue higher as long as any weakness holds $2990. Below this level and my old red count will get reintroduced. As always, and especially within crypto, it’s best to not get married to a count and to be prepared to bail if a support region gets broken. As of now, this is not the case, so we will keep looking up.
Super Micro (SMCI)
The 1st, 2nd and 3rd largest trade in SMCI’s history came within 72 hours of each other, and around the $1065 price level. We are significantly below this level, which implies institutional selling. The next meaningful support levels are $865 and then $775. Below these levels and the odds build that the top is in. We have taken significant gains in this stock. In fact, we’ve sold about 12%, while only adding 6% at much lower levels. So, we have taken our cost basis off the table, plus ~100% gain. If we do see any further strength, we will continue to sell this position.
Crowdstrike (CRWD)
CRWD looks to have topped in a 3rd wave. The last push to new highs was in a 3 wave pattern, which looks like a B wave. This means the correction is an expanded flat, and the C wave should be quite sharp. I’m targeting around $265 for the 4th wave decline. If we break above the recent high, we can extend the 3rd wave, but eventually, and sooner rather than later, the 4th wave will have to happen.
Chainlink (LINKUSD)
Though it may appear that we are getting a 5 wave drop from the high, this drop appears to be part of an expanded flat correction. If so, this should be the A wave, followed by a 3 wave bounce for b and then another 5 wave drop pointing toward the $12 range.
Below is the count that makes the most sense from the price action. Note how we have 3 waves down, then 3 waves up to new highs. This is most likely the A and B of the expanded flat. If this plays out as expected, look for a 3-5% buy in our target zone.
Micron (MU)
The move over $102 has forced me to rethink the potential counts in play. Since we are getting a gap over $102, then we should be heading to $154 in a larger 5th wave push. This breakout has to hold $102 or we could see a reversal. However, after that report, I find that to be unlikely.
Solana (SOLUSD)
Solana is in a 3rd wave. The 4th wave should take us back to the $137 – $85 range before turning back up for the 5th wave higher. If this drop from the high is a 5 wave move down, we will likely sell half of our gains on the bounce. Unfortunately, because we are dealing with such a large pattern, the critical support is below $85, for now. So, we will have to rely on the structure of the drop – 5 waves down will be an early warning sign.
Cloudflare (NET)
I still hold to NET being in a very complex B wave. The final C wave of this B wave is a 5 wave push higher, and the final move in this corrective bounce. Either we topped with a break below $90, or we can hold $90 and see one more push towards $145.
Microsoft (MSFT)
MSFT broke the February 13th high for a day, before falling back. The push higher appears to be a 5 wave pattern. It’s hard to believe, but this 5 wave pattern is wave 5 of 5 of 5 of 5 of 5, going all the way back to 2009. Below $397 and the top is in.
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