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 Analysis
The Larger Trend (S&P 500)
In last month’s report, I discussed the importance of holding the 4163 SPX level. This level would be the deciding line between how we approach risk for the rest of the year. My primary view was that the S&P 500 (SPX) would see one more swing higher into early 2024 as long as we held this region. We have broken this level since and found a low, so far, at the 4103 SPX level. This move has altered how I view this market, and also how we plan to manage our portfolio.
Because of this, I am maintaining the two general counts; however, I am shifting my primary count to the Red count, and having the Green count as an alternative.
Red
The bear market that started in January of 2022 is still playing out. In Elliott Wave speak, 2022 was the A wave, 2023 was the B wave, and we are starting the final leg of this secular bear market, called the C wave. In other words, 2023 was a cyclical bull market within a secular bear market.
C waves are relatively easy to track because they are always 5 wave patterns. Unlike a 3 wave pattern, they tend to follow set parameters, have little room for alternative interpretations and allow for precise targets. This is the good news. The bad news is that the C wave is the most dramatic and emotional part of a correction.
If this is playing out, then we are completing the 1st wave that makes up the larger C wave. What follows the 1st wave is the 2nd wave bounce, which I believe we are in. The 3rd wave drop is where the bulk of the destruction will happen. The fact that the drop off the July top is a 5 wave pattern, this potential is present and risk remains elevated.
As stated last month, I do not see a recession developing in Q3, and still do not today, based on the data. So, any top would mean an “event” would likely pull forward a recession, and therefore a market top. Since then, we have had another international event occur, which the market has used to push below our 4163 critical support, forcing us to alter our primary count.
Green
This is now my alternative scenario. It is still possible, especially after so many FAANGs reported favorable earnings. However, the only difference between the Red and Green count is how high this final bounce will go – the Green targets are anywhere between 300 – 600 SPX points above the Red targets.
While I do think the odds of SPX reaching a new high has diminished due to the depth of this correction, I do believe the NASDAQ-100 and a handful of FAANGs will still see higher highs, while most stocks and indexes see lower highs (more on this below).
2023 Uptrend and Top
If we zoom in on the structure of the 2023 cyclical bull market, there are a few visuals worth noting. For one, the depth of this drop has clearly broken through the trend channel that has held this move in place.
Fourth waves can, and sometimes do, break through the trend channel, but they need to reverse back into the channel quickly, which we have just seen. If this is a 4th wave, and it did temporarily break the trend channel, expect the 5th wave to be fast and nearly vertical. The next pullback will tell us more.
Secondly, note the structure of the drop from the July high. It is clearly 5 waves, which has decreased the probabilities in the Green count and increased the probabilities of the Red count. The reason for this is because it builds the case for the C-wave. These patterns are fractal, so a smaller 5 wave pattern builds into the larger. We now have what can be counted as a smaller 5 wave pattern in place, which is concerning.
The Last Bounce
The below image sums up where I think the next move will take us. My primary count is Red, which means we will see another drop then push higher into the 4400 SPX region. If this count is in play, the next drop should hold the below red trend line, or even a little lower towards 4238 SPX, at most. This would be the retest of the trend channel breakout.
If we instead break below it, the odds will increase that the correction that started in July is not over. This is marked in Blue and has us making one more drop towards the 4000 SPX region before completing the larger 1st wave pointing down. If this plays out, the Green count will get removed from the board.
If we are in the Green count, we will not know until we break above 4490 SPX.
In conclusion, I only see one more bounce in the S&P 500. Whether that bounce takes us to the 4400 SPX region or towards the 4700 – 5000 SPX region, will not change the likely outcome – any bounce we see will likely get retraced plus all of the 2023 cyclical bull market in 2024. Each investor will need to determine their own risk tolerance, time horizon, and ability to be nimble if they want to play this developing bounce.
Strong Supporting Markets
NASDAQ-100 (NDX)
While it is questionable whether the S&P 500 will push to new highs in the Green count, I think the odds are quite high that the NASDAQ-100 does. Note how NDX did not break below the trend channel. This was a prolonged and complex 4th wave, but it did not go deep enough to invalidate the larger count, which is pointing towards a 5th wave higher to complete large trend.
Amazon (AMZN)
Unlike many FAANGs, Amazon has, what appears to be, an incomplete pattern. It needs a 5th wave higher to complete the move off the January low. My primary target for this move is $155 – $160. Once Amazon gives us this 5th wave higher, it will be a big warning to the bulls, because it will have a complete pattern. If accurate, this should be followed by a larger drop.
Meta (META)
Meta is another FAANG that appears to have an incomplete uptrend. Note how the correction, so far, appears to be a 3 wave move that overlaps. This is characteristic of a corrective move, and also implies that we should see a 5th wave higher. Meta appears to have the most upside of all the remaining FAANGs.
Microsoft (MSFT)
MSFT is another FAANG that appears to have an incomplete uptrend. I’m showing the monthly chart here so you can see the larger trend in place. Many stocks within other sectors of the market have completed their very large 5 wave pattern off the 2009 low. A few, like MSFT, are behind, and still have one more high before completing this large pattern. My target for MSFT will around $378. Once this final leg is complete, I expect a deep retrace to begin.
The above charts in Big Tech are the clearest that I track. They have higher odds of making that final 5th wave move to new highs. Why this is important is because they can be our guides in better managing risk. Once these charts complete that 5th wave to new highs, the risk will be elevated for the bulls. On the other hand, if they instead fail, we will be able to pivot relatively quickly.
Weak Supporting Markets
Just as the above patterns can be a guide to help determine heightened risk, so can some of the weaker markets. The below markets have the same pattern is place – a large top (B wave), followed by a 5 wave decline from the recent high (early start of the C wave). So, these markets are farther along in their drawdown than the healthier ones above.
Equal Weight S&P 500 (RSP)
RSP proves that the weighting of the same stocks matters a lot. While SPX is a contender for one more high in 2023, RSP failed to break above the February highs. What’s notable is that we have broken through the lower trend line in a 5 wave move. The next bounce, which we are currently in, should be a 3 wave move that hits the above targets on the chart.
Transportation (IYT)
This index has also broken the major trend line in a deep 5 wave move. We should see one minor drop followed by a final push higher. This index, along with many of its constituents, looks quite unhealthy and tends to lead the market.
Regional Banks (KRE)
This index is the cleanest. We have a clear 5 wave drop, followed what looks like the start of the 2nd wave bounce. We will likely see a little more downside before getting that final push higher into our wave 2 targets.
Ark Innovation (ARKK)
Though ARKK has the same 5 wave pattern from the recent high, it isn’t as clean as the above charts. There is the potential for a bigger move higher, which would line up with the SPX Green count. This ETF will help determine where the broader market goes, and the next pullback will tell us a lot. However, even if we do see a bigger move higher, this ETF has topped and it will be years before it sees new highs.
In conclusion, the bifurcation in this market is only growing. While some stocks have incomplete uptrends, suggesting one more high, others have topped and are looking to make another lower low soon. All provide key clues on when this already risky market will approach maximum risk. As stated before, we are already quite defensive and ready to hedge 100% of our portfolio when our signal flips, but we will use the above patterns to help us de-risk even more in the coming weeks.
Macro
We have warned our members all year that the fight against inflation is far from over. The disinflation that we saw was not only historic, but it was driven predominantly by a deep deceleration in energy prices, as noted by the 3-month annualized readings below.
Note how Core Inflation stayed within the 4%-5% range through most of 2022 and 2023. Instead, we saw food and energy decelerate, causing the disinflation that rallied equities into 2023.
As we warned since June, energy was putting in a big bottom, and it should put pressure on inflation numbers. This is exactly what has happened. We have seen the headline CPI numbers bottom well above the FED’s 2% target, followed by 3 months of reacceleration.
What’s concerning is that not only has energy prices reaccelerated, but so have core prices. Even though we believe the FED has paused their rate hike campaign, like in all instances throughout all of modern market history, a recession is needed to truly tame inflationary pressures. I do not believe this time is different.
However, the economy is not in agreement. While we are seeing some soft spots, employment remains relatively strong to claim an imminent recession is underway.
For one, continuing claims for unemployment are staying stable. Once we see a sharp jump here, it is a warning sign. Also, some other key employment metrics that I tracks – Private Sector Quits Index, Employment Cost Index, and Job Openings/Total Unemployment – are all well above the pre-COVID highs. Though they are weakening, they are still quite strong relative to the pre-COVID levels, suggesting that they are not recessionary, yet.
Heightened unemployment is necessary in recessions. Though we are seeing a resilient employment market, it’s worth noting that some of the leading indicators for employment are flashing warnings.
For one, Total hours Worked is trending down and now noticeably bellow the pre-COVID highs. Also, one of the first metrics to drop for employment is temp hours worked. This metric is seeing its fourth month of deceleration to the downside.
So, while the overall employment market is showing resilience, under the hood, we are starting to see cracks form. This further confirms that we are on the clock for a coming recession.
Another point worth mentioning is the relationship between Japan, Oil, and the NASDAQ-100. Next to the NASDAQ-100, the Japanese Nikkei is one of the strongest markets in the world. Interestingly, the Nikkei has been leading the NASDAQ-100 for some time. The below chart shows this phenomenon – the Nikkei is in red while the NASDAQ-100 is in blue. Note how the Nikkei tends to bottom and top before the NASDAQ-100.
The reason for this is academic. What really matters is that the correlation is still intact, as the Nikkei is also working on an incomplete uptrend pattern.
The drop in the Nikkei is quite a mess. Note the overlapping waves with no clear direction. This is typical of 4th waves, and supports that the Nikkei is setting up for that final swing higher.
Japan also imports all of their oil, which also supports this thesis. If oil prices continue higher, this will compress Japanese margins, and likely cause their stocks to go lower. The current state of oil appears to be in the sharpest part of its current correction. My targets for this drop are around $76 – $70.
If the current drop in oil holds $70, and then starts turning back up, it will also signal that we are close to the end of this push higher in equities. Note how the larger pattern is a 5 wave move off the low, now followed by a 3 wave retrace. This is threatening the return of a large uptrend in oil, as well as many other commodities, which will increase inflationary pressures.
So, how oil reacts around the $70 region will be very important. Though most investors are starting to accept the sticky inflation theme we have been warning about, few are aware that oil is setting up for a potential move to new all-time highs. This needs to be monitored daily for risk management purposes. If oil can push below $70, then this thesis will be negated. This will be very bullish for equities, and potentially be the catalyst for the Green count in SPX
In conclusion, while the market is starting to accept that inflation is stickier than previously thought, few are talking about some of the setups in key commodities, like oil, that have the potential to push to new highs. If this happens, it will catch the market off guard, as most expect a softening economy to lead into a recession, which will pull down commodity prices, and therefore inflation. The implication, if accurate, is a true stagflation environment, which would be the catalyst for the larger C-wave drop to fresh lows. A lot is riding on how oil trades over the coming weeks.
I/O Fund Portfolio
We are currently sitting on about 25% cash. This is very defensive, and if we continue to see the above markets and stocks hit their targets, we will continue to raise cash. The below pie chart is how we are allocating the other 75% of our funds. This represents all funds invested.
Advanced Micro Devices (AMD)
AMD has broken out above the downtrend channel. This further supports the Green count that has the $130 region as a final target before putting in a larger top. AMD is due for a pullback – note how the detrend oscillator is at the same amplitude that saw the 2018 and 2020 tops. Prior tops tend to mark current tops with this oscillator. As long as the pullback holds $93, I expect the $130 target to be met in the coming weeks. Below $93 and this thesis will be threatened in favor of the Red count below.
Nvidia (NVDA)
NVDA appears to be one of the stronger FAANGs, like AMZN, META, MSFT above – it appears to be working through an incomplete uptrend, suggesting a 5th wave higher is needed. What is concerning is that the red count provides that 5th wave higher, which suggests a bigger top is already in. This would support some of the institutional activity in the $440 region, which suggests selling.
As usual, the upcoming earnings report will be paramount to deterring what count is in place for NVDA, and the larger market. As long any further weakness holds $380, the green count is still active. Any move below $340 will fully confirm the top is in.
Microsoft (MSFT)
MSFT is very close to the upper targets we laid out weeks ago. At $378 and we should see a pullback. If that pullback is a 5-wave drop, it will signal a larger top is developing. However, it still needs a higher high to complete that 5th wave. Until we get that, this could play out in many ways. Any imminent drop below $324 will be concerning. Below $307 and the top is in.
Bitcoin (BTCUSD)
Bitcoin’s correlation to tech stocks has completely detached. It is on its own path, which seems to have more of a correlation to global liquidity as well as banking concerns. I’m not sure what the catalyst for this bullish count will be, but so far, it is still valid and playing out. We need to see a fresh vertical move up from here to further confirm this count. If Bitcoin instead gets below $30,000, it will get concerning, and put the below bull path in jeopardy.
CrowdStrike (CRWD)
So far, CRWD is following the bullish count we laid out months ago. It appears to be tracing a leading diagonal pattern for its 1st wave. If true, we still need a 4th wave drop and 5th wave push higher to confirm it. I’m looking for a top soon, followed by a 4th wave pullback to $166 – $150. As long as this pullback hold $147, I’m leaning into the bullish path, which has us targeting $215 before the bigger pullback takes hold.
Netflix (NFLX)
I’m still considering the July high as a bigger top. This doesn’t mean we can retest that level and even push slightly higher in the coming weeks/months. This would be my Green count below. Note how the drop from the July peak was a 3 wave pattern, followed by what looks like another 3 wave bounce. This lines up with the big picture that we are tracking, which is that NFLX is in a large degree 2nd wave retrace. If the next drop is a 5 wave move, it will line up with this thesis. If instead we get a 3 wave retrace, it will support the Green count. So, the next decline in NFLX will be very telling.
Aehr Test Systems (AEHR)
The one thing this drop does have going for it is that we only have a 3-wave drop from the high. If we see a bounce back into the $26-$28 level (4th wave), followed by another drop lower (5th wave), then we have reason to be concerned. If this happens, it would be the larger 1st wave pointing lower, which should be followed by a 2nd wave bounce. This would be used to de-risk. If the Green count has any chance, AEHR needs to get back above $35 and not make another low.
Ethereum (ETHUSD)
The bullish structure in ETHUSD continues to build. I wouldn’t be concerned about Ethereum not breaking out with Bitcoin, yet. It’s due for a slight pullback, which should hold $1635. Below here is concerning. If we do hold this support zone, the next move will need to be a vertical breakout.
Super Micro (SMCI)
SMCI continues to frustrate and confuse. The patterns are messy, and just when I think a have a handle on it, it gets more confusing. What I do know for certain is that the move down from the October high is a clear 5 waves. Either this is all of the C wave of the 4th wave correction (Green), and we are setting up for new highs, or this is the 1st wave of a larger C wave pointing down (Red). The bounce, so far, appears to be corrective, which elevates the risk here. A break below $230 – $222 will confirm the red count. We need to get above $275 to confirm the Green count.
Marvell (MRVL)
Once MRVL broke below the $52 level, the risk became elevated. What’s frustrating about the chart is that we have overlapping waves up and down. The current drop cannot be counted as the start of a larger drop, yet. If we get one more drop towards $46-$44, then we have this confirmation, and the top will likely be in for MRVL. If this happens, the next bounce is where you de-risk. If the Green count has any chance, this has to be a low, and we need to turn back up from here.
CloudFlare (NET)
This Gann chart tells the current story with NET. It’s in a very large resistance zone. The 1×1 line (45 degrees) from the top is around $64-$66. Also, two difference techniques that I use to find support and resistance confirm the same level, and all three of my moving averages are also in this zone. If NET can break above this zone at $66, retest it as support and hold it, I’d consider that quite bullish and would look to add. Instead, if we see a strong reversal here that takes us below the $54, I’d start getting concerned.
Chainlink (LINKUSD)
This is my general roadmap for LINKUSD. We should see some type of top around $14-$18. If the following pullback is a 3 wave move, then that will confirm the blue count presented. We would use that drop to add more to our position. If instead, we see a 5 wave drop from that high, it would be concerning, and we may use that to reduce our exposure. As of now, I see no reason to be pessimistic, as the next drop will tell us everything.
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