The Great Bear Case

The gamma squeeze, “cubic function” look to the last rally has given me great pause. I have spent a good deal of time thinking about it. I have shared my basic conclusions about it with you already, namely, that it may very well turn out to have been a finishing move, rather than a beginning move (I’ve discussed that here, for instance). But I am now increasingly concerned (excited?) that it may have been the finishing move.

And in fact, in answer to the question “Why on Earth did we go up like that?” I think the answer is essentially this: I think that was the total, utter, final capitulation of the bears.

I am going to run through a whole bunch of things in this article, just laying out pieces of evidence and observations. It is not my intention to sell you on the bear case; rather it’s a truth-telling expedition, in my opinion. I believe strongly in the bear case here, and I will share what I believe is the truth of the market. But it’s not my intention to persuade you, rather, to express what I feel is true.

Total, Utter, Final Capitulation of the Bears?

I follow many Elliotticians. A good mixture of both bears and bulls. All bulls here are looking up, of course. And, what’s most astonishing to me at present is the virtual consensus even among bears that we have at least another leg up. I will delve into this more deeply, shortly (when I discuss counts). But, notably for me is one Elliottician in particular (I won’t name him as I don’t want to make this a point about individuals), but it’s the tone he has adopted recently: it has been one of total capitulation. I know what that feels like, as of course I capitulated some time ago. But, I just found it to be notable, the sudden total giving up. Not even wanting to admit that we may be close to a top, which this particular person has firmly held as a view for quite some time. This is a highly intelligent person for whom I have great respect, so, it struck me.

I think this last rally finally broke the spirits of the most spirited. And now practically everyone concedes we may be in this for a while still. And that, it seems to me, makes this market suddenly and dangerously vulnerable. And I mean that on the shortest possible timeframes, like as in: right now.

I note that the Rydex Bear Funds were almost completely evacuated during this last rally. A total fund flow exodus. Everybody desperately piling out at any price. The gamma rally may have actually been the last bears trying desperately to stay alive by eating each other alive.

I also note a strange phenomenon in the AAII bull/bear survey. Typically, as we rally, we get more bullish, and then as we correct, we get more bearish. However, not so in the last weeks. As we rallied, market participants got increasingly more bearish (“it’s got to turn here“), and then, in this little correction, it got increasingly bullish. That’s a big oh shit, something’s changed here. That’s a switch, mentally, from “this is fade-able” to “oh my God, I better buy the next dip because we must have much further to go.”

You can even detect this in my own work, to a degree, as I began at least to acknowledge that really stupid things are possible here. Now, my academic background is in philosophy. And sometimes folks poke fun at that purportedly impractical field of study, but I tend to disagree. It has the capacity to increase one’s self-awareness, and so I can sometimes detect where I am at in my surroundings. And that’s been useful to me here, on this last point in particular.

Another bear capitulation point is the well-known Russell Clark, who has just closed his fund. He is a professional short-seller, a master of his craft. These men have always existed, and, if you’re well-capitalized, one can remain bearish for whole market cycles. These men are experts at what they do. The fact that his fund has died is notable. If you have the time, you should read the article if you haven’t yet. It’s tragic, heartbreaking, really. Imagine if the high is actually in right now, where this would now be his time to finally shine. Terrible.

So, this is my sense of things: I’ve got fifty bears right now telling me, “yes, but just a little bit higher though first.” That is insane. There are no bears after a move like that? No one saying, “That was it.” None?!

Oh Dear. I’m amazed by it.

What I Think Most People Are Expecting Here and Why It’s So Dangerous

You will often hear people say, “don’t try to pick tops.” And so, at this point in the $ES structure, what they mean by that is, keep looking up. And yet, I’m always a little disturbed by that because if one does that, one is actually picking a top. It’s just that they’re saying, “the top will be over there.” But lo and behold, we actually do have a top in now. The top is to our left. Now, obviously, we need some followthrough here, and I think we’re about to get it. But, let’s do some charts.

It seems to me that a majority has adopted what had been my primary count (or a variant of it). And that suggested that primary (pink) 3 was just ahead.


I think many think we will rally from here to primary (pink) 3 either straightaway (if they think green 4 is “in”), or after one more dip (if they think green 4 is “about to be put in”).

Now here is why I think that is so dangerous: those who think we’re due for a drop think it’s a temporary drop that will be followed by new highs. Even if we get a steep correction for (what they believe will be) primary (pink) 4, they will be looking for a big bottom, and a chance to play another rally like the one we just had that they probably missed. This is a perfect setup for the top to be in with a serious market failure to follow. Let us suppose, as I now think, that we just fall from here. If we do that, what most people may end up doing is supposing, after the fact, that primary (pink) 3 is already in. So they will move that 3 over and start playing as though we’re in primary (pink) 4, while expecting it to bottom before heading to 5.

That’s the deadly spot. There will be internal waves on the way down, it will slow. And, as it does, if many are expecting it to rally from there, all that buying volume will be soaked up by the big boys who know we’re doomed. And then we just fall again straightaway catching everyone bulls and bullish bears alike. And it will only be then that everyone realizes that the big, pink 5 was already behind us all along. And of course at that point everyone panics, sells everything and then we’ll get our first real counter-rally (taking them by surprise yet again).

That’s what I think is going to happen here.

Visually, I think they’re expecting what I had been expecting (but now no longer do):


But if we drop straight from here (as I now think), they will do this:


They’ll move the 3 over, and try to play this as a 4 correction. But I think we will actually be in an impulse down, a series of ones and twos, the early stages of which will resemble a wave 4 zig-zag. I think they are going to mistake my minute (blue) 1 and minor (green) 1 for the “A” and “C” of a correction. I think they are going to try to buy those two points hard (green arrows):


Minute (blue) 2 will be a three-wave move, making them think it’s a convincing “B,” but I think the twos are actually going to be very shallow (much like twos on the way up have been shallow). And it’s the green 1 at the bottom that they’re going to buy really hard, because they will think it’s a major primary (pink) 4. But I think it is going to fail from there.

Now, I’ve jumped to the conclusion so that you can get an idea, but I want to spend much of the rest of this article amassing some evidence for this view. I am not the type of Elliottician who adopts a count and marries it until it is invalidated. I dynamically adopt counts based on all sorts of stuff I look at. Bonds, currencies, leading stocks, and on and on. I will try to give an ample taste of that here below.

The “Reflation” Trade

I previously wrote that the reflation trade wasn’t dead. But I am beginning to change my mind about that here. Inflexibility harmed me on the way up, and I have no intention to repeat that intransigence. On that prior claim, I wasn’t entirely wrong: after all, $OIL had a remarkable 20% rally. That said, I believed that the breakout of a multi-multi-year down trend line was quite notable. Does that mean that we could be entering a new commodities bull market? Perhaps. And yet, let’s take another look at oil here.

My expectation has been that we’ve been building a series of ones and twos. But as we’ve gotten up here, I feel like we’re really losing momentum now. The waves are getting compressed and unimpressive. If we’re actually in intermediate (orange) 3 of primary (pink) 3, we should really be taking off here unmistakably. And what troubles me here is the fever pitch screeching from all sides about inflation…inflationINFLATION.

Tell me that’s not the consensus here. I’ll wait…


On the weekly $OIL chart, note this dangerous divergence that has formed on the RSI:


So, let’s back out for another look. From the top of the GFC reflation trade, we actually have three distinct lows. That means it’s fundamentally a 5-wave move. And that’s not a very good sign. It could be interpreted as a leading diagonal. And those do break out. And so that might be tricking us here. And worse: when they break out, we expect them to stop in the target range where we’re at presently. And worse: we would expect that counter-rally (yellow b on this count) to be a 3-wave move.


And so let’s look more closely:


Yep, we can absolutely get just that here if we need to. Does this mean oil will go negative again? I have no idea, but it happened once, so who knows.

I also want to briefly look at $NATURALGAS. The part that bugs me the most is the first rally from the June low. It’s 3 waves clear as day (that’s the orange “A”). And so, it, too, like $OIL, may only be correcting up, i.e., the actual longer-term trend may be down.


The million dollar question here is, as it was in 2008: are we actually reflating, or are we merely pricing in a reflation that isn’t really here. I brought this point up some time ago on Twitter (here). I was willing to grant, almost a year ago, that the market would price in reflation, but that it could be wrong about the economy actually reflating (in a longer-term sense). In other words, that this “reflation” is a Fed-induced, stimulus-driven fakeout. And the question was: how would one play that? Well, you’d have to play along with it and I have. But, I think that may be coming to an end here.

Some Other Troubling Charts

I had a really good bull wedge setup on the Shanghai Composite (I posted that here). But look what it did:


That’s not particularly good, to fail like that.

And there are other failures. I’ve mentioned $LMT and $T (here and here) losing decade and multi-decade trend lines. We need to listen to that.

Other thoughts I’ve had surround the meme-ish things. $AMC and $DOGE both looked like they could really rip.

I want to walk you through $AMC with some care. My prior view was that it was going to enter a major advance targeting much higher highs. I noted that here, for instance. Now, on that thought, the thought was, if the meme-ish things are going to rip in a short squeeze as the Redditers all think they will, then we’ve still got a ways to go in the markets generally.

Giving the benefit of the doubt to the bulls looks like this. That we’re in a third primary advance, etc. Now, I’ve left my big primary (pink) 3 on the chart where I last had it because it proves my point. That big green bull wedge we had, really should have broken up. And look what we’ve done instead:


Nothing but sideways, sideways, sideways. So, whatever this sideways drift is, it’s way too big to be anything of the degree we should be in up here. This count has been rendered incredible at this point. I was willing to accept a short squeeze. We haven’t done that. And instead, this looks absolutely like distribution. Imagine being able to distribute $AMC at this valuation. You would do it if you could, and they are. There’s no short squeeze going on here.

If we can accept a four-cent overlap at the beginning of the year (I’ve said before that I’m not an Elliott Wave purist, so I can), we can give the whole structure a very bearish look, 5 waves complete, and we’re already on the way down. Notice the two orange boxes, each where we would expect to find twos:


I was willing to accept the “to the moon thesis,” and they’ve kept people’s hopes up because it’s remained elevated, but if we’re actually in a large impulsive structure to the upside, we need to move up in price, and we’re not. I wouldn’t expect us to consolidate anything like this. Consolidation is always either: accumulation or distribution. The short squeeze is something completely different. Since we’re not doing that (we already would have if we were), then we’re either accumulating or distributing. And which institution do you think would actually accumulate this stock at this price? Yeah, my thoughts exactly. It’s being distributed.

$DOGE is doing something similar. We had a good bull wedge, I called for a pop, and we got it. But after that, we never really finished the structure. It should have stayed up there, given us a four and then a five (I’ve left my original count on there, where I had guessed the numbers would go). Instead, it only gave us an overlapping, 3-wave structure.


Backing out, let’s take a look. Note that, much like $AMC, $DOGE has gone totally sideways forever. If this is an impulse up, we need to get going up, not perfectly sideways for months and months and months. It’s being distributed. They’re filling bags, I think.


I have previously mentioned $AMZN (here). Who knows what else may be distributing.

Another data point. $JNK is not confirming any of this market bullishness. Big, big jaws:


Lots of Crypto Could Fail

In addition to distributing $DOGE above, both $BTC and $ETH threaten to complete huge macro cycles here. (I know some of you are crypto bulls, so forgive me; please don’t take any of this personally.)

But, I may never have seen a more beautiful series of five waves on so many timeframes as I do on Bitcoin right now.

On the largest scale, we have three peaks, so five waves (cycle [yellow] degree):


Zooming in to the 5th cycle (yellow) wave, we also have five waves (primary [pink] degree):


Zooming in to the 5th primary (pink) wave, we also have five waves (intermediate [orange] degree), and the fifth intermediate (orange) degree now subdivides nicely into its own 5 minor (green) waves. Amazing. Boy, this looks cooked.


Now, I had been willing to be bullish on crypto. But this last wave needed to go much higher and consolidate well above the old highs, and its not. Someone wants out at this price, and until this whole magnificent nested five-wave structure proves otherwise, it genuinely does look entirely complete to me on every timeframe.

If Bitcoin has made a top of that degree, and if $DOGE is about to die, I think it may be prudent to label $ETH in a dark way as well, and though a little misshapen, it has all of the waves it would need to be to be complete as well. Now, if these do collapse, they could be done forever (which is the bear in me not believing that the technology actually has a future other than speculation) then these tops will never be revisited. However, bulls can assume that these are supercycle wave ones completing, but they may expect many, many year bear markets to commence. Personally, I doubt that, because: for Bitcoin to embark on a supercycle wave three, they would need to take it to hundreds and hundreds of thousands per coin, if not even millions. And I just can’t see so many trillions of dollars being poured into it. I know everyone thinks the Fed is going to print forever, but they’re not.

I don’t think we’re going to have a hyperinflation anything. I think these are ingenious speculative instruments that will profoundly enrich a very few.




I already showed you this, and it’s not good, and I want to point it out again. Record short. Smart money. They know something. Record short. Never before this much.

Consumer Sentiment. This is not good. This will drive the market down. When consumers feel like this, they contract spending. They pull back, they’re scared for the future, and will spend less because of it, and I see no political capital remaining to release more stimulus checks. The economy will actually need to start recovering for real, and I don’t think we can do that from here. I think we’re going to washout first. In a big way.


I’m sorry for the super-dark post. But I think it’s time. I think we’re cooked. I think we may be in a bear market already and haven’t realized it yet. And I think it’s going to be a big one, probably years. I see a lot of distribution, I see a lot of completed patterns, I see almost universal bullishness and consensus on inflation.

But there’s a good chance we’re cooked here.

[UPDATE]: I added some additional evidence here.

Full US Index Counts

If we’re done, here’s how I would count everything.









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3 thoughts on “The Great Bear Case”

  1. Many thanks. I have additional thoughts on the $VIX, and some other things, but it was getting late, and folks will get the idea with what I was able to get done. I think the evidence is mounting.

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