What Conditions I Believe Must Be Met to Stop Giving the Benefit of the Doubt to the Bulls

As you all know, I am entertaining the possibility that we could replicate the dot-com bubble blow off. One reason I have been willing to do that is because the market has surprised to the upside for a very long time now and it’s been dangerous to assume otherwise. And hell, for all we know, the Omicron variant might give us all herd immunity and maybe there will be a period of explosive growth and relief that causes quite a period of exuberance in the markets beyond even what we’ve seen already. A second reason is the uncanny similarities between the price structures of 1999+ and 2020+. A final reason is that hundreds of stocks have already endured outright bear markets and if they were to experience even only coordinated relief rallies together, I could see it pushing the whole market much higher.

However, I won’t take these mere hypotheses with me to my grave. I give the bulls the benefit of the doubt until I don’t believe I should. But when does that happen?

For starters, let’s reexamine the fractal we’re in now, most clearly visible on the $NDX. In 1999 it looked suspiciously similar right before the monster blowoff. That said, while it’s similar “in shape,” the magnitude is nothing similar. This present move, despite having waves in all the same places, is significantly “bigger” in terms of both price and time. Can such a larger structure tolerate a late 1999/early 2000 move? I am not sure about that. Can Apple’s market cap really go up, what, another 25% or more? And Tesla? I am not sure.

The other thing to note is that this present move is getting very long in the tooth. The “E” wave back then (1999) was short and sweet, and things took off. All of the waves of this “B-Wave” are taking a lot of time, and if we’re in the “E-Wave” now, it’s threatening to lose the structure altogether. Failing that green trend line would cast some somewhat serious doubt on the possibility that this fractal wants to replicate the dot-com fractal.

NDX

Here is another interesting way I sometimes look at the market. As we all know, there is often a great deal of rotation between the indices (some are more rate sensitive than others, or inversely correlated to rates, etc.) and it’s hard to see what “the market” is doing when we look at pieces of it that are the various indices. One way to remove the rotation “noise” is to create an aggregate ticker. In this case, I’ve combined the ETFs for the US indices (the S&P, the Naz, the Dow and the Russell) and I use the ETFs so that I can obtain volume data.

And when you plot them all together, we see something interesting, I believe. This is a nice, beautiful, Wyckoff channel. Now, the million dollar question in any instance of these is: is it accumulation (or reaccumulation in this instance) or is it distribution? It’s difficult to know before the breakout because institutions take every possible pain to conceal their intentions from us. They are experts at that above all else.

However, one thing that is not particularly promising about this channel is that each of the three declines (red arrows) occurred on rising volume, while each of the two rallies (green arrows) took place on declining volume. Some Wyckoffians believe this is often a symptom of distribution.

I just thought I would point that out. A failure of the lower green trend line would be labeled, in Wyckoff terms, as a “sign of weakness,” and it would be a grave artifact.

QQQ-SPY-DIA-IWM

If these sorts of things begin to play out, then the benefit of the doubt may belong squarely with the bears instead.


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