Alrighty, there are a lot of things I want to discuss, so I’ll just dive right in. We’re seeing some delicious selling, and so we need to ask: Is this it? And if not, then how serious is it? And I will try to address those in this article.
First, Is this it?. I don’t know yet, to be blunt. And as much of me that wants this to be it (because I am bearish by nature), I am not yet convinced that it is it. And I will present some evidence that questions whether this is really it.
Now, for the Great Liquidity Thermometer, I have been warning that it risked failure and with it equity markets (e.g., here). The frustrating part has been that Bitcoin often leads, and I’ve been watching it closely for signs that it would give up that head and shoulders pattern neckline before equities took a bath, but it held on to that level for as long as humanly possibly before finally taking a bath concurrently with equities.
At any rate, it’s given given us something more of an actual plunge—finally—but now how does that plunge look? Well, on the one hand, we have no idea yet if it’s finished. It could still be well within the move. If it is, we will want to see much lower prices still, as the H&S pattern’s measured move is somewhere deep down around $12-22K. And yet, I will note two features of the plunge so far.
The first feature is the volume profile. Bitcoin’s little plunge so far has taken it (unsurprisingly) to a POC (point of control, red line, the price at which the greatest volume has traded in this timeframe) and it has a huge volume node it will need to work through in order to go lower:
Under normal conditions, we would expect this level to provide significant support. In order to cut through that though, we need to see some volume. And so let’s look at the kind of volume we’re dealing with so far:
We had an almost 14% down day (high to low) without much volume and there are reports of liquidations in the crypto market. If we don’t see significantly more volume (institutional abandonment), this flush could just be wiping out the poorest positioned speculators. And that’s actually very healthy.
Let’s review the bearish count. On this count, we would have expected the loss of the H&S neckline to coincide with us entering the third minor (green) wave of the third intermediate (orange) wave. This should be the widow maker move. It should give us the kind of volume we would need to cut through the POC like a hot knife through butter. And so far, we just don’t have it.
So, as I see it, we are left with two options:
1) we are subdividing again, and this latest drop is just minute (blue) 1 of minor (green) 3, and we would expect a poor quality rally retracing back partway to the neckline before the real drop comes, like this:
Or, 2) this count is not correct. And as far as that goes, it was prudent for me to acknowledge the super bearish count (first noted here) because it’s gotten us this far, but that doesn’t mean I have to marry that count forever.
The bearish view is that primary (pink) 4 is in, as well as primary (pink) 5. But, it’s also possible that we’ve been in primary (pink) 4 this whole time. And we would look at it as a flat, and if it’s a running flat, it would look like this:
Depending on where we put the intermediate A (green or red alternatives), I find it interesting that orange C having parity with A takes us right to where we’re at now (or with a slightly lower low). So, if we simply begin to rally powerfully from here, I can explain why. But then why would we do that?
My worry here is that this whole selloff has simply been a mistake, and this will lead me into my next points.
What is the “news” that we’re attaching to the selloff? The major features seem quite clear: the Fed is not our friend here anymore and we’re worried about a Russian invasion of the Ukraine (and prices are high and we all know that we’re in a bubble, etc.). The problem that I see is this: everyone knows that the dot-com bubble was popped because the Fed raised rates and took the punchbowl away. And knowing we’re in a similar bubble now, everyone is trying to front run that. And that is why everyone has one foot out the door. But: bubbles can go on longer than we think, and the Fed hasn’t actually raised rates (or tapered) and Russia hasn’t invaded the Ukraine.
Goodness. AND: the Fed, historically has raised rates for periods before equity markets top. There’s a time-delay; in other words: the popping of bubbles happens sometimes weeks or months or years after rates have been going up and here we are, without having even yet seen even one 25 bps rate hike. Let’s take a look:
Fed Funds Rate
In the case of the dot-com bubble, the Fed raised rates for just over a year before the markets topped. And it was even worse (longer) before the GFC:
The markets can usually tolerate a whole series of incremental rate hikes before whatever threshold causing things to break is reached. And we literally haven’t even gotten up off the ground yet this time. Just the thought of the last two (longer) recessions is freaking people out.
You’ve heard me say this before, but I am constantly amazed by how quickly sentiment can change. At every high, everyone is maybe too bullish (many of us acknowledge the possibility for a melt-up and want to participate) and every time we pullback, everyone is too bearish (because we know the bubble can pop at any moment). But the bearishness is so extreme every time that we quickly hedge and the market will find it difficult to plunge. I want to discuss what sentiment probably should look like at a bubble top. I really do think we need to end on a note of euphoria. Right now, I see about 20 perma-bulls in full bear mode and of course all the bears are lapping this price action up like mad (let’s be honest though too, it’s been pretty fun for the bears here, and they’ve earned it).
But let’s look at some AAII data.
In January of 2000, the bullish percent hit a high of 75%. Last year, the highest reading we got was only 56.9% (that was in April). That means that at our highest point, only about half of money managers were bullish. lol
In reality, this has been an extremely bearish market: prices have gone straight up and no one will believe it. Now, when I realized that a year ago, I capitulated and decided we need to see all that bearishness bleed out, and I realized that it might take a very long time to do so. And now, even before the last two days of last week, we immediately struck a 52-week high bearish percent on the survey at 46.7%. Who knows what it will be this week.
So, it seems to me that the Fed should be able to raise rates for some unknown period of time before we top (because we have so much historical precedence for that) and it seems to me that this “one foot always out the door” mentality will drive us higher and higher until too many people get both of their damned feet back inside the door and leave them there for a bit.
And, like the lag we should see in Fed rate hikes (versus market topping), we should be alerted to recessionary forces in advance, and I’m not seeing that yet, so let’s look:
While $NFLX slid into the abyss, we’re not yet seeing anything notable on the Fed’s National Financial Conditions Index. This data only goes to January 14th, so it will be important to watch for this week’s number. But, an important feature here, too, is that this index tends to lead the equity markets. You can see that in 2000, it ran up to the line (above the line represents lenders distrusting lendees, below the line indicates presence of trust) multiple times well in advance of the March 2000 index tops. And in the GFC, it started spasming almost two months before equities topped. And now, we don’t see anything yet. And even if we do start seeing something, it doesn’t mean we’re immediately at the top yet, either.
(There is an exception on that chart, and it is the COVID crash: conditions were fine, we did the lockdowns, and then the spasm started on this chart, no warning there. The problem for us now is: where’s the lockdown? We don’t have an event yet, and until we get one, we won’t see a spasm, even if we’re replicating the COVID crash now and not the other last two major market tops).
Another leading indicator is, suitably, from the Leading Economic Index (you can read the full report here). It has a remarkable ability to alert us to changing recessionary conditions sometimes very well in advance. And what we’re seeing right now is super hardcore growth still. I would expect this to top in advance of the equities markets. Its going sideways for years even sort of alerted us to the COVID crash. But it’s not even going sideways here, let alone down, but entirely to the contrary: it’s still going straight up. I would much rather look for this first to slow, then to top, then to reverse, and then start looking for a major market top.
Oil and Copper
You’ve heard me complain about oil’s lack of participation in the rout. And I watch it because it, too, tends to lead. It doesn’t always. In 2000, for instance, equities topped in March, and oil topped in October of 2000. But, it often leads, and it often especially leads crashes, and it still looks good here. And similarly with copper, Dr. Copper, the great industrial metal, it often lets us see economic slowdown early as manufacturers stop buying it before we stop buying what they’re manufacturing. They anticipate their slowing future demand because they’re good at managing their production. And copper is just consolidating sideways right now as far as I can see here.
Now, despite the sentiment and lack of alerts noted above, let’s be frank: the selling has been intense and certain’y institutional in volume. Let’s look at a couple of names and some indices.
Amazon looks grim. You’ve seen the bullish count, and, despite the drop, it can still qualify as a triangle (though now expanding rather than contracting):
But we would not like to see this go much lower. For instance, if we ditch the counts and simply describe the range, it looks like this:
And, as many of you are familiar with, this can be interpreted as a Wyckoff distribution (or re-accumulation). Now, of it is distribution, we’re obviously done and we’re going to enter the markdown phase and we’ll see much lower prices.
And yet, we haven’t really left the range yet, and even if we do, a re-accumulation often ends with a “spring,” a violent drop that shakes out all the weak longs just before the markup phase. Now, in either case (unless we’re actually in a crash now), this should see a rebound. If it’s the “spring” we’ll go shooting up to new highs and much, much more. And if it’s the markdown phase, it could drop more locally first, but then there should be some “LPSY” (last point of supply) in which it tries one more time to recapture the range. If we’re actually doomed here, that’s the short. But I would really like to have seen more of these leading indicators I discussed above having turned down first before I can draw that conclusion with conviction.
Let’s look at a growth name, as that’s where much of the poor breadth and real carnage has been. I’ll cherry pick one, $ZM. It’s getting harder and harder with each and every passing day with these to count them as anything but complete or nearly complete. The peak drop in RSI should correspond with the 3rd of the 3rd down (green arrows), and everything after that should be wrapping things up. Even if you’re a bear, and that’s not a 2 down there, it should be something complete, maybe an A-wave of a massive 3-wave bear market, but one would still expect it to see relief here. And of course if one is a bull, then this would be a major low. So, in either case, I would still expect a rally to at least $300 from here or close to here. And I can’t help but see almost all of the growth names that also look like this chart in much the same way.
Now, if the markets are panicking here unnecessarily, trying to front-run front-running data that hasn’t even turned down yet, and they realize their mistake (the Fed soothes, GDP keeps coming in strong, no Russia invasion, etc. etc.), don’t think for a minute that the opposite panic can’t set in as we’ve just tested 200-day moving averages across the board for the first time in almost a couple of years, making this perhaps the bast buying opportunity in many, many moons. If that happens, here’s how I would account for it:
$ES remains near an important trend line of mine (part of that “B-wave triangle hypothesis”), but it’s also poked through it. If we see relief very soon, I can account for this as a major low by counting the move down as an ending diagonal “C of E of B.” It doesn’t have to be a B here; for instance, if I’m wrong about that hypothesis, and we’ve had an impulse wave up from the COVID lows, this could be a primary 2 instead. That will be immaterial here for the time being if we rally relentlessly from here (as we would do so in either case). (It will make a big difference later though, but we don’t need to worry about that now).
I can do something quite similar with $NQ. As it stands, the move from the all-time high looks like a 3-wave move (and you’ll see something very similar on the Russell shortly). We can still use the B-wave hypothesis here, too, but it will lose credibility if we keep plunging. As it is, a flat-bottomed, ascending triangle is still a perfectly good triangle (if we’re in a triangle).
And I still can’t shake the feeling that there’s a smaller triangle up there above us, too (the green B). It’s not something bears want to see; they would want to see a 1 down, 2 up, and it’s hard to get that there.
I have this counted out on the ETF (and not the futures), so here’s a look at $IWM. You see the structure similar to what I believe is a triangle on the Nasdaq. Likewise, this looks like an excellent 3-wave move, centered around its own triangle, and not necessarily a huge impulse wave, which we would rather see at the top of a market. There is a fib relationship here between the drawdown legs. Note also the bullish divergence on the RSI (which you will have seen in all of the index charts above us as well). That said, we’re getting deep here. But, as with $AMZN above us, this could be the capitulation spring pushing everybody out who lacks the deepest pockets before the markup phase.
One reason I’m not too scared yet is—and this is of course in no way intended to diminish the British—we all love them of course, but, their primary index is not a world leader as it lacks the stupidity of the US tech giants that have been swallowing the world. And so, the $FTSE should be looking like shit right now if we were about to crash. And what do we have here instead? Why, while the US markets implode, it’s been rather beautiful, driving itself up to new highs while we’re getting our faces melted over here. Now, if its “B-wave” is complete already, that’s sort of what I would like it to do, as it would then force it to top first later on.
And just wait, there’s more. If it fails to fail here, there’s even a more bullish technical when we move out to the daily. This, my friends, is a breakout:
Now why would it be doing this? And that goes back to my speculation about what might cause a monster melt-up. We’ve been cooped up, they put a lot of money out there, and what if we do get over the virus? They set us free, mild Omicron gets us the herd immunity we need, and we breathe a collective sigh of unbelievable relief. And what did Boris just do? He just dropped all their mandates and restrictions. And look at the $FTSE go. And it mustered that while the US indices have almost collapsed. I’m frankly impressed. Perhaps the strength we see there is a harbinger of what might come to all the indices if the US follows the UK and Ireland’s lead on this. So, it’s worth watching this index, especially right now.
The Dark Side
In the middle of a melt-down that hasn’t found buyers of note yet, it would be irresponsible of me to ignore the downside risk, so I’ll just speculate about next moves if everything I’ve just discussed above is completely wrong. I will look at the $SPX, as I don’t quite have time to do so for all of the indices here.
If we’re in a crash, or the beginnings of a monster bear market, all leading data be damned, I would expect something like this. If we’re lucky, we’re in a third wave here that stabilizes in the standard 1.236-1.618 extension box (we’re in it now), consolidate in a 4th wave, make another low for the 5th, then have a 3-wave rally of poor quality (poor volume and breadth) retracing for the minor (green) 2 before we fall off the earth. If we’re not as lucky, then we’re just having a deeper minute (blue) 3rd wave. The 200% and 2.618 extensions are at 4270 and 4120, respectively. So, in either case, I would still want to wait for the retracement to make any big bearish decisions, and that will give us time to see what Putin and Powell are going to do to us (or not).
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