I See A Couple of Options

I continue to believe that there is a low probability of a long, drawn-out bear market. That does not mean that we cannot have a technical bear market, of course. But I do not think we have some multi-year demon ahead of us. I remain more inclined to believe that we are closer to a bottom in time, if not yet in price.

I know a lot of people are expecting a GFC-style crash, but I don’t see a systemic risk large enough for something of that magnitude. I do believe we are in a correction in a longer-term bull market that is incomplete. But, it is possible for us to still see lower prices in the short-term.


The options I will list below are based off of a conviction I have that sentiment here is more compatible with us being near a significant low, rather than in the middle of a move, or certainly near any kind of top. People are certainly allowed to get very bearish. But they need to become so after most of it’s already done. People are very bearish here, and so I think that most of it’s already done (or it already is done).


If Friday Was a Panic Low

It is statistically rare to sell into a close and then gap down the next day. Gap downs are more commonly found after there are short covering rallies (if even only small ones) into a close. Friday was quite a statistically rare day. That said, the bullish count is not invalid, though it looks like hell because a nice intraday reversal would have looked a lot better after a drop like that—especially given the well-defined wedge that had developed. But, “abandoned babies” and “island reversalsare chart patterns that do happen. And so, if it’s a deep “2,” we may rally strongly from here and never look back. That is a possibility here.

SPY

As unlikely as this seems, it may not be too unlikely. For instance, when we really started to fall apart in the COVID crash and had our first real gap downs, $VVIX was 120+, indicating a strong appetite by institutions for hedging in the $VIX. Anything over 110 is concerning. $VVIX is presently at 99. That would be weird in the middle of a crash.


If We Need to Go Only a Little Lower

It is possible that a structure is forming that I have not yet foreseen. For instance, a bullish wedge such as this is a possibility. If we continue to fall and threaten the 5/20 low, I would look to the trend line below around 370 (on the ETF):

SPY


Other Things

I have already pointed out the reasonable technical setup on the Dollar Index (here). I still expect it to turn lower soon and that should especially help tech stocks.

Similarly with $OIL. I am expecting it to turn down soon. This is not a call based on my attempts to be cute and to be contrarian regarding fundamentals. It’s just the technicals. And those technicals inform what I think will happen fundamentally (that inflation has effectively peaked or is peaking). I know the story here is that inflation is out of control. But, just like when oil was trading at $70 and I said I thought it would go a lot higher, and few wanted to believe it, it’s because there was a different “story” then: namely, back then everyone thought inflation had already peaked. So yes, I understand the narratives we like to employ in our attempts to bring order to chaos (to understand the world), but I also know that the world is always in a state of change. And sometimes the charts can point us to that change.

As with the dollar and oil, I do expect yields to turn lower as well. Now, with $TLT, we will want to see some kind of accumulation here. We can try to compare the present structure to the last known accumulation, from the spring of 2021. With the last one, we can see that it took quite some time, more than a couple of months, and with this range we’re in now, it’s been only a bit more than a month:

TLT

Does that mean that it’s going to take a lot longer? Not necessarily. One reason the last one may have taken so long is because of the relatively low volume back then as compared to the present period (you can see the higher average volume in this period, and it adds up fast). And so, the recent latest rally in yields (and the associated drop in bonds) may be the “spring” that frequently concludes accumulations.


Crypto

And finally, let’s look at crypto ($BTC & $ETH in particular). I want to inform the discussion by combining two forms of analysis, some things we know about Wyckoff patterns of accumulation and some things we know about Elliott waves.

There are more or less two basic patterns of accumulation.

One of them looks a bit like this:

ACCCUMULATION

It trades sideways, but more or less slowly making higher lows along the way. And when there is a “spring,” it doesn’t necessarily have to wipe out all of the prior lows. Now, a consolidation after a big drop is often understood to be a wave “4.” And why? Because “big” drops are often understood to be “3rd” waves. So it would make sense that after a 3, you need a 4, and after that, you need one more lower low to get your 5th.

But of course that does not always happen, as with patterns like the one above. And so then all the scrambling begins and folks who are attempting to keep count are forced by the evidence to smoosh in something like this:

ACCCUMULATION

Super-duper squashed, stealthy “twos.”

Now that said, the other accumulation variant is also often visible, and it looks more or less like this:

ACCCUMULATION

And this has a much more traditional “look” to it, especially to Elliotticians. And it can easily be counted like this:

ACCCUMULATION

A nice big “spring” that does wipe out all the prior lows.

This is one reason I often don’t like to insist that there always has to be 5th waves after big moves and consolidations. I’ve seen countless examples where folks make assumptions wanting this latter, more textbook scenario to play out only to then see it do precisely not that. (In a joking tone, I sometimes think that a reasonable number of “Wavers” are sometimes a tad deep on the autism spectrum and they like a few too many hard rules to get them through life—I say this all in love).

So, I bring this up, because there is a disconnect between Ethereum and Bitcoin, with the former being weaker here than the latter.

With Ethereum, we had a big drop (in May), then a nice, contracting period of consolidation, and we’re puking here:

ETH

This looks like the fairly “textbook” wave 4 triangle failing into a 5th wave. Regardless of what happens from here, whatever move we’re in now should in principle be the last leg of something. The one caveat being: 5th waves can also travel as long as they’d like to. But we just can’t rule out that a major (bearish) structure can complete at any moment.

And, with Bitcoin, it’s in nowhere near as bad of shape. And, since it’s never broken all these prior lows, it could be the first of the two patterns I discussed above (or some other variant that may be one bigger 1-2—as opposed to a 1-2-1-2, but still does not take out the steep plunge from May):

BTC

So I do think it’s dangerous to insist these must fail. They very well could be accumulations. Of course I recognize that it is possible that they are not, but with Bitcoin not having taken out prior lows, and with Ethereum’s having done so, it should mean that Ethereum is ending something. How soon it will finish is yet to be seen, but since it seems to be in the final leg of its structure, maybe it will soon embark on a new rally which may foreshadow improving liquidity conditions.


Conclusion

A lot of charts look a lot worse by the end of the week than they did at the beginning of the week. Even that great look on the $DAX made a turn for the worse as it lost that beautiful breakout. So, we may definitely be in trouble. But, I would feel a lot better about insisting on that if I saw more bulls out there. And so, until then, I remain open to better than expected outcomes.


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