My Bias on $ES Remains Bullish Here

A little bit of stream of consciousness for you today. My basic analysis from yesterday remains unchanged. I think it’s more probable that we go up rather than down, but there of course is at least one structural risk that remains intact. We of course could look back on that little structure in a week and say, “Ah, I see that must not have been a triangle—of course the market wouldn’t repeat itself exactly like that”).

But, let’s look over some things:

$ES is in a small bull pennant here, perhaps consolidating the energy it needs to break the downtrend line. It may even go as low as the orange line (for “equal legs”) or as low as the orange box (typical depth of a “2” here and prior trend line retest). Both of these are marked by the green arrows. Lower than those and I would begin to become concerned.

ES

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Yields, Small Caps and Tech

The $10YRYLD is in a 3rd wave advance. I’m sort of guessing here, but this is my expectation: I expect the rally to change its slope of ascent (soonish?) as it approaches that trend line, react off that trend line (broader discussion of what that line is here) and then do…I’m not sure what exactly, but sort of wrestle with that trend line for a while in some way.

That’s when I believe the Naz will begin going off in its 3rd of 3rd minor wave leading to its 3rd intermediate wave (ignore all the giberish, but I mean the most powerful central ascent to its next top). And that’s when some of these rate-sensitive reflation names should consolidate or correct.

10YRYLD

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An Exhaustive Guide to the Most Significant Elliott Wave Count Alternatives Available to Us

My members have largely given me permission to post this publicly, so now you owe each of them a beer.

I keep these alternative wave counts in my mind at all times, and I’ve worked on them over many months, but I thought it would be helpful to lay them all out for you, as well. As the market moves along, I try to judge and estimate the probabilities of these various options, and I will take the time to present these alternatives to you in a single post so that you can see them more easily in one place, yourself. These are the various most reasonable count alternatives we have available to us (there are probably a few more, but I think these are the best candidates). As you examine the many Elliott Wave counts out there in the wild, you will almost certainly see those counts among these (or close variants).

I will work through each one in turn, raising some of their pros and cons, and what sorts of evidence we might need to see in order to begin shifting to any one in particular. I will also discuss which ones are more or less probable, in my opinion. I will sort them roughly from their bullishness to their bearishness.

This post is super long and geeked out, so be warned, this won’t be for everyone.


1. The Lesser 1-2 Pump Count

This is the most immediately bullish count. There are many ways to count the waves around the 1-2 we’ve just completed (I’ve just picked one sort of arbitrarily, but just about any will do here), but the fact remains that the low we reached on 9/20 came right to the 61.8% retracement of the advance from the minute (blue) 4, as I have it labeled here. In a market where, for over a year, most lows are “one and done,” this would give us that if we move up straight away from here without really looking back for some time.

I would definitely assign this count as “possible,” but it is not my favored count now, for reasons you will read shortly (regarding the structure of the move off the recent low). But: if we move up and—crucially—take out the all-time high, this is probably what we’re looking at. We would likely be in a third wave advance (on this labelling, of minuette [orange] degree) and it should have some legs for a bit before consolidating (sideways-ish) before then going on to make another high after that (up there toward the green 3).

MINI-1-2-PUMP

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The Reflation Trade Isn’t Dead and Evergrande Isn’t Lehman

Just hear me out. You think it’s merely a capitulated bear talking (it is), but I bring you some charts and not simply my severed, emotionally burdened heart (though I bring that, too).

We often make comparisons between the events of the last year and a half and the Great Financial Crisis (hallowed be thy name) because deleveraging events seem to be needed in an era when everything seems so god damned levered up, and so when a great shock struck (I wrote that so your mental tongue would hurt) our economy, which was followed by a great recovery—at least on paper—we have our doubts about that recovery because those of us who are not twelve won’t allow ourselves to be fooled twice in the same lifetime if we can get away with it.

However, packaged neatly into that arrangement is the very evidence we may need to cast doubt on the whole thing: perhaps it was not as much the excess leverage in the system as it was our (lack of) preconceptions about the imminent dangers of that leverage that caused the deleveraging event. And so today, worried to death that we will travel down that same path again, maybe we won’t, because worrying wasn’t a feature of that path.

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Here’s Why I Doubt We’re Near A Major Market Top

Now, Dear Reader, do not get me wrong: yes, I know that the indexes are expensive; yes, I know we are miles above many long-term moving averages; and yes, I still enjoy trying to solve my own psychological problems germinating from my profound unhappiness by watching things burn to the ground.

None of these variables has changed. However, it’s just that those things aren’t always very good predictors of major market tops. Do I think we may be getting close to some delicious corrective action? It’s absolutely possible: and in fact, it’s my preferred analysis. But as far as, let’s say, seeing anything more than a ten or twelve percent decline, I am skeptical of that here and I wanted to share my evidence for that all in one article. And even if we do get some corrective action, that may also still be a ways ahead of us though I am open to the possibility that it could come at any time. Hell, I’d love it if we just fell apart right now.

There are several things I like to watch that very often help us to measure the risk off sentiment of the big players in the market:

  1. Oil – Obviously as growth slows, energy demand does too, and oil often leads equity markets lower.
  2. Copper – Same as oil, the decelerating use of copper as an industrial metal will very often lead the markets lower, so effectively so at times, that we’ve come to refer to it as “Dr. Copper” in recognition of this metal’s ability to ascertain market health.
  3. Yields – Yields falling of course implies that the safety of shitty returns is being highly sought. Since the big boys don’t have mattresses large enough to stick their cash into, they like to park it here.
  4. The dollar – Though not always perfectly correlated, dollar weakness can often be tied to equity strength.
  5. Credit – In the great debt black hole that has become the world financial clown show, an expanding economy necessarily requires an expansion of credit. A slowdown in credit expansion (or heaven forbid, an outright contraction of credit) is the canary in the coal mine that can alert us to the onset of Bear Paradise.
  6. LEI – The Conference Board’s “Leading Economic Index” has an uncanny ability to often, ahem, lead the markets lower and alert us to recessionary forces.

Let’s look at each one in turn.

I have two preferred ways to count $OIL. The first one is as a nested 1-2-1-2 (pink, then orange).

OIL

If this count is correct, oil stands to make significant gains over the coming many months. This would imply some admixture of growth and inflation ahead. The count seems to me to have “a good look” in terms of both price and time. But let us not be obnoxiously bullish because that feels silly. And so, we can move a couple of things around and assign a different bullish-but-less-bullish count to oil thusly:

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Full Index Counts for $ES, $NQ, $RTY and $YM with Justifications

The indexes are expensive. They are stretched well above their long-term moving averages (with the exception of the Russell, which recently came close to its 250-EMA and isn’t all that far above it now). September and October are seasonally fairly bearish months. The rallies from the March of 2020 lows all seem very mature. One would, on the basis of all of that, expect imminent corrections in either time or price.

The real question then becomes, “How imminent?” I can’t know that for sure, but in an effort to incorporate my thoughts on the $VIX and the evidence I see that suggests we’re not too close to devastating corrections or market top type price action, I’ve laid out these counts on the indexes.

Friday’s $ES price action has led me to believe it will rally sharply at least in the short-term, and what it does from there is still a bit of an open question of course, but I tend to think it felt more like a “wave 2,” having not really broken down hard enough for my tastes. If we had already entered a larger degree correction (like my green 4 below), I would have expected an even sharper initial move down. If we get the rally I’m expecting in the short-term and it stalls, then I would be more likely to believe that my blue 5 (green 3) in the count below should actually be placed where I’ve got the little orange 1 just above us. But, we need to see lower prices, and most especially, we need to take out some prior lows.

It’s my belief that when one of these larger corrections comes along (the green 4, the orange 4), we won’t be asking if we’ve entered it. My trading strategy for the next weeks, even perhaps the next few months is to not be heavily long anywhere too close to the top of the channel, and to buy dips tentatively when short-term setups present themselves on the indexes, while looking for short-term setups in individual names. I am often both long and short at the same time, so I hope not to get caught off guard if these show up. Also, many people are expecting a huge swoon, maybe a 5-700 point drop for the intermediate 4 (large orange 4 on the very right). I’m not entirely convinced that we’re going to get it. It’s just as likely—I think—that if and when we enter these corrections, we correct as much in time as we do in price (and so I’ve drawn these possibilities as triangles on the right side of many of these charts, though the corrections can take any form).

ES

$NQ is very similar to $ES, as you would expect, given the weighting of these indexes. If it has entered a 4th wave here, it could go as low as the orange target box, but I say that with some doubt as all of the last wave fours we have had have not made it to their ideal fibs. If I am off on this count, it may be more like $ES above in that we’re going to go straight up to the green 5 now. I am leaving these counts as they are so that I can keep both alternatives in mind for both indexes, as they often follow each other closely. If I gain greater clarity during the course of the week, I will of course announce my thoughts as we go.

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