Extreme Caution Remains Warranted: A Strong Further Decline May Still Lie Before Us

May still lie before us. I do not possess a crystal ball. But, there is a technical structure I am observing that may suggest a further decline ahead of us in risk assets. This article will lay out the idea in detail.

I am not here to confirm or deny anyone’s bullish or bearish expectations for the markets. I endeavor, instead, to objectively assess the situation in anticipation of its unfolding. In the spirit of that, let us summarize the merits of the bullish and bearish cases, respectively:

Bullish case:

  • It has been my expectation that a reduction of pandemic-related restrictions combined with the weak Omicron variant (leading to herd immunity) could produce a feeling of worldwide relief that could support a very strong appetite for risk assets for quite some time, perhaps even several years
  • We seem to have not—by many sentiment measures—experienced the type of euphoria we typically see at major market tops
  • Many of the destroyed growth names have already endured terrible and lengthy bear markets and if those were all to end soon, their next moves could be tremendously bullish
  • We will be hard pressed to find historical examples of markets topping prior to rate hikes being implemented, and, in fact, they often top long after the rate hike cycles begin (and there has been no yield curve inversion, GDP continues to grow, etc., etc.)
  • There is an enormous amount of “cash on the sidelines,” some estimates I see place that in the trillions of dollars.

Bearish case:

  • The short and intermediate trends remain decidedly down, and if we go much further, longer term trends may also become threatened
  • The events in Europe may cause rapid-onset contraction in many economies (Russia’s of course, but also, say, of Germany’s, as 70% of their energy supplies come from the now heavily sanctioned Russia—see how the $DAX has interpreted these events)
  • A rapid contraction will of course not been seen by leading economic data
  • Any such unanticipated contraction may become contagious

Weighing these two groups continues to lead me to believe that we are in a correction, and not a bear market. A point of clarification: when we use the phrase “bear market,” we can mean two things: oftentimes, we mean by that a long, and drawn-out decline in asset prices lasting many months or years; or we can mean a “technical bear market,” typically understood to be a decline of 20% from a recent high in a major index (such as the S&P 500). When I conclude that a “bear market” continues to seem less likely to me here given the totality of the evidence listed above, I am referring to the former sense and not the latter.

And one thing that I will be suggesting today is that I am open to the latter. That is to say: though I do not expect anything like the GFC or the dot-com bubble bursting, I am open to some further lows ahead that may even put the S&P 500 in a “technical” bear market.


To begin, I would like to look at the basic structures on $BTC. Where liquidity flows, so flows the Bitcoin candles, and it’s far easier to use technicals on a single chart like this than to try to do so on a complex of variable risk bonds or something like that.

Some general notes:

  • It has the appearance of two, consecutive head and shoulders patterns
  • The top of the one on the left coincided with the beginning of the decline of all the high growth names
  • The top of the one on the right coincided with the top of the Nasdaq
  • Thus, if we can draw some conclusions about this asset’s future, they may assist us in predicting the course of equities

Now differences between the two head and shoulders patterns are interesting:

  • The right shoulder of the one on the left never seriously broke down below its respective neck line; the right shoulder of the one on the right did
  • The right shoulder of the one on the left developed into a falling, bullish wedge; the right shoulder of the one on the right has produced (so far) a far more directionally agnostic wedge. Though symmetrical triangles are understood to be directionally agnostic (the “bullish divergence” on the RSI many believe they see is rendered null and void as no new low in price is present), following a steep decline, they are perhaps more reliably interpreted as “continuation wedges,” which gives the present picture a far more bearish look than how things looked last summer

BTC

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Let’s Take a Quick Look at Oil

I believe that $OIL has completed an impulse wave to the upside. It may fail anywhere here around the orange box just above us, and if it does, I would expect it to enter the orange box below us before finding support. After that, I expect it to continue its uptrend. If such a scenario does begin to play out, I will endeavor to release an updated chart on this.

OIL


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Forgive Me for Doing This to You

Now, I know it seems like I throw a lot of ideas around, and it’s because we’re in a giant triangle—I believe—(that’s where the upcoming “B-Wave” comes from) and it’s a volatile structure, full of uncertainty and I have to try to navigate through it on almost a day-by-day basis. And though I use many “risk signals” to help me to guide my counts, since we’re not in a trending market, I may seem like I’m flip-flopping around a lot, and while I am in a sense, it’s not been a bad strategy, as I’ve caught the basic motions of the market fairly well, though timing precise bottoms and tops is always most difficult.

What I’m going to do here is lay out an alternative that has just come to mind today based on many things I watch. I’m going to walk through all the steps so that you can see it’s been reasoned out and is not simply a whim.

Now, I’ve been bearish here, and that’s paid off, as we just gave back a big chunk of that rally in a single bite. I adopted a bearish tone on the 28th because some of my risk signals were winking at me, and we went exactly sideways and then got this nice flush. But maybe that’s all my risks signals were pointing to, for all I know.

I’ve acknowledged the possibility for us to make another push up but something helpful has happened today. There are two instruments that have been especially challenging for me: Bitcoin and the Nasdaq 100.

With Bitcoin, I first thought it was going to rally, and when it didn’t, I expected it to fail. And while today is sort of a good start, it’s not been quite what I was expecting and it’s given me a big clue. In this chart below (from a prior post), I expected a fairly significant 5-wave impulse from minor (green) B to minor (green) C.

BTC

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Another Risk Signal: $OIL

I want to add this to my list of risk signals that are creeping in to my attention.

My expectation was for $OIL to be in its 3rd minor wave (I noted that here). 3rd waves are unmistakable and when they don’t show up I stare intently. A 3rd wave of this degree should have carried us effortlessly to the big orange box above us at a minimum.

Instead, I want to point out where it stalled (green arrow). That thin orange line is the exact point where the rally from 12/20 until now equals the rally from 12/2 to 12/8. That is equal legs. To the tick. And that is exactly how we distinguish between “corrective” and “impulsive” structures. An impulse up here should have some real extension in it. A correction here would have equal legs. Also, the smaller orange box we’re in now is the 50-61.8% retracement of the prior decline. All of this means that my minor (green) 1-2 could be a corrective A-B instead.

Now, if this gets off the mat and rallies really hard, so be it. But until then, it still needs to prove that to me.

OIL

 


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Some Various Thoughts on $ES

I am presently inclined to continue to count $ES as a nice, big impulse wave here. So far, my first instinct is to count us as within minute (blue) 3 of minor (green) 1. Blue 3 may have finished today or it may still be a bit ahead of us. If this count is correct, we would like to see some consolidation for minute (blue) 4 followed by one more rally to complete the structure before getting a 3-wave pullback for minor (green) 2.

ES

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Micro Inverse on Oil Targets $72

A successful recapture of the neckline of this inverse head and shoulders pattern on $OIL targets about $72.

OIL


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Above the Orange Box, I Am Inclined to Count $ES as a 1-2

So long as $ES stays above the orange box, I am inclined to count it as an impulsive 1-2 to the upside. Yesterday’s bonkers rally looks impulsive, the decline looks to be in 3-waves (at least so far) and came to the 50-61.8% retracement of the advance. This minuette (orange) 1-2 produces a target of 4840.

It’s not clear to me if this should be a nest (with yesterday’s price action being a 1-2 of minute [blue] degree). That would produce a strange and unrealistic fib relationship between the size of blue one and blue three. So perhaps minor (green) 2 belongs where I presently have minute (blue) 2. I will need to give that part some more thought.

ES

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$OIL May Suggest That the Big Pink B Is In

I’m having doubts here about another washout. The question is: is the big primary (pink) B across the assets for which I believe it is relevant in, or do we have another drop first? I can’t tell from equities alone yet, because $ES is funky. And I initiated my call for another drop because Bitcoin looked so lethargic (and still does). But let’s look at $OIL.

The long-term view is this:

OIL

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$OIL, Long-Term Target

I know it’s geeky to do the Elliott Wave 3-wave correction on the markets everywhere, but it’s been thrilling to discover that because I’m finding that it’s solving a lot of mysteries that we face in structures everywhere. One such mystery is in $OIL.

So, using the 3-wave move that I am seeing in the US indices as a guide, all of a sudden, oil counts beautifully here. And we can immediately see that it, too, fits the parameters of a B-Wave triangle up here just like damned near everything else. And so we need the primary (pink) C-wave next. I’ve posted two fibs. I think the reflation trade is on and on hard.

And I think this tells us our answer: it’s also “fake.” We’re not getting out of this alive. Because after that C, oil (and everything else) is going to crash (and in 5 huge waves) for cycle (yellow) c. Amazing. So, we’re going to crash up in 5-waves, then crash down in 5 even bigger waves.

We’ve got a year to enjoy the ride and to look for the big one. This will top before the equity markets, but, not before going much higher first into next fall.

You want to know when they’re going to raise rates because of the inflation they’ve caused? Looks like October is a great candidate.

OIL


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