Pour Yourself a Drink: It’s Time for the Weekend Review

In this weekend’s article, I want to discuss the very long-term picture, and what I believe are the two basic options for where we may be at within that picture.

When we account for the phenomena we see in the markets today, it is in our nature to look to history for some kind of guide to help us through the present. And given the nature and length of the decline in equities this year, it is natural to look to prior bear markets to help us to understand what this one might be like. Most of us have lived through and experienced the dot-com bust or the GFC (or both). And so those are our two most natural guides at hand.

And yet, the macro-economic forces today aren’t necessarily a good match for either of those two times. I had, for instance, at one point looked to the dot-com bust as a guide, but I’m not so convinced now as I had been. We certainly had a tech bubble inflating in the present day. But, when you look at almost all of the growth stocks that had enormous run-ups (ARKK, etc.), they already look now like the dot-com bust stocks looked at the end of that bear market. Totally gutted. And yet the major U.S. Indices remain relatively strong by comparison.

And we have inflation. And what do we do with that? I am inclined to think that Russell Napier understands the situation well (you may read an important interview he recently gave here). He predicts that governments are going to use inflation as a vehicle to solve the debt crisis. If he is right, this is a process that may take quite some time. A period of tightening and weakening policy, allowing sticky inflation to persist for maybe even 10-15 years until metrics such as debt-GDP normalize.

In the past, after the enormous debts from World War II were accrued, and additional expenditures of the Cold War mounted, those debts were normalized in the 60s and 70s through waves of inflation. And, the great irony today of course is that while Jerome Powell tells us the Fed aims to avoid those very mistakes, that may actually be exactly what he is intending to replicate. And if it’s not what he intends, it may then be what the US Treasury intends, and in the event of conflict, that is a fight the Fed will lose, as the Sovereign is all powerful, and among them, the US Sovereign is the most powerful among the global Sovereigns. Not Powell (nor his successors) can resist the will of the Treasury in the end. And neither will we be able to. And it is not a partisan issue. It’s not “those damned Democrats” or “those damned Republicans.” Both will aim to solve the problem in roughly the same way.

Now, given all of that, which I find persuasive, what in the hell could that even look like on the S&P 500? A somewhat carefully managed period of tightening and loosening policy is probably going to look like a huge consolidation. Fortunately for us, consolidations like this are often large 3-swing moves typically involving one “nest,” giving them the look of a 5-swing move: down-up-down-up-down, maybe even triangle-like (A-E). It could roughly resemble this:


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The Weekend Review of the Markets

Beginning from here, after I discovered what I thought was an ending diagonal on Apple, I began to assess whether a full impulse wave had also completed on the S&P. And if so, that would have been some kind of “1,” and we should expect a “2.” Wave “twos” are typically sharp retracements (whereas wave “fours” are typically flat, and sideways). This is not always true by any stretch, but it is common. Given that, and the fact that we lost our major trend line without a gap, I assigned a resonable probability of a sharp “2” to come.

As the week unfolded, things looked good. I want to review that for a moment.

First, the ending diagonal looked lovely, and malicious:


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Public Chart: Let’s Take a Look at the Huge Distribution Top on $TSLA

Whether we like it or not, $TSLA was in a bubble. And whether you think the Green Energy movement has a future or not, the stock is simply way overpriced.

And when we zoom out, the sideways trading range it’s been in for two years (!) doesn’t look good, because a range like that can only mean one of two things:

  1. It’s a long re-accumulation prior to another markup
  2. Or it’s a distribution

But in an inflationary recessionary tightish monetary policy era, just how high do you think it can go? Nah, I think it’s far more likely had its day and will come back down to earth.

And scarily, there is very little volume on the way down:


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One Last Intermediate-Term Discussion for the Weekend (Important Perspectival Considerations)

This post is just some chill weekend things to consider. Maybe a companion to a cup of coffee or some whiskey. Nothing urgent in here.

This is back burner stuff, so just tuck this away somewhere and pull it out only in case we need it. As I’ve said, I’m not particularly in love with the bullish thesis, but I also won’t completely dismiss it yet, either. I want to summarize why, and discuss a target possibility and what that could mean for various instruments.

  1. We know that especially by the June lows, sentiment reached absurdly poor levels, levels typically associated with lows that have great endurance (months not weeks).
  2. We know that historically, the market has never topped (so far as I can see) before a hiking cycle has begun (I understand this time might be an exception).
  3. The structure off the top of the market has been especially choppy, perhaps too much so for a real bear market.
  4. The rally we recently had broke a lot of records, and did a lot of things that typical “bear market rallies” tend not to do.
  5. The breadth thrust we had during that rally we just had was unusually strong. Stronger than the thrusts in typical—even very strong—bear market rallies of the past.
  6. Also, the NYSE Composite Index made a new high after the other major indices, which it has never done before. Usually, it diverges, making a lower high when the S&P makes a higher high at the high. The NYSE Composite topped on 1/14/22; the S&P on 1/4/22. Highly unusual.

Because of all of that, I am at least open to the possibility that we go to all-time highs once more. That may sound ridiculous, but that rally did impress me. Now, if we go and check back in on that head and shoulders neckline that we just broke today and fail from it, so be it. I’ll be all bear for months. But what if we don’t? If we don’t (fail from it), this is roughly what I would expect.

IF we do rally, I’m not expecting some ridiculous rally to 7500 or anything like that. There is a terrific fib at 4950.25 on the nose. It is the 50% extension of the rally from the COVID low to the all-time highs, extended from the June low:


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Weekend Article: A Look at the S&P 500, the Dollar, Bitcoin, Amazon and Tesla

Nothing has changed regarding my views all this week that lead me to believe this countertrend rally is ending. I spent much of the week seeking wave balance at these highs for instruments across the board, and we have some lovely structure that has developed. All of those relationships remain valid today as we opened little changed. The two most significant levels of balance for $SPX were 4003 and 4009 both of which we poked through during the first hour of today’s trading.

Super zoomed in, the S&P 500 counts well as an impulse wave down, and there is a retracement in the afternoon that is at least consistent with a wave 2 of a small degree, because there was balance right at the close for that small rally:


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