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The Third Wave Down

In this post I will discuss technical (chart) analysis, and a small corner of the charting world called "Elliott Wave Theory" (EWT).

Many fundamental analysts deride chart analysis as "financial voodoo". They especially disdain EWT because it posits that social mood (greed/fear) is the "invisible hand" that moves markets. Obviously something that is invisible can be difficult to measure. Conversely, Wall Street relies almost entirely upon fundamental analysis. For this they create massive spreadsheet models that include every economic and earnings parameter possible but in the end they plug-in fabricated assumptions to arrive at an educated "guess" as to where earnings and the economy will be a year from now. During the middle of the economic cycle, Wall Street's models are usually fairly accurate, however at the end of the cycle their models have the veracity of a Magic 8 Ball. Which is when they fall back on "Black Swan" theory - no one saw it coming. Certainly no one goal-seeking spreadsheets.

What's interesting is that for the past 15 years, both fundamental and technical analysis have taken a backseat to Fed watching. Parsing every word that central banks utter in order to determine the path of monetary policy. As I said in my last post, similar to 2019, for over a year markets have been front-running the Fed's rate cuts and QT taper.

My opinion is that there is a feedback loop between monetary policy, economic fundamentals, market performance and social mood. Monetary policy can boost the economy and monetary liquidity can gin up stock markets, but at some point manic speculation reaches a peak. By the time the Fed eased strongly in both 2007 and 2020, markets were going down not up, because markets had already "priced in" easing policy and speculation had reached its climax.

Which is why we look to the charts to tell us not what will happen, but what HAS happened. In my second to last post which was a conversation with SpotGamma (Kochuba), he predicted that once again monetary policy would push markets higher. Indeed, that was the case this week post-FOMC. But a funny thing has happened in March 2024 - the biggest asset bubbles - AI and Crypto both already peaked two weeks ago.

Which means that social mood, in this case "greed" also peaked two weeks ago.

The chart of the week is Momentum Tech which are the fastest growing stocks in the market. These stocks tend to outperform on the upside and crash the hardest on the downside. This is an equal weighted index so it is not unduly imbalanced by a handful of darling stocks such as Nvidia and Meta. What you notice is that there was a very large pullback at the mid-point of this rally at "b" which is not evident during the bull market rally preceding Gamestop. This is a telltale EWT sign that this is a corrective rally. Also the call/put ratio exceeds the prior two highs but the highest octane stocks are failing to make a new high.

What about Bitcoin, isn't that making a new all time high? Yes it did two weeks ago around the same time that AI peaked. However, the total Crypto market is NOT confirming Bitcoin. What we see is that the total Crypto market has the same chart as Momentum Tech.

This is a weekly chart:

What if you take Nvidia out of the Artificial Intelligence index and look solely at the TRUE AI companies that are delivering AI solutions to final customers, instead of delivering hardware to data centers.

Then you get a much clearer picture of social mood.

The third wave down is a panic wave. Because traders went ALL IN believing that new all time highs are imminent, but the market reverses just slightly above the prior high at "a".

But here is where it gets interesting, because if we zoom in to the daily view on this right shoulder, you see that the biggest bubbles all peaked two weeks ago. And new highs peaked THREE months ago.

Despite record inflows, spot Bitcoin ETFs (and the underlying Bitcoin) are rolling over. Why?

Because in summary, just because someone pays a $million for a worthless brick yesterday it doesn't mean someone else will pay a $million today.

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