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Wednesday Before The Open
With these daily posts before the open, we try to lay out some parameters within which we think the near term movements of market indices are likely to take place. The idea is to set some context for longer-term investment decisions (eg. is it a good idea or a bad idea to be accumulating index ETFs right now?) and for short-term trading decisions (is the Nasdaq at support or not and if so what might I do about it?).
We use our usual Elliott Wave / Fibonacci method. The tools together can work well. Using a wave count gives you some pattern recognition to say, how many moves up or down can a security take before buyers or sellers get exhausted and the trend reverse; and using Fibonacci extensions and retracements helps you measure the likely size of the moves up or down. None of this is pre-ordained and it may turn out to be very wrong, but more often than not you can use the wave counts and extensions / retracements to better inform your decisions.
We use the futures charts for equity indices, because futures trade most of the time whereas ETFs snooze between 2000 and 0400 Eastern on weekdays and don’t trade at all on weekends. So we can glean more insight about short-term sentiment from the futures than we can from ETF movements. You can use the futures movements to assist with ETF decisions - if the S&P futures are up by 1% then SPY will be up by near enough to 1% to make little difference to most people. And so on.
OK so, without further ado, let's get to it. For each of these charts, you can open a full page version by clicking the title link.
The S&P has put in a 5-wave cycle up off the October lows, which thus far have formed the 2022 lows. So in the larger degree this is a very important move right now. The 5 wave cycle completed mid-November and it would be normal to see a security sell off thereafter, which it has. The problem is, it hasn't sold off very much. It briefly touched the 0.236 retracement of the 5-waves up, but that is a very shallow selloff vs. what one would expect (which would be a 0.5-0.786 retracement - putting ES down to the range 3776-3619 respectively). Best guess we see the S&P moving down somewhere near these levels before it gets a wriggle on to break up above those mid-Nov highs in any convincing manner.
The Nasdaq looks to be in a long Wave 4 down as part of the 5-wave-up cycle off of the October (and 2022) lows. Yesterday it put in a new Wave 4 low; the prior Wave 2 was a deep correction so in theory this Wave 4 can be shallow. We may have seen all of it; or it may push lower one more time down to the 11250 range to re-test that Wave 1 high. We ought then to see a move up towards 12080 (the min. Wave 5 target, just above the prior W3 high), or to 12425 (that's the 0.618 extension of Waves 1+3 - a common W5 target), maybe 12670 (0.786 extension of Waves 1+3) before another correction.
From a sentiment perspective and on general macro (rates, inflation) basis you could believe this chart logic.
The problem is Apple AAPL 0.00 which represents 11% of the Nasdaq-100 and its near-term outlook does not look promising. Supply problems in China will hit iPhone revenues and anyone who uses Apple services can see the dash for replacement revenue coming through by way of subscription price rises. The company's App Store revenues may not be tenable long term - see the Epic Games challenge recently and there is a spat brewing with Twitter over this too. Apple's dominance is hard to escape - see the damage wrought to META 0.00 , SNAP 0.00 and so forth. The stock looks like it has some tough times ahead - and usually that means the Nasdaq has some tough times ahead.
So we have to see what wins - sentiment or corporate reality. Normally we back the former, but 11% is 11%.
The Dow has put in what is known in technical analyst circles as a Yuge Move since the 2022 lows. It may have one more small move up (to 34,500, maybe up to 35,250) to finish off that 5-wave up cycle off the year's lows, but then we will likely see some short term weakness. The red arrows below indicate typical levels to which the Dow may fall based on typical wave / Fibonacci patterns. Most likely a correction down below 31000 in our view, before a move back up.
The Russell has also moved up big from the year's lows; to 1910-ish in mid November. Since then we have seen a selloff, retracing to 1820 earlier this month and thinking about re-testing that right now. The chart suggests weakness down to maybe 1780-ish before a new move up.
Cestrian Capital Research, Inc - 30 November 2022
Disclosure: Cestrian Capital Research, Inc staff personal accounts hold long positions in, inter alia, SPXU, UPRO, TQQQ, TZA, META