So far in the month of March, the volatility in the YM, ES, NQ, and RTY as measured by the VIX remains around the 25 level. After the markets hit additional record highs in February leaving the return of most average diversified U.S. stock funds for February at 4.9% which in turn pushed the year-to-date gain to 5.3% according to Refinitiv Lipper data. However, the market’s latest “pillars of support” – government spending and the FED’s aggressive monetary policy have kept a lid on whether inflation can be kept in control as the economy attempts to recover from the pandemic lockdowns.
No doubt the recent good earnings reports coupled with low interest rates propelled the rally to new all time highs as seen in February. However, the bond markets have been taking the inflation threat more seriously as the global markets begin to factor in economic recoveries as the rollout of vaccines begin on a global scale. That threat whether real or not has pushed longer term rates up and that does not bode well for many sectors of struggling economies. The U.S. is under threat of longer term damage to its economy if trillions of dollars are not pumped into the system. Thus producing a “sticky” situation for the FED in continuing to find bond buyers at current interest rate levels. That uncertainty has given the markets reason to pause. The current downturn has created a scenario where fund managers have begun to rotate capital out of growth stocks and into more cyclical plays.
This has been more strongly felt in the tech heavy NASDAQ-100 where the index has declined 1693 points since February 15th after reaching an all time high at 13900.50. The correction now underway is evidence of that rotation out of the tech sector but all the “blame” can’t be placed on inflation/interest rate concerns. The advance from the March 2020 lows was built on technology saving the markets from the economic doom the pandemic was creating. The realization of the damage done is coming to light as city, state, and federal government agencies begin to come to terms with the growing financial needs to lift the cities, states and country economies out of the black hole created by the previous administration’s total inability in having a national response other than denial. Denial of the damage being done to individuals both personally and economically. While individually it is possible to adopt a “stick your head in the sand” mentality and hope for the best on a national level the denial or acceptance of reality can destroy or build much more than confidence in our government leaders. The economic damage is real and can’t be reversed without acknowledging its existence and taking accountability and then responsibility in insuring that all people need to participate in the recovery. That suggests several rounds of stimulus to lift us all out of the black hole. It will also require patience and perseverance. Remember it has taken a year to get to this point – believing it can all change in a few weeks is unrealistic.
Quick Review of Elliott Wave Principl
The broad concept is as follows: within the context of direction the trend (bull or bear market) of the market will develop and build upon or within sequences of five-waves, three in the direction of the larger trend and two in a counter trend direction. Waves 1, 3 and 5 are termed impulse waves and waves 2 and 4 corrective waves. Wave 2 corrects wave 1, wave 4 corrects wave 3 and the entire sequence 1, 2, 3, 4, 5 is corrected by the sequence a, b, c. Therefore a complete sequence (cycle) consists of eight waves.
Magnitude (duration and size) was also discernible to Elliott and he precisely categorized them into nine different ranges: Grand Supercycle, Supercycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette, Sub-Minuette. Correctly employing the principles gives the analyst valuable input with regards to where the market is within the larger trend in force which in turn provides a clear road map complete with directions.
Update for the NQ:
The longer term Elliott wave count shows that a Cycle level 5 wave advance remains in force. The current count shows that Cycle wave 3 is complete at the current all time high at 13900.50, suggesting that the decline in progress will ultimate form Cycle wave 4. This wave will form a larger A-B-C structure where waves A and C will be declines of Primary degree and wave B will be a Primary degree counter trend a-b-c advance.
Thus far, the market remains in the process of tracing out Primary wave A, which at the moment appears to be forming a Primary degree 5 wave decline. Within this Primary wave decline waves 1 and 2 are complete with the market now dropping in a Primary 3rd wave. As I’ve stated before, 3rd waves within a 5 wave sequence are usually the longest and strongest wave. Primary wave 3 now in force should hold to that standard and include sequences of accelerated movement – in the case of the current move that would produce accelerated declines.
A point to remember is that Elliott Wave are a series of building blocks. So, within Primary wave 3 there will be 5 waves of Intermediate degree and within the Intermediate degree will be 5 waves of minor degree. Thus I prefer to keep in mind that the picture is a “work in progress” and will need revisions on the count to allow the market to continue to tell “us” what it is doing. This is particularly important when counting on an intraday basis.
Back to the current count: Primary wave 3 began off of the March 1st high at 13326 and appears to have completed Minor wave 1 at Friday’s low at 12207.25. Minor wave 2 is now underway and will ultimately form an a-b-c structure up. Resistance for the entire move should be found at 12768, 12900, and 13,000. Once wave a is complete we will be able to add Fibonacci support levels for the b wave decline and then again once wave b is complete we can add Fibonacci resistance levels to be more specific where the c wave and in turn the larger wave 2 will complete. I don’t suspect that the volatility of the moves will slow much during the corrective bounce and will very likely accelerate once the Intermediate wave 3 kicks into gear.
Fibonacci support for the larger Primary wave A should be found at the 10623 area with support for the Cycle wave 4 decline coming in at 8988, 7465, and 5943. A general guideline suggests that the decline will find support within the previous 4th wave of one lesser degree. This would be the Primary 4th wave decline from March 2020. That area starts at 9763 down to 6629, suggesting the current Cycle wave 4 will most likely complete within a bit tighter range of 7465 to 5943. Of course as the move progress we will be able to fine tune all levels.
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