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Where Next For Markets, Part One (Cestrian Stocks Bulletin #107)

Cestrian Stocks Bulletin
Where Next For Markets, Part One (Cestrian Stocks Bulletin #107)
By Cestrian Capital Research, Inc • Issue #107 • View online
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DISCLAIMER: This note is intended for US recipients only and in particular is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
"Probably Wrong"
“Probably Wrong”. The most confident client presentation headline we ever did see, presented many years ago by an is-he-brilliant-or-just-lazy management consultant one of our number once shared an office with. The second most confident header came from the same is-he-enigmatic-or-just-dumb-as-a-rock guy, which was, “Interesting If True”.
These headers are perfectly suited to stock chart analysis, particularly in the larger degree. Because, of course, nobody has a Scooby’s which way stocks are headed in an hour, much less a week or a month or a year. Nonetheless, there are methods which can help you identify more probable paths vs. less probable paths, and you can use these methods to good effect in your investing and trading. All you have to do is be aware that your work is, at best, “Interesting If True”, and at worst, “Probably Wrong”.
With this in mind we turn to an inspection of the major indices, at least in their ETF doppelganger incarnations. At some point in 2022 we’ll roll ETF coverage into our Growth Investor Pro service or maybe launch an ETF letter, not decided yet. For now though we’ll just share some coloring-in we’ve been doing in the office lately. As you will have surmised if you read this newsletter regularly, this particular rag is written primarily as catharsis for us. That rather a lot of folks seem to like it is a bonus. And that a goodly chunk of those folks have … signed up for the “Idea of the Week” paid version of this letter … even better. (NB. It’s an almost-free $9/month and you can sign up here if you haven’t already done so).
And so with self-medication in mind, let’s use our trusty tools of Elliott Waves and Fibonacci levels to see if we can divine the direction of the S&P500 ($SPY), the Nasdaq ($QQQ) and the Russell 2000 ($IWM). In staff personal accounts we use this index work to inform our mouse-raid trading in the levered versions of those ETFs - your $TQQQs, $TNAs and so forth. If you can call the direction of the underlying index roughly right, and you don’t get too greedy trying to buy at bottoms or sell at tops, being merely happy to scalp a little free money along the way, these can be wonderful instruments. When we get around to running our ETF service we’ll likely include some actionable trading ideas in exactly those names.
Today we’ll look at SPY; expect a note on QQQ and on IWM in the next day or two.
S&P500 ($SPY)
The big kahuna. OK, well, here’s a weekly chart - you can open a full page version at this link.
Source: TradingView, Cestrian Analysis
Source: TradingView, Cestrian Analysis
Here’s what the Wavey Voodoo That We Do is whispering in our ears.
Wave 1 up runs from early 2016 to a peak right before the Covid crisis; a +$160/share move.
Wave 2 down is brutal, and fast. A near-textbook 78.6% retracement of Wave 1, bottoming in Q1 2020 as the crisis hits.
Wave 3 up is fast, so everyone feels like the market be crazy, but actually it’s just a fairly normal 1.618 extension of Wave 1, plotted from the Wave 2 low. That’s not such a big deal for a Wave 3.
And that’s where we sit right now. SPY has been hitting its head on that 1.618 extension, lacking the confidence to push up and through to turn that price level (around $478ish) into support. Today it peeked above the parapet but then rejected and closed a hair’s breadth below the 1.618 extension. (It’s like these Fibonacci numbers are … actually useful or something). The question is, can SPY punch up and through that level before a Wave 4 down, or not.
If the answer is no, we expect a fairly shallow Wave 4 down (because the Wave 2 down was so brutal) - call it a 0.236 retracement of the Wave 3 up, bottoming around $417-ish, before a final Wave 5 up to at least a new high (ie above $478), perhaps as high as $577 (= that $160 move of Wave 1 placed at the Wave 4 low) and maybe (we don’t really believe this one) up to $600ish which would be the 0.618 extension of Waves 1 & 3 placed at the Wave 4 low. Here our gut overrides our chart logic - best guess we think a medium term high of $550-580 is about right and likely faster than our chart indicates too.
SPY levels matter because they are a focal point for the market. If SPY is moving up, plenty of folks are happy because the passive easy money is sat in S&P500 trackers. A trend in recent weeks has been SPY up big, individual stocks that aren’t called Apple, Nvidia or Microsoft, down. Something we’re looking for is a reversal of that … so if SPY does enter a Wave 4 down now, we’re wondering whether individual stocks move up now. We have some setups in staff personal accounts based on the notion that this might happen.
So - the message for today, beyond “always find yourself a get-out clause when presenting to clients”, is, watch this $475-$480 zone in SPY closely because if it is rejected and SPY moves down, we could see that Wave 4 happen. It doesn’t look much on a chart but SPY hitting anything like $420 anytime soon will scare the living daylights out of Johnny Retail. Whereupon Big Money will take all of Johnny’s money and dance in front of the debtors’ gaol where Johnny will be residing, a result of his all-on-margin levered option plays blowing up so spectacularly. If on the other hand SPY can turn that 1.618 extension into support, watch out above because we could have a live one on our hands. In short - we think right now is a time to sit back and watch SPY rather than take any huge bets one way or the other. We own a tiny position in SPY puts in staff personal accounts but that’s merely to have some downside protection in place - our accounts are biased heavily long because, you know, we’re still in a bull market and all. If we see SPY holding up over that $478 level, we’ll be dusting off the Buy button and heading for $UPRO or some other supercharged fandango McTrickery to take advantage of such a move.
More tomorrow - $QQQ awaits.
Cestrian Capital Research, Inc - 29 December 2021.
DISCLOSURE: Cestrian Capital Research, Inc staff personal accounts hold long positions in, inter alia, MSFT and NVDA common stock and (small) positions in SPY puts.
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