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.