Benzinga - by Chris Maikisch, Benzinga Contributor.
On the heels of closing out 2023 and heading into a brand new shiny new year, I like to reflect back on possible lessons learned like many in my field. 2023 will be an educational year for me and many things happened that could constitute a lesson. For example, learning how to manage a community of traders from around the world was not a skill set I had in 2022. However, one thing I did learn, germane to trading, and market analysis, is to give more benefit of the doubt to the prevailing long-term trend.
In this case I’m referring to the almost 100-year super-cycle wave (III) trend.
This trend, which started back in 1932, at the completion of our wave (II) super-cycle bottom. We can draw that conclusion because we have the benefit of hindsight. A long-term price chart of the SPX cash market below shows post 1932 the market has advanced in a steady 45-degree angle higher into current day price action.
The form of analysis I practice, Elliott Wave Theory, was just being formulated around that time. This new technical perspective of markets was focused on the sentiment and behavior of its participants in contrast to using fundamental metrics like P/E ratios, the study of balance sheets, earnings’ reports and economic data. Without going into the details, and at the risk of over simplifying Elliott Wave Theory, the outcome was trends tend to advance in five distinct “waves”, whereas counter trends take on a 3-wave structure which consolidates, or corrects, the prevailing trend. Within these large crowds of market participants, it was determined that these 5 and 3 wave patterns were similar across the many timeframes being observed. From daily and monthly charts all the way down to the 30-minute chart. It was clear these fractal patterns of 5 and 3 waves repeated and thereby provided an accurate framework of forecasting future price action.
So, what does Elliott Wave Theory tell us about the future price action of the S&P500? First and foremost, I will state that typical long-term forecasts tend to span months, possibly years. However, my focus over the past year has been the cycles that span many decades and up to a century. We call these events in Elliott Wave Theory, Super Cycles.
Determining a super-cycle market top has been of little concern to the trading public, and rightfully so. When we observe some of humanity’s most pivotal events under the lens of 150 years of stock market price action, these life changing events barely have prominence. Most recently the once in a century Covid-19 global pandemic, the 2008 Great Financial Crisis, the September 11th attacks of 2001, and the stock market crash of 1987. I have labeled them on the below main chart. There’s no questioning their impact on everyday life…but in the grand scheme of a 150-year chart of the SPX, they appear fairly innocuous. One could say simply based on the trajectory of price for the last 90 or so years, that stock market traders have weathered the best and worst of times and emerged better off for having done so.
So why should a wave (IV) super cycle be any different?
It’s a valid question.
Since I don’t tell the future I do not know the answer to that question. Wave 4's are variable waves. I'm keen to remind myself that as a trader if I am frustrated with intraday price action, I'm probably in a minor wave 4. What I do know is that within the construct of Elliott Wave Theory, a super-cycle wave (IV) should be no different than its daily or intraday counterparts. It should have a direct, but alternating relationship, to its former wave (II). As you can see in the below main chart, the wave (II) event started with the 1929 stock market crash and that downward price action persisted downward for 3 years, but took 11 years to begin confirming its completion. The societal byproduct of this price action ushered in the Great Depression. This trend of bad economic times persisted so long that only a world war would serve as an effective catalyst to bring an end to that era.
In terms of wave 2 and 4 alternation, we observe this phenomenon in the smaller fractals every day. So, it’s a practical expectation that this type of pattern alternation will take place with respect to the much larger scales of time. For wave (IV) to alternate with wave (II) it should be shallow in terms of its depth, but much longer in time duration. Additionally, I will state the term “shallow” is relative. Wave (II) was deep and retraced almost 90% of the previous wave (I). Therefore, to alternate, we know we should expect the stock market to decline by far less than 90%, but take considerably more time than 11 years to emerge and start confirming completion. There are other metrics that allow us to forecast a target range for an expected wave 4. Those ranges are represented in the black target box of green wave (IV) below. That range is currently forecasted to be between the Covid-19 low of 2192 best case, to as low as the 2009 low of 667 worst case.
If wave (I) was the start of the S&P500, wave (II) was the 1929 stock market crash and the Great Depression, and the current wave (III), including all the technological advances humanity has made post WW2 like the advances of medicine, relative global peace and stability, the creation of the Internet, space travel to name a few...it's likely wave (IV) will also have a profound effect on society. Speculating what those events are will be fruitless. No one forecasted the stock market crash of 1929, and with the exception of one human being (RN Elliott), no one else thought in the depths of the great depression the markets would embark on a 100-year rally. Therefore, I do not think the wave 4 super-cycle events will be any less profound.
Sidenote: I do find it interestingly coincidental that upon the conclusion of the Spanish Flu of 1918, sheltering in place led to the roaring twenties as that pent up demand was unleased, which in turn, lead to those economic excesses being unwound in a stock market crash in October of 1929.
I recently watched a movie on Netflix entitled “Leave the World Behind”. Aside from this movie being another apocalyptic flick. There is a scene in the movie where one of the movie characters played by actor Mahershala Ali, is speaking to a character played Julia Roberts in attempt to make sense of the inexplicable events that fictional world is experiencing…he states.
“…a while ago, before all this happened, I looked at the markets, and I knew...something was coming.” Julia Roberts’ character responds, “What do you mean”? He continues, “In my line of work you have to understand the patterns that govern the world. You have to know how to read the curves. Spend as long a time as I have doing it, it can help you see the future. The pattern holds steady-it promises harmony, but when it inches up or down”, he pauses… “you know it means something”.
It was eerie because my family all turned and looked at me as if I was guilty of something. It was a silent moment for all of us to say the least.
The last thing I will say in terms of forecasting this wave (IV) downturn is I believe it will not announce itself. Much like previous long term cyclical turning points, they came like a thief in the night. This time last year, you would be hard pressed to find any economist, market technician, analyst who was NOT looking at the markets under the imminent sphere of an economic recession for 2023. Those forecasts did not come to fruition. I believe when everyone is expecting the same outcome, chances are high it will not happen as we expect or when we expect. What I will say is in 2024, I am on guard for clues wave (IV) has started. I will not be against going long this stock market like I was in 2023. However, it will be with tight stops, and if long, I plan to never carry that index long into a weekend. Stops are useless if something was to occur over a weekend.
My SPX analysis shows we are in the ninth inning of our wave (III) conclusion and that alone warrants vigilance. An ending diagonal (outlined in blue in the below chart) would be a fitting end to the last sub component of wave v of 5 of V of (III). In the very micro aspect, I still favor this advance as an a-wave of 5. However, to not breach 4818.62 I will continue to carry the primary (B) wave top as it is a valid EWT count...but it will remain an alternate. The only thing that will change this current perspective of mine would be a breach of 4103 SPX once price reverses from a top that is below 4818.62. To breach SPX 4818.62 to the upside will confirm the ED. From there I only state my primary expectation would be a corrective b-wave decline that would hold standard retracement areas, and conclude in one more high towards the 4950 to 5200 area. (Once the b-wave is in place, I'll be able to dial in more precise targets).
I favor the a-wave of an ED mainly due to the MACD structure on the above daily SPX chart having broken out to new highs.
Keep in mind, if my analysis is eventually confirmed, the MACD indicator will NOT make a new high in blue 5 thus providing us negative divergence on our final c-wave rally of wave 5 in the ED count. Unfortunately, ending diagonal patterns result in a swift trip back to their origination areas which in this case were the October 2022 lows.
Much like in that Netflix movie I watched with my family...I believe both the long-term price action and cycles are now predicting something is coming. Are we at that long-term cyclical crossroads in the market’s history now? I believe 2024 will provide important clues as to what’s to come…and yes, I think these clues will…mean something. They’ll mean something to more than just stock market traders. They'll mean something important to society. They’ll mean something to YOU.
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