Hello traders! We recently had the pleasure of partnering with the wonderful folks at Cestrian Capital Research to bring you, our users, some great market commentary. We love their writing, and they love our charts. It’s a match made in heaven! They will give us their ideas every two weeks, so sit back, relax and enjoy their view of current market conditions!
As everyone knows, it’s over for stocks. The US stumbles into a recession, the Federal Reserve raises interest rates to quell inflation that is really out of its control, and strategic tensions are rising around the world, from the escalating Cold War between the US and China to the Russian invasion of Ukraine. This is not a background to make money on and so we should all sell everything, buy a cave in the mountains, stock up on bottled water and wait a decade for the trouble to pass. right? Well, you might be forgiven for thinking, so if you listen to any of the news or anyone else on FinTwit in the first half of this year. But then, since the June low, the market has taken off too far, making this narrative nonsensical. So you have to ask yourself – what Fibonacci happened here and when will this fake bull race QQQuit be?
We have news. What happens here is only the natural ebb and flow of the markets. There is literally nothing unusual to see here. And in a moment, we’ll be using TrendSpider’s charting tools to show you how it’s done.
First, let’s free our minds. Let’s remind ourselves that stocks do not respond to what is happening in the news. This is because stock prices are mostly moved by big money accounts. And Big Money doesn’t watch the news and then go to work the next day and decide to buy, sell or keep based on what was on TV last night or what was on their feed on the way to the office this morning. Big Money already has a great deal of insight into what’s going to happen in the news, because Big Money is always on top of the story. It was not news for Big Money that (a) Russia was going to invade Ukraine and then (b) wheat prices would rise because (c) Ukraine was a huge producer of wheat on a global scale. Some of this may be news for Joe P. Retail, but none of it is news for Big Money. This is why when Joe P went to buy some wheat futures or wheat futures ETFs in the first quarter, things were already over. Processing!!!? No. Business as usual. Because Big Money’s job is to figure out things like this early on. For more information on this topic, check out our post from back in March of this year, The Great Unification Theory of Everything.
Next, let’s remember that stocks and markets move according to a never-ending process of massive money rotation. Stocks are quietly bought at lows – not in a flashy fashion, never revealing one-shot volumes – this is the buildup phase. Once the cat is out of the bag, talking heads talk about the stock, retail traders and momentum funds buy the stock, and it’s moving up – the markup phase. At a suitable point of stability, Big Money then moves to sell their possessions, as cunningly as when buying – this is the distribution stage. Finally when supply satisfies demand and late sellers come to the party only to find the price falls far away from them – then we have the markdown phase. Do you think this is perfect? it’s not. You can see a real-life example of this behavior – known as the Wyckoff cycle – in how IWM has behaved in recent years – we talked about in a recent post, over here.
Now, in all of the above, you might have noticed that we never once mentioned GDP, interest rates, inflation, non-farm payrolls, unemployment claims, or anything else IRL. That’s because much of what moves stocks and markets is entirely internal to stocks and markets. They often move to their own rhythm, and to the extent that they relate to external events, they are ahead of the story rather than behind it. So it’s all lost unless you’re the master of the universe, right?
no. Because while you might not be able to sit next to Big Money’s managing partner, LP, and listen to the plans every single day, you can notice what Big Money does with very little delay. This is the purpose of stock charts. Armed with a good charting tool, you can understand the markets with much deeper insight than anything you are likely to read or listen to in the news or on FinTwit. The stock chart gives you the sum of all the fear and greed in the market, and better yet, it weights the size of each slice of fear and greed…the result is price action. We’re not saying ignore the basics completely. We are saying that you can do a very good job of investing and trading using only techniques; The same does not apply to the basics alone. Let’s take the Nasdaq 100 as an example because its behavior has been extreme in recent years. Or is it so? Here’s how we’ve seen its ETF agent, $QQQ, since the 2018 lows.
So. We started at those 2018 lows – this is the last time the Fed tried to normalize monetary policy and wean the market off the quantitative easing regime that was introduced in 2008. (The market won!). QQQ puts the peak of wave 1 up just before the Covid crisis, then fast wave 2 down at the 78.6% Fibonacci retracement level in the middle of the crisis. Then it puts a long wave 3 peaking at 2.618 Fibonacci extension of wave 1 in late 2021, followed by a wave 4 down which finds support above the 61.8% retracement of wave 3 up. Since then, the Qs have been out of racing.
The kid at the bus stop and the guy at the gas station will tell you that Nasdaq is crazy and meaningless. But both are wrong. Because of QQQ? This is actually a lot closer to the Elliott Wave pattern that you are likely to ever find. (Actually, Spy is still more textbook but we can talk about that again.) The only thing notable here is that wave 3 of QQQ culminated at the 2.618 extension of wave 1, not the 1.618 extension. And it was this extended wave 3 that led directly to the relatively deep wave 4 correction we just tested.
Now based on typical Elliott wave patterns, you could say, well, the last phase of this cycle, wave 5 up, should be at least the length of wave 1 set at wave 4 low. But that would only take QQQ to $350 or so, which doesn’t make a new high – so this is not a 5 wave. So assuming the 5 wave chart pattern continues up – and we see no reason why it shouldn’t – expect a lower bound Wave 5 target at $409 (slightly higher than previous high W3) and bullish W5 high at $505 – this is the length of wave 3 drawn from wave 4 lower. The same kid at the bus stop would choke on Cheeto if you said Qs would go for $505. But based only on this classic pattern analysis, there’s no reason why they shouldn’t. (There’s also no guarantee that they will. So if you’re planning to trade this idea, we’re highlighting a potential stop-loss zone below the 0.382 retracement of that wave 3 up).
Back to the first question – why is QQQ moving now? When is the world supposed to end? And our answer? basic! Since it was moving down in wave 4, it looks like that wave has bottomed, and the stock is going up in the early stages of wave 5 up. And since we can’t tell the minds of big money, lest we actually be big money, all we can do is track their opinions through stock charts. So, our goal is not to find out why the big money moves stocks in any particular direction – that’s how mania and madness lies. Our goal is to know when the big money is doing it, in what direction and in what size. Which is, again, what stock charts are.
In a later post, we’ll talk to you about why TrendSpider’s Raindrop chart approach is particularly useful for determining exactly what big money might be. But until then? Good luck to all investors and traders.
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Cisterian Capital Research, Inc – August 16, 2022
Disclaimer: This note is for US recipients only and, in particular, is not directed at any UK recipient and is not intended to be relied upon. Any information or analysis in this memorandum is not an offer to sell or the solicitation of an offer to purchase any securities. Nothing in this note is intended to be investment advice and should not be relied upon for making investment decisions. Cestrian Capital Research, Inc. may have. or its employees, agents or affiliates, including the author of this Memorandum or persons associated with it, hold a position in any stock, security or financial instrument referred to in this Memorandum. Any opinions, analyzes, or possibilities expressed in this note are those of the author as of the date the note was posted and are subject to change without notice. The companies referred to in this memorandum or their employees or affiliates may be clients of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. It is independent and transparent and does not believe this presents a potential conflict of interest or affects the content of its research or publications.