Free Holiday Gift Edition: 2023 Ended on a High Note, 2024 Starting on a Defensive Note

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Table of Contents

• Summary

• Technical Analysis

• Sentiment

• Cycles Update

• Major Indexes Cycle Price Projections and EW Count …

• VIX Update

• Annex 1- Bond Yields Outlook - TNX

• Annex 2- Forex- DXY

• Annex 3- Crypto-Bitcoin

• Annex 4- Commodities Corner- GL and CL

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Summary

In the last couple of reports, we suggested that indexes could rally into the end of the year, which materialized. We also suggested a week or so ago that the game should be to sell the rips (STRs), i.e., raise cash gradually. In my opinion, that should continue with any bounce or new high in indexes. Some indexes may have topped, but others appear to need another high, according to EWT, though micro counts are not very reliable because of very small pullbacks since the October low. Although many indicators suggest a top of significance is forming, there is no reliable indication that the top indeed formed. Long story short, allow, cautiously, for some additional strength, but be mindful that the top may be in place.

Technical Analysis

• SPX was rallying last week on a declining volume, a bearish signal, but should be somewhat discounted due to the Holiday week;

• SPX/VIX ratio has started to pull back from more than 20Y extreme – extreme values of this ratio are indicative of a pending correction but not an accurate timing signal as sometimes it takes days, or even weeks before the correction starts in earnest.

• RSI exhibited a negative divergence versus SPX at Friday’s high, which is suggestive of a top but does not preclude another high, perhaps still with RSI divergence;

• The RSI indicator is trying to break the red trendline on the indicator, falling from a negative divergence condition – breaking the trend line convincingly will indicate correction in progress.

Sentiment

• The AAII Sentiment Index published last Thursday (see my post on X last week) started to recede from a multi-year extreme;

• OPTIX, shown in Figure 3 is also pulling back from a multi-year extreme – OPTIX includes indicators like put/call ratios, mutual fund flows, futures traders’ positioning, sentiment surveys, etc.;

• These are positive signs for the bears.

Cycles Update

• SPX played out just as hourly cycles prescribed last Tuesday, very short-term cycles allow for still a few more days of up bias;

• Cycles from the daily chart (not shown) suggest SPX also could push still higher due to the N10D cycle;

• An updated weekly chart cycle composite, using the data until the end of the year, is shown in Figure 4 and indicates weekly cycles peaked but always need to allow for some tolerance;

• In view of small discrepancies of cycle messages between hourly and daily cycles with those from the weekly chart, one should allow for still some up bias in the next few days, at least for a bounce in SPX, if not another minor high.

Major Indexes Cycle Price Projections and EW Counts

• Outstanding cycle price projection targets (no changes, a cut and paste from the last report):

  • SPX N20W cycle: 4671-4939 (reached but could push more, at least 1+%, IMO);

  • NDX N20D cycle: 16980+/-100;

  • DJI N20W cycle: 337k-38k (reached but could push higher);

  • RUT:

    • N20W cycle: 1975-2112 (reached but could push higher);

    • N80W cycle: 2080-2123.

• Shorter term cycle projections down in multiple indexes were satisfied today which allows for at least a bounce;

• Figure 5 shows the SPX EW count options on the daily chart. While I could count a completed EW structure, the pullbacks were very shallow, which made the counting unreliable, consequently, we should allow for at least one more high, but this is not guaranteed;

• There are more alternatives, including bullish ones, but I have them on the back burner for now;

• The picture is similar in the case of NDX.

• Figure 6 shows the daily DJI chart and EW count;

• Although DJI reached its cycle target it could still push higher toward 38k and my preferred count ideally requires one more high;

• Notably, there is a potential Dow Theory divergence relative to the transportation index suggesting a top of significance.

• The message from EW counts is to allow for one more high but to be mindful that tops in some indexes may have already formed.

VIX Update

• As suspected, the volatility and VXX/VIX fall during the Holiday week;

• VXX EW chart is shown in Figure 8;

• Looks like the red count won and VXX could probe still lower in view of expected bounce in SPX - it should reach at least the 300% fib at 15.33, if not lower;

• But VXX should have a positive multi-month bias, starting soon.

Annex 1- Bond Yields Outlook - TNX

Where are long bonds going short- to intermediate-term?

Annex 2- Forex- DXY

• As mentioned, several days ago, the USD index, DXY, is expected to bounce for 2-2.5 months;

• Figure A2.1 shows the weekly cycles composite for DXY, using the data as of 31 Dec. 2023;

• DXY may have started the bounce today.

• It should reach at least 103.5 initially, maybe more, TBD, will track it;

• It should be noted from cycle analysis in this report that DXY appears to be positively correlated, at least in the short-term, with TNX, and negatively correlated with SPX and Bitcoin, and, also to a lesser extent with GC and CL;

• Note: one should be careful with extrapolating detected correlations far out, just as for cycle composite projections, as correlations may change over time in dynamic systems/markets, and that is why we should re-evaluate periodically.

Annex 3- Crypto-Bitcoin

• Figure A3.1 shows the weekly cycles composite for Bitcoin, BTCUSD, using the data as of yesterday;

• Cycles suggest topping within 2 weeks but should provide some +/- tolerance as always;

• Once it rolls over, the decline could last one year or so.

• BTCUSD achieved all existing up targets;

• Figure A3.2 shows the satisfied N40D cycle target from the intraday chart (on the daily chart, the target extends to 46.5k), and previously, we showed that it also satisfied the N18M cycle target;

• So, although it could still push higher into the target box, or even slightly exceed it, it is allowed to go down now;

• The only way to generate higher targets is to make another loop up from this pullback in progress.

Annex 4- Commodities Corner- GL and CL

• GC, gold futures, may soon start a multi-month consolidation, then pop into the Fall of 2024, followed by down into early 2025;

• Although about 4Y and 8Y cycles have turned up some choppiness this year is going to be dominated by 44, 66, and 172-week cycles;

• With choppiness indicated by multiple “interleaved” cycles, some pointing up while others pointing down, the accuracy of turning points prediction of the cycle composite is, unfortunately, reduced;

• But from the Spring of 2025, all these cycles should point up, likely giving rise to strong gold performance, at least in 2025.

• CL, the crude oil futures, weekly cycle composite is shown in Figure A4.2;

• CL may have some additional up bias from the cycles for 10+/- weeks, but relatively strong 32, and 76-week cycles should have cycle troughs in the Summer of 2025;

• Thereafter, Cl will have a positive cycle support for a year or so;

• Note: Crude oil could be impacted by geopolitical events, which may change the cycle projections – it is well known that strong fundamental events/news may affect cycle behavior for some time.