Table of Contents

Summary

Based on the analysis in this weekly report and the last two intra-week reports my expectation is for some additional strength early next week followed by a pullback/consolidation into late November, say 27 +/- Nov. Typical positive holiday bias complicates this a bit. Then after the usual seasonal rally into the first few days on next month, December, another pullback into about 2nd week of December. Then the usual Santa Rally. This is my general expectation now, based on the cycle prospects and season, but I will refine the road map weekly and intra-weekly as new information emerges.

Introduction

My impression after scanning different sites is that people are either extremely bullish (breadth trust, break out from a bull flag (debatable flag), above key MAs, etc.) or extremely bearish (recession is coming, this rally is typical short covering and FOMO, sentiment is back to Greed, etc.). In the short- to intermediate-term, the prospects are maybe in between. CNN Fear & Greed, see Figure 1 below, shows that the sentiment is just above neutral, and similarly, for the NAAIM Exposure Index, while AAII members' sentiment reversed bears vs bulls since late October. It is notable that SPX is almost at July highs while new 52-week highs are well below its July levels. But the sentiment is not at extremes to let us make contrarian bets, it could support both up and down. Moreover, the sentiment indicators are reflective of a condition, they are not short-term timing triggers.

Another thing that triggered my attention is that several EW counts, bullish and bearish, are at thresholds, and it is not clear at this point which one/ones will win, need to see a couple of more cards. I see that analysts at some major EW sites are mostly looking down, and they were often wrong in the past. So caution here, and I think the number of count alternatives might be significantly reduced by the end of next week.

I identified to the day, or almost to the day, 2021/22 and July 2023 highs, as well as Oct’22 and Oct’23 lows, and followed a couple of obvious bearish EW counts which so far have been correct. Some may also recall that on Oct. 27 I posted a bullish cycle chart and said the game next few months would be to buy the dips. But the dips were just shallow sideways consolidations absorbing down phases of some shorter cycles, like the 10D cycle, e.g.

In view of the above, in this weekly report, I will revisit EW options and cycles from a perspective of a few weeks and months, as well as from 9-12 months and multi-year perspectives. I will also focus a bit more on NDX cycles for reasons explained further below. Correspondingly, it will be exceptionally long.

Figure 1 – CNN Fear & Greed Index.

NDX has been traditionally the leader in both up and down markets. Last few years it became extremely overvalued, on a historical basis, compared to other market segments. Figure 2 below demonstrates this overvaluation argument. The top two windows above the NDX weekly chart are the ratios of NDX with IWM and DIA, respectively. I posted similar charts a few times since May 2023 but I did not get the impression that people paid much attention. They should, though.

These ratios are comparable, or higher, to the corresponding ratios at 2021 and 2000 (not shown) highs, after which NDX plunged about 35% and 85%, respectively. These overvaluation gaps normally revert to the mean, and in the past, that was accomplished by NDX dropping more than other market segments during bearish periods.

It is also worthwhile pointing out that the RSI and PPO (see bottom windows) exhibit a negative divergence by being significantly below their July high values, while NDX is at July high level, a bearish indication. Bulls’ argument might be that RSI and PPO have more room to go up.

I want to emphasize that this NDX overvaluation is suggestive of a pending bear market that will correct it, but it is not a precise market timing indicator, as this condition could persist for months.

Figure 2 – NDX overvaluation relative to IWM and DIA and negatively diverged technical.

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