Heaven or Armageddon? What Comes Next?

Heaven or Armageddon? What Comes Next?

Good Morning:

♁- To suggest we are at a critical moment is an understatement. Let’s examine the stock market’s location using our usual proxy, the S&P 500 Index. Because I mainly trade futures, I will use the front-month Emini continuous contract. Today is a good time to step out and look at the big picture.

♁- Let’s take it a step at a time, beginning with a look at the triangle consolidation that has been underway since August 2022:

S&P 500 Index Futures - Monthly Chart of Triangle Consolidation from August 2022 to Date (click to enlarge).
S&P 500 Index Futures - Monthly Chart of Triangle Consolidation from August 2022 to Date (click to enlarge).

♁- What is a triangle if not confusion and consolidation? As of the last seven months (7 being a key number for the stock market), bulls and bears have had equal power and have been battling for control.

♁- For our purposes, the most important question is, what does it look like if the bears win? A picture can replace a thousand words:

Applying Elliott Wave Principles, and Assuming that Price Stays Below the Red 45^ Line in the Geometric Structure, the Price is Likely to Step Down the Line, Moving in the Direction of the Lower 100-Year Channel Lines As We Forecast at the Beginning of 2021. (Click to enlarge).
Applying Elliott Wave Principles, and Assuming that Price Stays Below the Red 45^ Line in the Geometric Structure, the Price is Likely to Step Down the Line, Moving in the Direction of the Lower 100-Year Channel Lines As We Forecast at the Beginning of 2021. (Click to enlarge).

♁- A good target for the panic cycle implied by an inversion of the Master Cycle is the midpoint of the 100-year channel shown above.

♁- Keep in mind that this is a monthly chart. It moves very slowly until it doesn’t. You can analogize it to the two previous bears starting in 2000 and 2007 out to the left side of the chart. Both of those declines exceeded 60% on the futures contract. Remember that this is a log chart. The current slide will look understated compared to the previous two bears.

♁- If we take an average of 60% for the two previous bears and project it to the current bear, we land right in the middle of the current circle (a circle is the three-dimensional representation of a cycle).

♁- Depending on how quickly the price would get there, it would join the middle of the rising 100-year channel, roughly 3000 or so on the S&P 500 Futures contract. Note that this was our original forecast from January 2022

♁- Geometrically, the next market reversal (from the direction leading into it) comes this summer (July) from a monthly chart perspective.

♁- This is not a forecast. With bulls and bears still wrestling for control, prognosticating would be unwise.

♁- But the chart immediately above allows us to examine a possible worst case for a fully invested bull if the price breaks the pattern and stays below the red line. Obviously, a bear would smile ear to ear for the given opportunity.

♁- Right now, and viewed solely from the monthly chart perspective, the battle is about breaking above that falling red line for the bulls and maintaining price underneath the line for the bears.

♁- Note that investors must be careful in triangles. Often the first breakout fails, and the market completely reverses, eventually breaking out in the opposite direction. Your tactics must take this risk into account.

♁- And don’t forget that any break below 180^ will cause the price action to accelerate. It falls off the proverbial shelf, and gravity takes over.

♁- All of this raises the question, do we abandon the 60-Year Master Cycle over a couple of poorly managed banks and a poorly managed country? Sorry for the loaded question, or the answer would be an obvious “yes.”

♁- A better way to analyze a potential cycle inversion is to realize that brief anomalies will occur only to see the cycle resumed. Also, Forecasts derived from 60-year-old data have inherent limitations. As examples. planetary differences and non-trading days (such as weekends and holidays) don’t always align.

♁- Below, you can see the difference between the full 2023 forecast for the Dow until the end of March compared to the current actuals:

Some Master Cycle Forecast Anomalies in the Dow Jones Industrial Average (click to enlarge). Source Fiorente2 @substack.com
Some Master Cycle Forecast Anomalies in the Dow Jones Industrial Average (click to enlarge). Source Fiorente2 @substack.com

♁- Our combined indicators brought us to cash (short) well before recent declines. We are in the catbird’s seat. I am not up for a sudden move into the markets now. I am primarily watching the bond market and the MOVE (bond volatility) Index.

♁- Here is the 60-year Master Cycle if we allow for the inversion:

Master Cycle Forecast Footed to the One-Year Cycle or 1903 Panic Cycle Inversion (click to enlarge).
Master Cycle Forecast Footed to the One-Year Cycle or 1903 Panic Cycle Inversion (click to enlarge).

♁- The Consumer Price Index was just released. It was in line with expectations but still 6%. It was lower than last month’s 6.4%. I don’t think this “meeting of expectations” necessarily boosts the market. For the moment, inflation is less of a concern than systematic risk.

♁- For the most part, the S&P 500 is testing the neckline breakdown of the Head and Shoulders topping pattern at 3925. If the market rejects the price by failing to close above it, we have a 300-point breakdown target of 3625.

♁- Not that it matters much, and we will let the price action guide us, but I am still expecting a bottom around mid-month, an attempted rally into May, with Armageddon to follow. But we cannot trade my opinion, right? Or at least we shouldn’t.

♁- You remember my “opinion” track record? 50/50. How about the Archimedes Algorithm? More like 85%+. Who/what would you rather follow? 

♁- We remain 100% cash or short for our more aggressive friends. But we want to throw our line back in the water when the opportunity ripens.

A.F. Thornton

AF Thornton

Website: https://tradingarchimedes.com

A.F. "Arthur" Thornton is an expert in logic, risk/reward quantification, market fractals, pattern recognition and asset class behavioral analysis with 34 years devoted to developing algorithmic and quantitative trading systems. In addition to trading his own capital, Mr. Thornton designs custom algorithmic and quantitative trading systems for a small and exclusive group of exceptionally qualified traders.

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