Elevated Squeeze Risk vs Baizuo Freight Train Headed Off Cliff and h-Patterns Everywhere

Squeeze risk is currently elevated, but the caveat is crashes happen in oversold conditions. You don't want to be opening short positions here unless you have tight stops or are watching closely. That said, intraday reversals such as we saw on Thursday and Friday can reset this equation in a day or less. Short the right rip and one need not cover until the bottom.

On the other side of squeeze risk is the reality of Europe's energy situation. Using the Elliot Wave as a framework, here are the stages of accepting the European energy crisis.

1. Sanctions/Russia cuts supply. Uh oh!

2. Priced in, not that bad.

3. The market doesn't realize how bad winter will be. Euro must devalue XX percent based on printing needs. (We're here now.)

4. Priced in, won't be as bad as expected.

5. Final panic over energy or collapse in currency or panic in stocks, or all three.

The euro made a new 52-week low on Sunday night. The futures chart, along with many assets such as weaker stocks and crypto, has formed the dreaded h-pattern. It's the prelude to a bear squeeze or resumption of selling to a new low. Since I believe this is a bear market, the h-pattern will be more friend than foe to bears from now on.

My view is macro and psychology overwhelm technicals in Wave 3. Bears are already all-in by some measures, but my expectation is commodities will implode and cause panic in the inflation trades.

There's also something very wrong in how the market is pricing Europe's energy crisis in my opinion. Or I'm very wrong and it isn't nearly the crisis everyone is making it out to be. What's the truth? 

Most people still pay attention to major media and the media are 100 percent behind the Baizuo governments of the West. Markets are down, but investors remain sanguine in the face of what is coming because "all is well" propaganda is running 24/7. My hunch is something will break the facade such as a sudden, impossible to ignore drop in economic output or company earnings. European companies are shutting down left and right because power costs are finally filtering through the broader economy. It is akin to a permanent lockdown or a lockdown with no expectation of exit. 

If energy costs are permanently higher, then economic output is permanently lower, and equities must reprice far lower. Even without any of these problems, a major bear market is possible. Add higher energy into the mix and a 60 percent or higher decline (adjusted for inflation) is a conservative target.

Hussman has the projected 12-year return at something more than negative 3.5 percent annualized. That means a portfolio would be down about 35 percent 12 years from now. Stocks don't slide year after year though, they plummet and then climb back. How low would stocks have to go to achieve that return over 12 years? One way it to lose close to 80 percent up front and then recover with a couple of 30 percent and 20 percent annual returns mixed in. History says plunging prices are more likely than not.

RUSSIA INDEFINITELY SUSPENDS NORD STREAM GAS PIPELINE TO EUROPE: FT

Markets are wildly optimistic about how this will shake out. I'm not talking about what people are saying, but what asset prices are saying. This is barely priced into stocks. Or as I like to see it, we're att the starting line of the plunge.

I could see those indexes touching support on nothing else except a bear market similar to the 2000s dotcom bust. Things are far worse though, unprecedented since maybe the Arab Oil Embargo of the 1970s. EZU at $15, retracing all gains since 2008, is a real possibility. A nearly 60 percent drop from here.