What's Next for Markets

Many traders are looking for a low around the 3500. Some are short-term oriented, but others have that as a long-term target. The 3500 level is only 5 percent away. I will ride a position down to 3500 and might take very short-term trades, but overall I wouldn't be looking to short here if I thought 3500 would be the final low. There would be more to be made by buying at 3500 and riding the subsequent rally.

Above is Elliot Wave. It is fractal, such that wave 2 can develop like the ABC pattern at the top, because within Wave 1 there are five waves. I don't use Elliot Wave for trading, but it does describe market psychology well, tends to work better in bear markets for that reason and makes it easier to put the market in context.

The first scenario is Wave 1 ended in June. (Note that everything is inverted because this is a bear market.) That low will hold until next year or the dip to 3500 on the S&P 500 is a bear trap for anyone not covering there. A new low at 3500, followed by a big rally, means wave b of the a-b-c of wave 2, completed. Wave c will be the rally into late this year or early 2023. 

Not making a new low is the same as making a slightly lower low, as long as the next move is a big rally. The 4400 level discussed before could be where this goes, a 25 percent rally. Since the market (measured by the S&P 500) would be down close to 30 percent at 3500, if that were only wave 1 it would open up a final bear market low in the low or even sub-2000s level because there are two more bear waves coming. This could easily touch the bottom of the megaphone made by the 2018 and 2020 lows. (I'm using VOO because it is less marked up than other charts.)

The second scenario is Wave 3. The market tumbles as it did in 2008 after sliding down most of the year. Most likely down to 3000-3300 area. An middle ground in this scenario would be the Feb 2020 level of 3400. Closer to 3000 it is more of a crash and would strengthen the Wave 3 thesis. Jan-Jun is Wave 1, Jun-Aug Wave 2, Aug-Oct Wave 3, Oct-Jan? Wave 4, and then the final low next year either breaking the March 2020 low or close enough to be called a test. More than 40 percent down from the top, more than 50 percent on Nasdaq. The final low might come in March to May. 

A crash should be triggered by a huge event. Catalysts could be currencies (yuan deval would be high on my list) or bonds (I posted high yield yesterday, right at long-term support and the ex-dividend portfolio trading like they did in 2008 and 2020). Perhaps a key earnings miss or warning from a company such as Apple (AAPL). Geopolitical events such as Russia-Ukraine escalating into a regional war or with use of unconventional weapons. This might be a best case scenario for bulls (without the war escalation) and for bears if they have positioned for a big drop.

Leaving speculation aside, a move lower will absolutely require major breakdowns in key charts. One is high yields bonds. HYG broke and recovered a line from the 2008 and 2020 lows. JNK broke that line clean, but there's a second line formed by post-2008 corrections still ahead. HYG is the better signal here. A plunge through support will be a huge event.

CNYJPY probably doesn't need watching, but it sums up the yuan depreciation thesis. China is struggling as export competitor currencies crash. If the yen continues falling, the yuan will eventually break sharply lower as it catches down to the yen, won and euro.

Many charts, including HYG above, are where a bounce looks likely. Charts such as USDKRW also make it clear that this move has to be terminating because charts don't go vertical for very long.

Moreover, a chart such as USDKRW will reverse explosively. The only scenarios for this chart are accelerated continuation or reversal. The 1997 peak was in December after a 3-month panic, but global financial markets didn't bottom out until September 1998. The "2008" peak was in March 2009 with some choppy months. It is 13 percent back to the 2009 peak and 30 percent to the 1997 peak.

As I speculated on August 19 in Won Enters Crash Zone, the prior two breaks above the horizontal led to huge moves. We are in this move now. It ends when it ends, but this has major implications for all markets because this chart isn't moving in isolation.

I wish there were a way to be more confident, but these situations are always opaque on the inside. In hindsight, they are obvious. They're unknowable because crashes break everything. Candles, technical indicators, sentiment and so on can all scream buy buy buy and the very fact that the market doesn't bounce, or reverses after a short bounce, is what induces panic from the professional trader down to mom and pop retail investors. 

Nothing is screaming crash here, but continuation in high yield, currencies, stocks and bonds will push everything towards a crash moment. Don't forget crypto. BTC would likely implode in a crash, yet it too sits above long-term support. Gold broke its last line of support on Friday, so that is one key chart that has walked through the door opened by King Dollar. Whether the market bounces or falls or crashes, in my opinion there are days to weeks left for bearish trades in stocks and bonds.