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08/17/2022 |

Cestrian Capital Research Presents: The Q’s Just Won’t Quit

Hello, Traders! We’ve recently had the pleasure of partnering up with the great folks at Cestrian Capital Research to bring you, our users, some awesome market commentary. We love their writing, and they love our charts. It’s a match made in heaven! They’ll be bringing us their ideas every week, so sit back, relax, and enjoy their outlook on the current market conditions!

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Wait … It’s Going UP Now???!

As everyone knows, it’s all over for stocks. The US is stumbling headlong into a recession, the Fed is raising rates to quell inflation that in truth is beyond its control, and strategic tensions are rising all around the world, from the escalating Cold War between the US and China to the Russian invasion of Ukraine. This is no backdrop against which to make money and so we should all sell everything, buy a cave in the mountains, stock up on canned water and wait a decade for trouble to pass. Right? Well, you could be forgiven for thinking so if you listened to any of the news or most anyone on FinTwit in the first half of this year. But then since the June lows, the market has fair rocketed away, which makes nonsense of this narrative. So you have to ask yourself – what the Fibonacci has happened here and when will this fake bull-run QQQuit?

We have news. What’s going on here is just the normal ebbs and flows of markets. There is literally nothing unusual to see here. And in a moment we’ll use TrendSpider charting tools to show you how that is.

First, let’s free our minds. Let’s remind ourselves that stocks do not respond to what is happening in the news. This is because stock prices are for the most part moved by big-money accounts. And Big Money is not watching the news and then going into work the next day deciding to buy, sell or hold based on what was on TV last night or what was in their feed on the way into the office this morning. Big Money already has a good deal of insight into what is going to be in the news, because Big Money is always ahead of the story. It wasn’t news to Big Money that (a) Russia was going to invade Ukraine and then (b) wheat prices would rise because (c) Ukraine is a huge wheat producer on a global scale. Some of that might have been news to Joe P. Retail, but none of it was news to Big Money. This is why when Joe P went to go buy some wheat futures or wheat futures ETFs back in Q1, the dang things had already mooned. Manipulation!!!? No. Business as usual. Because it’s Big Money’s job to know things like this ahead of time. For more on this, see our post from back in March this year, The Grand Unifying Theory Of Everything.

Next, let’s remember that stocks and markets move according to the never-ending process of Big Money rotation. Stocks are quietly bought at the lows – not in a flashy way, never in revealing one-shot volumes – this is the accumulation phase. Once the cat is out of the bag, talking heads are talking up the stock, momentum funds and retail traders are buying the stock, and it’s moving up – the markup phase. At a suitable plateau, Big Money then moves to sell down their holdings, with as much guile as when buying – this is the distribution phase. And finally when supply has satisfied demand and late sellers come to the party only to find the price dropping away beneath them – then we have the markdown phase. Do you think this is idealized hoodoo? It’s not. You can see a real-life example of this behavior – known as the Wyckoff Cycle – in how $IWM behaved in recent years – we talked about it in a recent post, here.

Now, in all the above you may have noticed that not once have we mentioned GDP, interest rates, inflation rates, nonfarm payrolls, unemployment claims, or anything else IRL. That’s because so much of what drives stocks and markets is entirely internal to stocks and markets. They move often to a rhythm of their own, and to the extent that they relate to outside events, they are ahead of the story, not behind it. So all is lost unless you are a Master of the Universe, right?

Nope. Because whilst you may not be able to sit next door to the managing partner of Big Money, LP, listening in to the plans each day, you can observe what Big Money is doing with just a very small delay. This is what stock charts are for. And armed with a good charting tool, you can understand markets with far greater insight than anything you’re likely to read or listen to on the news or on FinTwit. A stock chart gives you the summation of all fear and greed in the market, and better, it has volume-weighted each slice of fear and greed … and the result is the price action. We aren’t saying ignore fundamentals completely. We are saying that you can do very well in your investing and trading with technicals alone; the same is not true for fundamentals alone. Let’s take the Nasdaq-100 as an example because its behavior has been extreme in recent years. Or has it? Here’s how we see its proxy ETF, $QQQ, since the 2018 lows.

This is a weekly chart of the QQQ

So. We start at those 2018 lows – that’s the last time the Fed tried to normalize monetary policy and wean the market off of the QE regime introduced in 2008. (The market won that one!). The QQQ puts in a Wave 1 up peaking right before the Covid crisis, then a rapid Wave 2 down that bottoms at the 78.6% Fibonacci retracement level in the middle of the crisis. It then puts in a long Wave 3 up peaking at the 2.618 Fibonacci extension of Wave 1 in late 2021, followed by a Wave 4 down which finds support just above the 61.8% retracement of that Wave 3 up. And since then the Qs have been off to the races.

The kid at the bus stop and the guy at the gas station will tell you that the Nasdaq is CRAZY and makes no sense. But they are both wrong. Because of the QQQ? This is in fact as close to a textbook Elliott Wave pattern as you are ever likely to find. (Actually, the SPY is still more textbook but we can talk about that another time). The only notable element here is that the QQQ’s Wave 3 peaked at the 2.618 extension of Wave 1, not the 1.618 extension. And it’s that extended Wave 3 up that has led directly to the relatively deep Wave 4 correction we have just experienced.

Now based on typical Elliott Wave patterns you would say, well, the final leg of this cycle, the Wave 5 up, must be at least the length of Wave 1 placed at the Wave 4 low. But that would take the QQQ to only $350 or so, which doesn’t make a new high – so that’s not a Wave 5. So assuming this 5-wave-up chart pattern continues – and we see no reason why it won’t – we anticipate a minimum Wave 5 target of $409 (slightly above the prior W3 high) and a bullish W5 high of $505 – that’s the length of Wave 3 drawn from the Wave 4 low. That same kid at the bus stop will choke on his Cheeto’s if you say the Qs are going to $505. But based solely on this classic pattern analysis, there’s no reason why they won’t. (There’s also no guarantee that they will. So in case you plan on trading this idea, we highlight a potential stop-loss zone beneath the 0.382 retrace of that Wave 3 up).

So back to the first question – why is QQQ moving up now? When the world is supposed to be ending? And our answer? Simple! Because it was moving down in Wave 4, that wave appears to have bottomed out, and the stock is rising in the early stages of a Wave 5 up. And since we cannot know the minds of Big Money, lest we in fact be Big Money, all we can do is track their opinions with stock charts. So, ours is not to work out why Big Money is moving stocks in any particular direction – that way lies obsession and madness. Ours is to work out when Big Money is doing so and in which direction and with what magnitude. Which is, again, what stock charts are for.

In a later post, we’ll talk to you about why TrendSpider’s Raindrop Chart approach can be particularly helpful in working out exactly what Big Money might be up to. But until then? Good luck to all investors and traders.

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Cestrian Capital Research, Inc – 16 August 2022

DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.