Who Believes in the Retail Wave?
Premium Section: Dividends (DVY), & Materials (XLB) Setups
The stock market continues to push higher. However, we may be in Wave 5 of an Elliott Wave impulse sequence, often referred to as the “Retail Wave.” In this phase, Smart Money tends to be cautious and skeptical, while Dumb Money assumes the uptrend will continue as usual. The Smart Money/Dumb Money Confidence model below reflects this dynamic.
We believe the uptrend has more room to run before reaching a turning point. The Fear & Greed Model indicates that the market is still climbing the wall of worry. Since the model remains in an uptrend and has not yet approached the Greed extreme, the market can continue to rise.
Our favorite market timing indicators are mixed at the moment however. The Nasdaq 100 (QQQ) is in an uptrend above the 5 SMA however the CCI indicator is nearing the overbought level of 200 (currently 159). The Nasdaq 100 Stocks Above the 20 SMA (NDTW) is in an uptrend above the 5 SMA as well. It is close to the overbought zone, but probably has a little more to run before it begins getting too hot. Meanwhile, the VIX Curve hit the 1.20 extreme and reversed lower. This is an early sign of the market being overbought.
The S&P 500 (SPY) continues higher and is currently bouncing off the 5 SMA (purple). As long as SPY stays above the 5 SMA, currently at $607.92, there is no reason to assume that the Wave 5 uptrend is over. The MACD indicator continues to show growing bullish momentum so the path of least resistance is up.
So where can Wave 5 end? Wave 5s are often the same size as Wave 1s. If this Wave 5 equals the August 2024 Wave 1, that would provide a $629 target before a corrective wave begins. Wave 5s are often 0.618x Wave 3 and that would provide a target of $618. We do think that the time allotted to Wave 5 is limited as our Cycle Forecasts point to a bearish turning point around 3/12/25.
The Nasdaq 100 (QQQ) is also trending above the 5 SMA and as long as price stays above $533.94 the uptrend should continue. Also notice that the MACD shows that bullish momentum is increasing. If Wave 5 equals Wave 1, it would provide a target of $562. If Wave 5 equals 0.618x Wave 3, it would provide a target of $555.
It is easy to write off the lagging Russell 2000 (IWM). However, what if it is just completing it’s Elliott Wave Combination Corrective Pattern before it starts a new impulse move? This is more visible on the 4-hour chart. Notice that IWM could be in a complex correction, where two patterns are connected by an X-Wave. The Zig Zag Correction was the first corrective pattern that occurred from Late November 2024 to 1/13/25. Then an X-Wave occurred from 1/13/25 to 1/21/25. Following the X-Wave a Flat corrective pattern occurred. The second corrective pattern could be over if the downtrend line is broken to the upside. Moreover if price can break above the B Wave high at $230.69 a new Wave 1 would definitely be starting. The RSI and MACD indicators show underlying strength so there is a good chance that the IWM resolves to the upside.
This week, the Economic Calendar is pretty light with the FOMC Minutes at 2pm EST on Wednesday being the highlight.
Friday is February Options Expiration day and that should also bring some volatility. Looking at the Max Pain for this Options Expiration day, Friday will have a $600 Max Pain level with Put Walls (support levels) at $605, $600 and $595. There are also Call Walls (resistance levels) at $610 and $615. With an Options Expected Move to Friday of $5.62, the expected range from now until the close on Friday is $605.87 to $617.11.
In conclusion, despite some volatility, there is a high chance that the uptrend continues until early March.
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