What do Cocoa and Chips have in common?

That was some week with Nvidia and AI taking centre stage (as usual) with its record-breaking surge in cap on Thursday following results. In recent blogs I have been kicking around the idea that AI is either in a bubble and about to suffer a major correction, or is in reality the saviour of the world whose inhabitants would no longer need to work (as Musk has proposed).

And last week’s action did not dispel the latter conclusion one jot. Here is the chart of operating Nvidia profits

They have exploded up from near zero three years ago to the current $10 per share, making the current P/E ratio about 80 – on a par with many previous bubble stretched dotcom valuations back in1999.

I have repeatedly in my blogs brought up the question of semiconductor competition and I note that few other observers have done the same. But I find it almost impossible to believe that Nvidia will remain a monopoly supplier of the advanced AI chips for much longer – the margins and profits are simply too juicy to ignore.

A continued rising share price would imply Nvidia keeps its AI chip monopoly and maintain what Warren Buffet refers to as a ‘moat’. But there are other huge semiconductor giants with the means to enter this sector. And I am sure they are trying very very hard.

To their credit, Nvidia has recently named Huawei the Chinese giant as their main competitor – and that makes sense as that nation is well known for being inspired by (aka stealing) advanced Western technology. But the West is trying to distance itself from that company. But if this or another company can innovate and make inroads and if they can offer a significant price advantage with shorter lead times, who knows what could happen to Nvidia’s share price? My guess is that it would suffer a major correction.

Right now, momentum on the weekly is off the charts

This option calls for termination of wave 5 of 3 soon and then the start of a major wave 4 correction into later in the year. When that wave plays out and when bullish sentiment is on the floor. then the final wave 5 an get started leading to new ATHs. That is one valid option.

In addition, the demand for chips in smartphones is declining off the 2016 high.

and with the slowdown in EV sales, demand for auto chips is similarly in decline.

Thus we have only the AI sector that has a semiconductor tailwind (for now).

And last week the AI sector managed to push the Nasdaq 100 to a slight new ATH.

I have noted to VIP Traders Club members that several US indexes have risen to test Big Round Numbers (BRN).

The Dow is testing the 39,000 BRN, the S&P the 5,000 BRN and the Nasdaq 100 the 18,000 BRN.

Would it be a total coincidence if all three stage reversals from here?

The AI-powered Nasdaq 100 has been advancing off the major October low on evermore weaker momentum as shown on the daily chart

This rally appears very tired and with Friday’s slight new high at 18,142 I can consider my wave 5 of 5 complete. If so, then the reversal should start at any time.

Cocoa is the Nvidia of the commodities

The MSM have now latched on to the booming Cocoa/Chocolate story as it continues its mission to the moon alongside Nvidia. ‘Unaffordable Easter Eggs’ alarm fills the headlines!

I often poke fun at markets heading for the moon, but in fact some things actually do make it there. Last week the Odysseus lander touched down near the south pole looking for evidence of water ice among other things. Visions of human moon colonies to come if water is found in quantity!

Recall, we unearthed for VIP Traders Club members the great potential for this market last year not knowing the extent of the developing El Nino to put West African crops in peril from a likely drought that is materialising now. It was the clear message from the charts that provided the major clues

This was the chart I posted to members in November that forecast chocolate and Easter Egg inflation ahead – and boy, was I right! In my local stores I note that many chocolate bars have shrunk in size (a clear case of ‘shrinkflation’) while keeping prices the same..

In the meantime, Cocoa has zoomed up to Friday’s record all-time high of $6,800 – an advance of over 200% from November. And price surges of this kind are rare in commodities since they are usually constrained by direct supply/demand constraints. Forecasts put the pivotal Ghana crop 40% below target.

My guess is that the market is in its late mania phase. Would it not be an amazing coincidence if Cocoa and Nvidia reverse at the same time? Chocolate coated chips anyone?

Crude oil is struggling

I have been bullish on energies but recent action has advanced a more bearish outlook in my mind. Yes, many are forecasting future demand will keep increasing and OPEC+ has considerable leverage on the supply side.

But because I also need to see corresponding price action as traced out in the charts, this outlook is far from certain. For instance, if China’s economy remains depressed and the West can join them, demand should miss estimates.

Global economies are already in danger from the continued collapse in the commercial real estate sector (making banks vulnerable) and interest rates are staying stubbornly high.

So here is a valid bearish scenario for crude

The decline off the September $95 high to the December $67 low can be counted as waves 1-2-3 of a developing five down with wave 4 a textbook three up to the $79 high. Last week it attempted to push up past this resistance but on Friday it was hit back again to the $76 support. A good break of this support would elevate this option to my top choice with a target below the wave 3 low at $67.

Thus, the market is at a moment of truth.

Longer term, I see energy and metals in a downtrend as economies enter recessions/depressions.