S&P 500 Elliott Wave Technical Analysis – 18th August, 2016

Upwards movement was expected for Thursday’s session.

A new high and a small green daily candlestick fits the expectations nicely. On Balance Volume is giving a strong signal today.

Summary: The trend remains the same, until proven otherwise. Assume the trend is up while price is above 2,147.58. The mid term targets are 2,332 or 2,445. If price makes a new low below 2,147.58, then probability will shift to a deep pullback beginning, target zone 1,941 to 1,883. At this stage, a deeper pullback looks increasingly unlikely. There is not enough selling pressure which would be required to push price lower.

Last monthly chart for the main wave count is here.

New updates to this analysis are in bold.

MAIN WAVE COUNT

WEEKLY CHART

S&P 500 weekly 2016
Click chart to enlarge.

Cycle wave II was a shallow 0.41 zigzag lasting three months. Cycle wave IV is seen as a more shallow 0.28 double combination lasting 15 months. With cycle wave IV five times the duration of cycle wave II, it should be over there.

Cycle wave I lasted 28 months (not a Fibonacci number), cycle wave II lasted a Fibonacci 3 months, cycle wave III lasted 38 months (not a Fibonacci number), and cycle wave IV lasted 15 months (two more than a Fibonacci 13).

If the target for cycle wave V is for it to be equal in length with cycle wave I, then it may also be expected to be about equal in duration. So far cycle wave V is in its sixth month. After this month, a further 22 months to total 28 seems a reasonable expectation, or possibly a further 15 months to total a Fibonacci 21.

This first weekly wave count expects the more common structure of an impulse is unfolding for cycle wave V. Within cycle wave V, primary waves 1 and now 2 should be over. Within primary wave 3, no second wave correction may move beyond its start below 1,991.68. If price makes a new high above 2,203.68, then that would provide enough confidence that intermediate wave (2) should be over to move the invalidation point on the weekly chart up to 2,147.58.

There is one other possible structure for cycle wave V, an ending diagonal. This is covered in an alternate.

DAILY CHART

S&P 500 daily 2016
Click chart to enlarge.

Primary wave 2 is complete as a shallow regular flat correction. Primary wave 3 is underway.

Within primary wave 3, intermediate wave (1) is a complete impulse. Intermediate wave (2) may now be a complete flat correction.

It is still possible that intermediate wave (2) may not be complete and could continue sideways and a little lower. A deep pullback would not be expected, only a sideways combination, double flat or slightly lower expanded flat would be indicated. If price moves above 2,203.68, then upwards movement from the low at 2,147.58 would be more than twice the length of intermediate wave (2). At that stage, the probability that upwards movement is a B wave within intermediate wave (2) would be so low the idea should be discarded. A new high above 2,203.68 would add confidence in the upwards trend.

Within intermediate wave (3), no second wave correction may move beyond its start below 2,147.58.

Add a mid line to the base channel drawn about primary waves 1 and 2. Draw this channel from the start of primary wave 1 (seen on the weekly chart) to the end of primary wave 2, then place a parallel copy on the end of primary wave 1. The mid line may provide some support along the way up.

At this stage, it looks most likely that intermediate wave (3) has begun. It should be expected to show the subdivisions of minor waves 2 and 4 clearly on the daily chart with one to a few red daily candlesticks or doji. With minor wave 2 now showing as two red candlesticks, one doji and a green candlestick with a long lower wick, this wave count so far has a typical look.

HOURLY CHART

S&P 500 hourly 2016
Click chart to enlarge.

Minor wave 2 now looks to be a complete expanded flat correction. It is relatively shallow at 0.45 the depth of minor wave 1. Minor wave 1 lasted four days and now minor wave 2 has lasted seven days. It is extremely likely to be over here if this wave count is correct.

At 2,230 minor wave 3 would reach 1.618 the length of minor wave 1. This target fits nicely with mid term targets for intermediate wave (3) to end.

Minor wave 3 may only subdivide as an impulse. Within minor wave 3, minute waves i and now ii look likely to be complete. A steep trend line is drawn across the recent lows. This line is not very technically significant yet may still provide some support. If it is breached, then minute wave ii may be continuing further as a combination or expanded flat correction. Minute wave ii may not move below the start of minute wave i at 2,168.50.

If price starts to move up and away from this trend line early in tomorrow’s session, then the probability that minute wave ii is over and minute wave iii upwards has begun would increase. The strong bullish signal from On Balance Volume today supports this idea.

Mid term targets for intermediate wave (3) remain the same. At 2,332 intermediate wave (3) would reach equality in length with intermediate wave (1). If price keeps rising through this first target, or if when it gets there the structure is incomplete, then the second target would be used. At 2,445 intermediate wave (3) would reach 1.618 the length of intermediate wave (1).

ALTERNATE WAVE COUNT

WEEKLY CHART

S&P 500 weekly 2016
Click chart to enlarge.

This alternate may diverge from the main wave count.

The other structural possibility for cycle wave V is an ending diagonal. Ending diagonals are more often contracting than expanding, so that is what this alternate will expect.

Ending diagonals require all sub-waves to subdivide as zigzags. Zigzags subdivide 5-3-5. Thus primary wave 1 may now be a complete (or almost complete) zigzag, labelled intermediate waves (A)-(B)-(C) which subdivides 5-3-5.

The normal depth for second and fourth waves of diagonals is from 0.66 to 0.81 the prior actionary wave. Primary wave 2 may end within this range, from 1,941 to 1,883.

Primary wave 2 may not move beyond the start of primary wave 1 below 1,810.10.

When primary wave 2 is a complete zigzag, then another zigzag upwards for primary wave 3 must make a new high above the end of primary wave 1. It would most likely be shorter than primary wave 1 as diagonals are more commonly contracting. If primary wave 3 is longer than primary wave 1, then an expanding diagonal would be indicated.

The psychology of diagonals is quite different to impulses. Diagonals contain corrective characteristics and subdivide as a series of zigzags. When diagonals turn up in fifth wave positions, they take on some of the properties of the correction which inevitably follows them. The deterioration in fundamentals and underlying technicals is more extreme and more evident. There is some support for this idea at this time.

The final target of 2,500 would not be able to be reached by an ending contracting diagonal. The final target for this alternate would be calculated only when primary wave 4 is complete.

The classic pattern equivalent is a rising wedge.

DAILY CHART

S&P 500 daily 2016
Click chart to enlarge.

It is possible now that intermediate wave (C) is a complete five wave impulse. However, this wave count suffers from disproportion between minor waves 2 and 4 which gives this possible impulse an odd look. It looks like a three where it should look like a five. However, the S&P just does not always have waves which look right at all time frames.

Because this wave count expects to see a substantial trend change here from bull to bear for a multi week deep pullback, it absolutely requires some indication from price before confidence may be had in it. A new low below 2,147.58 would add confidence.

At this stage, there is not enough selling pressure to support this wave count. When the market has fallen recently, it has fallen of its own weight. For a deep pullback sellers would have to enter the market and be active enough to push price lower. That is not happening at this time.

TECHNICAL ANALYSIS

WEEKLY CHART

S&P 500 weekly 2016
Click chart to enlarge. Chart courtesy of StockCharts.com.

Last week ends with a small green doji candlestick. The week before completed a possible hanging man, but the green real body and the long lower wick (bullish) require bearish confirmation from the next candlestick before the pattern can be read as a bearish reversal pattern. That has not happened, so both weekly candlesticks should now be read as bullish.

Last weekly candlestick comes with lighter volume. A decline in volume along with a doji candlestick indicates that price movement for the week may have been more consolidation than trend.

On Balance Volume is bullish while it remains above both trend lines. There is no divergence between price and OBV last week to indicate any weakness in price, both made new highs.

RSI is flat and not extreme. There is room for price to rise further.

DAILY CHART

S&P 500 daily 2016
Click chart to enlarge. Chart courtesy of StockCharts.com.

The long lower wick on yesterday’s candlestick was bullish. This is now followed by another green daily candlestick. Today’s candlestick comes on slightly lighter volume than yesterday, but volume for the last two upwards days is still stronger than the prior downwards day. Overall, there is still some support for the upwards movement in price.

Price may be finding some resistance at the horizontal trend line about 2,185. A break above resistance on a day with some increase in volume would add further confidence to the wave count.

While price has essentially been moving sideways since about 14th of July (with an upwards bias), ATR is declining. It should be expected that ATR will again start to increase as a trend becomes stronger and clearer.

ADX is still declining, but during this entire time the +DX line has remained above the -DX line. No trend change has been indicated from ADX; the trend remains up. ADX may be indicating an interruption to the upward trend by some sideways consolidation, which is what has been happening.

On Balance Volume has been tightly constrained until today. OBV today is giving a strong bullish signal with a break above the purple line that previously provided resistance. At this time, it has been noted that divergence between price and various oscillators and indicators has not been working well. One indicator that has been working well recently has been OBV. This signal is given reasonable weight in today’s analysis, and it adds confidence to the main wave count at all time frames.

RSI is not yet extreme. There is room for price to rise or fall. There is no divergence at this stage between price and RSI to indicate weakness, but even if there was it would not be given much weight. The absence of divergence offers some slight support to this analysis today.

Stochastics is close to overbought, but this oscillator may remain extreme for reasonable periods of time during a trending market. If the market is still consolidating, a downwards swing from price would be expected here. But in this instance the signal from OBV is stronger than this expectation from Stochastics.

Momentum has been declining as price has been moving overall sideways. There is divergence between price and MACD, but this is unreliable at this time and is still not given any weight in this analysis.

Bollinger Bands remain tightly contracted. It would be normal to expect them to again expand as some volatility returns to this market and price starts to more clearly trend. That is what the Elliott wave count expects to happen today. It remains to be seen if this market can behave normally at this time though.

VOLATILITY – INVERTED VIX CHART

VIX daily 2016
Click chart to enlarge. Chart courtesy of StockCharts.com.

Volatility is declining as price is rising. This is normal for an upwards trend.

There are a few instances of multi day divergence between price and inverted VIX noted here. Bearish divergence is blue. Bullish divergence is yellow. Each of these instances was followed by expected price movement if only for two days. Divergence with VIX and price is not always working, but it is still sometimes working. So it will be noted.

Most recently two examples are noted: one of regular bearish divergence and one of hidden bullish divergence. In each case this was followed by the indicated direction for price for two days.

Now inverted VIX today shows hidden bearish divergence with price. From the high of 15th of August to the high today of 18th of August, price has made a lower high but inverted VIX has made a higher high (recent blue lines). This indicates weakness to upwards movement today from price. It remains to be seen if this divergence will simply disappear or if it will result in one or two days of downwards movement from price beginning tomorrow. It is given a little weight in today’s analysis. On Balance Volume has been working more reliable recently, so that is still given more weight.

BREADTH – AD LINE

AD Line daily 2016
Click chart to enlarge. Chart courtesy of StockCharts.com.

There is support from market breadth as price is rising.

There is today some hidden bearish divergence between price and the AD line. As price has made a lower high below 15th of August, the AD line today made a higher high. This indicates weakness in price. Normally, this would be given some weight, but in recent weeks it has been noted that divergence between price and the AD line is unreliable. It is noted but will be given no weight in today’s analysis.

DOW THEORY

Major lows within the prior bull market:

DJIA: 15,855.12 (15th October, 2014) – closed below on 25th August, 2015.

DJT: 7,700.49 (12th October, 2014) – closed below on 24th August, 2015.

S&P500: 1,821.61 (15th October, 2014) – has not closed below this point yet.

Nasdaq: 4,117.84 (15th October, 2014) – has not closed below this point yet.

Major highs within the new bear market:

DJIA: 17,977.85 (4th November, 2015) – closed above on 18th April, 2016.

DJT: 8,358.20 (20th November, 2015) – has not closed above this point yet.

S&P500: 2,116.48 (3rd November, 2015) – closed above this point on 8th June, 2016.

Nasdaq: 5,176.77 (2nd December, 2015) – closed above this point on 1st August, 2016.

Dow Theory Conclusion: Original Dow Theory still sees price in a bear market because the transportations have failed to confirm an end to that bear market. Modified Dow Theory (adding S&P and Nasdaq) has failed still to confirm an end to the old bull market, modified Dow Theory sees price still in a bull market.

This analysis is published @ 11:13 p.m. EST.

[Note: Analysis is public today for promotional purposes. Member comments and discussion will remain private.]

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