S&P 500 Elliott Wave Technical Analysis – 17th May, 2016

Downwards movement was expected from the main Elliott wave count yesterday and this is exactly what happened.

Summary: The main wave count expects to see downwards movement accelerate in the next week or so as a third wave unfolds. The first short term target is at 1,988. The long term target remains at 1,423. An alternate survives, so risk to short positions must remain mid term at 2,111.05.

To see last published monthly charts click here.

To see how each of the bull and bear wave counts fit within a larger time frame see the Grand Supercycle Analysis.

To see detail of the bull market from 2009 to the all time high on weekly charts, click here.

New updates to this analysis are in bold.

BEAR ELLIOTT WAVE COUNT

WEEKLY CHART

S&P 500 weekly bear 2016
Click chart to enlarge.

This bear wave count fits better than the bull with the even larger picture, super cycle analysis found here. It is also well supported by regular technical analysis at the monthly chart level.

Importantly, there is no lower invalidation point for this wave count. That means there is no lower limit to this bear market.

Primary wave 1 is complete and lasted 19 weeks. Primary wave 2 is over lasting 28 weeks.

An expectation for duration of primary wave 3 would be for it to be longer in duration than primary wave 1. If it lasts about 31 weeks, it would be 1.618 the duration of primary wave 1. It may last about a Fibonacci 34 weeks in total, depending on how time consuming the corrections within it are.

Primary wave 2 may be a rare running flat. Just prior to a strong primary degree third wave is the kind of situation in which a running flat may appear. Intermediate wave (B) fits perfectly as a zigzag and is a 1.21 length of intermediate wave (A). This is within the normal range for a B wave of a flat of 1 to 1.38.

Within primary wave 3, no second wave correction may move beyond its start above 2,111.05.

DAILY CHART

S&P 500 daily bear 2016
Click chart to enlarge.

If intermediate wave (C) is over, then the truncation is small at only 5.43 points. This may occur right before a very strong third wave pulls the end of intermediate wave (C) downwards. At the end of last week, price has confirmed a trend change with a new low slightly below 2,039.74.

The next wave down for this wave count would be a strong third wave at primary wave degree. At 1,423 primary wave 3 would reach 2.618 the length of primary wave 1. This is the appropriate ratio for this target because primary wave 2 is very deep at 0.91 of primary wave 1. If this target is wrong, it may be too high. The next Fibonacci ratio in the sequence would be 4.236 which calculates to a target at 998. That looks too low, unless the degree of labelling is moved up one and this may be a third wave down at cycle degree just beginning. I know that possibility right now may seem absurd, but it is possible.

Alternatively, primary wave 3 may not exhibit a Fibonacci ratio to primary wave 1. When intermediate waves (1) through to (4) within the impulse of primary wave 3 are complete, then the target may be calculated at a second wave degree. At that stage, it may change or widen to a small zone.

At this stage, it looks slightly more likely that minor wave 3 is underway considering On Balance Volume at the weekly chart level, resistance at the short term cyan trend line, and structure at the hourly chart level. For these three reasons hourly charts are swapped over today. The main hourly chart below has a slightly higher probability than the alternate in my judgement today.

The equivalent minor wave 2 within the last big bear market was a 0.495 depth of minor wave 1 and lasted two days to minor wave 1’s five days.

The next possible equivalent minor wave 2 lasted one day longer than its minor wave 1 and was very deep at 0.81.

Overall, it is impossible to tell with certainty how deep and long lasting this minor wave 2 will be. Look out for possible surprises to the downside with a big third wave in its infancy.

Minor wave 1 lasted 12 days, one short of a Fibonacci 13. Minor wave 2 could be over at 0.63 the depth of minor wave 1 and lasting only two days as labelled, or it may be continuing to be deeper and longer lasting as per the hourly alternate wave count below.

Minor wave 2 may not move beyond the start of minor wave 1 above 2,111.05.

A short term bear market trend line is added from the high of primary wave 2 to the first small swing high of minute wave ii in cyan. This trend line is about where price is finding resistance. It is copied over to the first alternate hourly chart and the daily technical analysis chart.

I will publish two hourly wave counts in order of probability.

MAIN HOURLY CHART

S&P 500 daily bear 2016
Click chart to enlarge.

Minor wave 2 may be a complete zigzag, just a little deeper than 0.618 of minor wave 1.

Minor wave 3 may have begun and would reach 1.618 the length of minor wave 1 at 1,969. If price reaches the first target and the structure is incomplete, or if price keeps falling through the first target, then the next Fibonacci ratio in the sequence is 2.618 which gives a target calculation at 1,897.

Minor wave 3 may only subdivide as a simple impulse. Along the way down, lower degree corrections should find resistance at the upper edge of the dark blue base channel which is drawn about minor waves 1 and 2. Minor wave 3 should have the power to break through support at the lower edge of the base channel. Once that is done, the lower edge should then provide resistance.

Within minor wave 3, minute waves i and now ii are also complete.

Minute wave ii fits perfectly as an expanded flat correction (these are very common structures). It is a 0.59 depth of minute wave i. It has found resistance perfectly as the short term bear market trend line, copied over from the daily chart.

Minute wave ii is an expanded flat. Minuette wave (b) is a 1.57 length of minuette wave (a). This is a little longer than the common range of 1 to 1.38 but within the allowable convention of up to 2. Minuette wave (c) is just 0.19 points longer than 1.618 the length of minuette wave (a). All subdivisions fit perfectly, particularly minuette wave (b) as a zigzag.

At 1,988 minute wave iii would reach 2.618 the length of minute wave i. If this target is wrong, it may be too high.

Within minute wave iii, now the first impulse for minuette wave (i) is very close to completion. In the very short term, subminuette wave iv may not move into subminuette wave i price territory above 2,055.65. As soon as subminuette wave v makes a new low below the end of subminuette wave iii, it could be over. It may end at support from the lower pink trend line. A bounce tomorrow for minuette wave (ii) may be initiated from there.

Add another base channel this time about minute waves i and ii (drawn in pink). The upper edge of this pink channel should now provide resistance for corrections along the way down. If price breaches the upper pink line, then look for it to again find resistance at the short term bear market trend line.

The power of the middle of a third wave should be able to break below support at the lower edge of the pink channel. When price breaks below the lower pink trend line, then that line should provide resistance. If that is how price behaves, if it throws back up to the line, it would offer a good low risk entry opportunity to join the trend.

If price breaks below support of the lower dark blue line, then the alternate would be discarded. A breach of the lower blue line would be enough confirmation of a third wave down to discard the idea of minor wave 2 continuing in any form.

ALTERNATE HOURLY CHART

S&P 500 daily bear 2016
Click chart to enlarge.

It is essential to always consider “what if?”. What if the main wave count is wrong? Alternates are an essential part of correctly doing Elliott wave analysis. If the main wave count is wrong, then an alternate should be available to provide a road map for what should happen next.

It is still possible that minor wave 2 is an incomplete flat correction. So far minute wave b is 0.97 the depth of minute wave a, passing the minimum requirement of 0.9 but not yet long enough for an expanded flat at 1.05. If minute wave b reaches down to 2,037.18 or below, then minor wave 2 would be an expanded flat.

The common range for minute wave b within a flat is from 1 to 1.38 the length of minute wave a, giving a range of 2,039.45 to 2,022.19. There is no Elliott wave rule stating a maximum length for minute wave b, but there is an Elliott wave convention which states that when the potential B wave is twice the length of the potential A wave the idea of a flat should be discarded due to a very low probability. Here, that price point would be at 1,994.

Within the flat, minute wave a is a three, a zigzag. Minute wave b may also be a three, a zigzag, and very close to completion. A-B-C of a zigzag subdivides 5-3-5, exactly the same way as 1-2-3 of an impulse. The subdivisions of downwards movement for the last five days are seen in exactly the same way now for both wave counts. How each count subdivides cannot tell us at this stage which wave count has a higher probability, because there is no difference. This job is left to classic technical analysis.

The green channel here is a corrective channel about the zigzag of minute wave b. It is drawn in exactly the same way as a base channel.

The first indication that this wave count may be right and the main wave count may be wrong would be a clear breach of the upper edge of the green channel. Thereafter, a new high above 2,071.88 would invalidate the main hourly wave count and confirm this alternate. If that happens, then expect upwards movement to continue until it touches the bear market trend line.

BULL ELLIOTT WAVE COUNT

WEEKLY CHART

S&P 500 weekly 2016
Click chart to enlarge.

Cycle wave IV is seen as a complete flat correction. Within cycle wave IV, primary wave C is still seen as a five wave impulse.

Intermediate wave (3) has a strong three wave look to it on the weekly and daily charts. For the S&P, a large wave like this one at intermediate degree should look like an impulse at higher time frames. The three wave look substantially reduces the probability of this wave count. Subdivisions have been checked on the hourly chart, which will fit.

Cycle wave II was a shallow 0.41 zigzag lasting three months. Cycle wave IV may be a complete shallow 0.19 regular flat correction, exhibiting some alternation with cycle wave II.

At 2,500 cycle wave V would reach equality in length with cycle wave I.

Price remains below the final bear market trend line. This line is drawn from the all time high at 2,134.72 to the swing high labelled primary wave B at 2,116.48 on November 2015. This line is drawn using the approach outlined by Magee in the classic “Technical Analysis of Stock Trends”. To use it correctly we should assume that a bear market remains intact until this line is breached by a close of 3% or more of market value. In practice, that price point would be a new all time high which would invalidate any bear wave count.

This wave count requires price confirmation with a new all time high above 2,134.72.

While price has not made a new high, while it remains below the final bear market trend line and while technical indicators point to weakness in upwards movement, this very bullish wave count comes with a strong caveat. I still do not have confidence in it.

The invalidation point will remain on the weekly chart at 1,370.58. Cycle wave IV may not move into cycle wave I price territory.

This invalidation point allows for the possibility that cycle wave IV may not be complete and may continue sideways for another one to two years as a double flat or double combination. Because both double flats and double combinations are both sideways movements, a new low substantially below the end of primary wave C at 1,810.10 should see this wave count discarded on the basis of a very low probability long before price makes a new low below 1,370.58.

DAILY CHART

S&P 500 daily 2016
Click chart to enlarge.

If the bull market has resumed, it must begin with a five wave structure upwards at the daily and weekly chart level. That may today be complete. The possible trend change at intermediate degree still requires confirmation in the same way as the alternate hourly bear wave count outlines before any confidence may be had in it.

If intermediate wave (2) begins here, then a reasonable target for it to end would be the 0.618 Fibonacci ratio of intermediate wave (1) about 1,920. Intermediate wave (2) must subdivide as a corrective structure. It may not move beyond the start of intermediate wave (1) below 1,810.10.

In the long term, this wave count absolutely requires a new high above 2,134.72 for confirmation. This would be the only wave count in the unlikely event of a new all time high. All bear wave counts would be fully and finally invalidated.

TECHNICAL ANALYSIS

WEEKLY CHART

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

There is a bearish engulfing candlestick pattern at the last high. This has occurred at the round number of 2,100 which increases the significance. Volume on the second candlestick is higher than volume on the first candlestick, which further increases the significance. That it is at the weekly chart level is further significance.

Engulfing patterns are the strongest reversal patterns.

Now this pattern is followed by another red weekly candlestick. The reversal implications of the pattern are confirmed.

This is a very strong bearish signal. It adds significant weight to the expectation of a trend change. It does not tell us how low the following movement must go, only that it is likely to be at least of a few weeks duration.

Last week’s candlestick has a long upper shadow and is again red which is bearish.

There is another bearish signal from On Balance Volume this week with a break below the purple line. This does not indicate which hourly wave count is correct, but it does add weight to a downwards trend.

There is hidden bearish divergence between Stochastics and price at the last high and the high of November 2015. Stochastics has moved further into overbought territory, but this has failed to translate into a corresponding new high in price. Price is weak. MACD exhibits the same hidden bearish divergence.

After a period of declining ATR, it should be expected to turn and begin to increase.

DAILY CHART

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

Volume data on StockCharts is different to that given from NYSE, the home of this index. Comments on volume will be based on NYSE volume data when it differs from StockCharts.

Downwards movement for Tuesday’s session comes with stronger volume. The fall in price was supported by volume. This supports the main hourly Elliott wave count over the alternate.

Price is finding resistance at the cyan trend line (this is the short term bear market trend line on the main daily Elliott wave chart) and support at the horizontal line about 2,040. Price is range bound between about 2,080 and 2,040. During this range bound movement, lasting now about 11 days, it is two downwards days which have stronger volume. This indicates that a downwards breakout is more likely than upwards.

A head and shoulders pattern may be completing as labelled (green). The neckline is providing support for today’s downwards movement. If the neckline is breached, then the pattern would be confirmed. The target would be about 1,964.

Overall, the volume profile continues to be bearish.

ADX is still declining and may be beginning to flatten off. This indicates the market is not currently trending. The -DX line remains above the +DX line, so no trend change is indicated. If a trend returns here, then it would be downwards.

ATR disagrees now as it is increasing. This indicates a trend may be returning. Some disagreement with these two trend indicators may be expected in the early stages of a new trend.

On Balance Volume has come down to again find support at the purple line. This line is repeatedly tested, essentially horizontal and reasonably long held. It has strong technical significance. A break below this line would be interpreted as a strong bearish signal.

A break below the pink and green lines by OBV would also be strong bearish signals.

The break and test of the yellow line was a weak bearish signal. This line should provide resistance if OBV turns upwards. This line should help to hold any rise in price here and stop it moving too far.

RSI is neutral. There is plenty of room for price to fall or rise.

Stochastics is close to neutral.

MACD is flattening off as would be expected during a counter trend movement.

VOLATILITY – INVERTED VIX DAILY CHART

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

Volatility declines as inverted VIX climbs. This is normal for an upwards trend.

What is not normal here is the divergence over a reasonable time period between price and inverted VIX (green lines). The decline in volatility did not translate to a corresponding increase in price. Price is weak. This divergence is bearish.

Unfortunately, there is still no divergence between price and VIX for most recent movement to indicate which of the two hourly wave counts may be correct.

BREADTH – ADVANCE DECLINE LINE

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

With the AD line increasing, this indicates the number of advancing stocks exceeds the number of declining stocks. This indicates that there is breadth to prior upwards movement.

From November 2015 to 20th April, the AD line made new highs while price far failed to make a corresponding new high. This indicates weakness in price; the increase in market breadth is unable to be translated to increase in price (orange lines).

The 200 day moving average for the AD line is now increasing. This alone is not enough to indicate a new bull market. During November 2015 the 200 day MA for the AD line turned upwards and yet price still made subsequent new lows.

The AD line is now declining and has breached a support line (cyan). There is breadth to downwards movement; more stocks are declining than advancing which supports the fall in price.

ANALYSIS OF LAST MAJOR BEAR MARKET OCTOBER 2007 – MARCH 2009

Bear Market 2007 - 2009
Click to enlarge.

In looking back to see how a primary degree third wave should behave in a bear market, the last example may be useful.

Currently, the start of primary wave 3 now may be underway for this current bear market. Currently, ATR sits about 19. With the last primary degree third wave (blue highlighted) having an ATR range of about 18 to 76, so far this one looks about right.

The current wave count sees price in an intermediate degree first wave within a primary degree third wave. The equivalent in the last bear market (yellow highlighted) lasted 39 days and had a range of ATR from 16 – 27.

Bear Market 2007 - 2009
Click chart to enlarge.

This chart is shown on an arithmetic scale, so that the differences in daily range travelled from the start of primary wave 3 to the end of primary wave 3 is clear.

Primary wave 3 within the last bear market from October 2007 to March 2009 is shown here. It started out somewhat slowly with relatively small range days. I am confident of the labelling at primary degree, reasonably confident of labelling at intermediate degree, and uncertain of labelling at minor degree. It is the larger degrees with which we are concerned at this stage.

During intermediate wave (1), there were a fair few small daily doji and ATR only increased slowly. The strongest movements within primary wave 3 came at its end.

It appears that the S&P behaves somewhat like a commodity during its bear markets. That tendency should be considered again here.

Looking more closely at early corrections within primary wave 3 to see where we are, please note the two identified with orange arrows. Minor wave 1 lasted a Fibonacci 5 days and minor wave 2 was quick at only 2 days and shallow at only 0.495 the depth of minor wave 1.

Minute wave ii, the next second wave correction, was deeper. Minute wave i lasted 3 days and minute wave ii was quick at 2 days but deep at 0.94 the depth of minute wave i.

What this illustrates clearly is there is no certainty about second wave corrections. They do not have to be brief and shallow at this early stage; they can be deep.

This chart will be republished daily for reference. The current primary degree third wave which this analysis expects does not have to unfold in the same way, but it is likely that there may be similarities.

DOW THEORY

I am choosing to use the S&P500, Dow Industrials, Dow Transportation, Nasdaq and the Russell 2000 index. Major swing lows are noted below. So far the Industrials, Transportation and Russell 2000 have made new major swing lows. None of these indices have made new highs.

I am aware that this approach is extremely conservative. Original Dow Theory has already confirmed a major trend change as both the industrials and transportation indexes have made new major lows.

At this stage, if the S&P500 and Nasdaq also make new major swing lows, then my modified Dow Theory would confirm a major new bear market. At that stage, my only wave count would be the bear wave count.

The lows below are from October 2014. These lows were the last secondary correction within the primary trend which was the bull market from 2009.

These lows must be breached by a daily close below each point.

S&P500: 1,821.61
Nasdaq: 4,117.84
DJIA: 15,855.12 – close below on 25th August 2015.
DJT: 7,700.49 – close below on 24th August 2015.
Russell 2000: 1,343.51 – close below on 25th August 2015.

To the upside, DJIA has made a new major swing high above its prior major high of 3rd November, 2015, at 17,977.85. But DJT has so far failed to confirm because it has not yet made a new major swing high above its prior swing high of 20th November, 2015, at 8,358.20. Dow Theory has therefore not yet confirmed a new bull market. Neither the S&P500, Russell 2000 nor Nasdaq have made new major swing highs.

This analysis is published @ 10:32 p.m. EST.

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

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