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A small inside day remains below the invalidation point on both Elliott Wave hourly charts.

Summary: A correction was still most likely over at the last high two days ago. A short term target for the next wave down is 1,987.

Trading advice (not intended for more experienced members): Short positions entered reasonably above 2,100 should hold, and shorts opened today at the high when price touched and slightly overshot the black trend line should hold. Stops may be moved to break even to reduce risk if positions are positive. Corrections upwards present an opportunity to join the trend.

Looking at the bigger picture, any short positions entered here should be profitable this week and may still offer a very good risk / reward set up. However, any members entering short here must understand there is a risk the position may be underwater for several days before becoming profitable. With that in mind, it is essential to manage risk: no more than 5% of equity should be risked if entering short here.

Stops (and risk) for new positions must be just above 2,120.55.

Last published monthly charts are 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.

The box is added to the weekly chart. Price has been range bound for months. A breakout will eventually happen. The S&P often forms slow rounding tops, and this looks like what is happening here at a monthly / weekly time frame.

Primary wave 1 is seen as complete as a leading expanding diagonal. Primary wave 2 would be expected to be complete here or very soon indeed.

Leading diagonals are not rare, but they are not very common either. Leading diagonals are more often contracting than expanding. This wave count does not rely on a rare structure, but leading expanding diagonals are not common structures either.

Leading diagonals require sub waves 2 and 4 to be zigzags. Sub waves 1, 3 and 5 are most commonly zigzags but sometimes may appear to be impulses. In this case all subdivisions fit perfectly as zigzags and look like threes on the weekly and daily charts. There are no truncations and no rare structures in this wave count.

The fourth wave must overlap first wave price territory within a diagonal. It may not move beyond the end of the second wave.

Leading diagonals in first wave positions are often followed by very deep second wave corrections. Primary wave 2 would be the most common structure for a second wave, a zigzag, and fits the description of very deep. It may not move beyond the start of primary wave 1 above 2,134.72.

So far it looks like price is finding resistance at the lilac trend line. Price has not managed to break above it.

DAILY CHART

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

Primary wave 2 would be a 0.96 correction of primary wave 1. Second wave corrections following first wave leading diagonals are commonly very deep, so this fits the most common pattern if primary wave 1 was a leading diagonal.

The most common structure for a second wave correction is a zigzag.

There is no Fibonacci ratio between intermediate waves (A) and (C).

Draw a channel about primary wave 2 using Elliott’s technique for a correction: draw the first trend line from the start of the zigzag, then a parallel copy on the end of intermediate wave (A).

Intermediate wave (C) is a complete impulse and primary wave 2 is a complete zigzag. With two full daily candlesticks below the wide black channel and not touching the lower edge, there is some confidence that primary wave 2 is over.

At this stage, it looks like minor wave 1 ended at the low for last week and minor wave 2 may have ended yesterday with a throwback to test resistance at the lower edge of the black channel. It looks like price today found resistance at the cyan line and has remained below the black trend line.

Minor wave 2 may have been quicker than expected, totalling a Fibonacci two days.

Intermediate wave (C) lasted a Fibonacci thirteen days. Intermediate wave (B) lasted a Fibonacci twenty-one days and intermediate wave (A) lasted forty seven days (not a Fibonacci number). Primary wave 2 would have lasted eighty one days (also not a Fibonacci number). If primary wave 3 exhibits a Fibonacci duration, then a reasonable estimate would be a Fibonacci 144 days.

A new low below 2,025.91 would provide final price confirmation of a trend change. At that stage, downwards movement could not be a second wave correction within intermediate wave (C) and so intermediate wave (C) would have to be over.

The targets calculated are provisional only. They come with the caveat that price may yet move higher which means the targets would move correspondingly higher. They also come with the caveat that at this very early stage a target for primary wave 3 may only be calculated at primary degree. When intermediate waves (1) through to (4) within primary wave 3 are complete, then the targets may change as they can be calculated at more than one wave degree. Primary wave 3 may not exhibit a Fibonacci ratio to primary wave 1.

The first target at 1,595 is where primary wave 3 would reach 1.618 the length of primary wave 1. This target would most likely not be low enough because primary wave 2 is very deep at 0.96 the length of primary wave 1. Primary wave 3 must move below the end of primary wave 1, and it must move far enough below to allow subsequent room for primary wave 4 to unfold and remain below primary wave 1 price territory. Normally, there is a gap between first wave and fourth wave price territory, particularly in a bear market.

The next target may be more likely. At 1,271 primary wave 3 would reach 2.618 the length of primary wave 1.

If primary wave 3 does not exhibit a Fibonacci ratio to primary wave 1, then neither of these targets would be correct.

Well before these targets, it should be obvious if the next wave down is a primary degree third wave. It should exhibit increasing ATR, strong momentum, and a steep slope. However, please note that although it may begin very strongly it does not have to. It may also be that intermediate wave (1) maintains an ATR about 20 – 30 and has some deep time consuming corrections within it. That was how the last primary degree third wave began within the last bear market, so it may happen again.

MAIN HOURLY CHART

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

Ratios within minor wave 1 are: minute wave iii is just 0.24 points longer than 1.618 the length of minute wave i, and minute wave v is 1.69 points short of 2.618 the length of minute wave iii.

Ratios within minute wave v are: minuette wave (iii) is 1.72 points short of 2.618 the length of minuette wave (i), and minuette wave (v) is 1.26 points longer than equality in length with minuette wave (iii).

With excellent Fibonacci ratios, this labelling has a good probability. The only problem is the proportion of minuette wave (iv) to minuette wave (ii), but the S&P does not always exhibit good proportions.

Minor wave 2 may be over as a quick deep zigzag. There is no Fibonacci ratio between minute waves a and c within it. Minute wave c overshoots the channel about this zigzag, which is fairly typical of C waves. Price tested resistance at the black trend line and moved above it to find support.

Price during this session found resistance at the cyan trend line. At the end of the session, price has broken below the pink channel which contained minor wave 2. This is a weak indicator that minor wave 2 may be over.

Minute wave ii may not move beyond the start of minute wave i above 2,100.66. At 1,987 minor wave 3 would reach 1.618 the length of minor wave 1. If price keeps falling through this first target, then the next target would be at 1,917 where minor wave 3 would reach 2.618 the length of minor wave 1.

A new low below 2,079.62 would invalidate the alternate hourly wave count below. At that stage, more confidence may be had that minor wave 2 is very likely over.

ALTERNATE HOURLY CHART

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

Minor wave 2 may be unfolding as an expanded flat correction. Divergence between price and MACD at the hourly chart level supports this wave count, but it is not supported at lower time frames.

Ratios within minor wave 1 are: minute wave iii is just 0.24 points longer than 1.618 the length of minute wave i, and minute wave v has no Fibonacci ratio to either of minute waves i or iii.

Ratios within minute wave v are: there is no Fibonacci ratio between minuette waves (i) and (iii), and minuette wave (v) is just 0.06 short of 0.382 the length of minuette wave (i) (ratios here calculated on the five minute chart).

With reasonable Fibonacci ratios for this labelling, it has a reasonable probability.

Within minor wave 2, minute wave b would be a 1.69 length of minute wave a. This is longer than the common length but within allowable limits.

The structure of minute wave c is incomplete. It must subdivide as a five. So far minuette waves (i) through to (iv) may be complete. If it moves any lower, minuette wave (iv) may not move into minuette wave (i) price territory below 2,079.62.

At 2,112 minuette wave (v) would reach equality in length with minuette wave (i).

Minor wave 2 may not move beyond the start of minor wave 1 above 2,120.55.

This wave count expects still one more day most likely of upwards movement to complete a correction. However, the round number pivot of 2,100 and the black trend lines would be expected to provide strong resistance. This favours the main hourly wave count over this alternate which must overcome some of that resistance before returning downwards.

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 and lasting nine months. Cycle wave IV would be grossly disproportionate to cycle wave II, and would have to move substantially out of a trend channel on the monthly chart, for it to continue further sideways as a double flat, triangle or combination. For this reason, although it is possible, it looks less likely that cycle wave IV would continue further. It should be over at the low as labelled.

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

Price has now broken a little above the 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. Now that the line is breached, the price point at which it is breached is calculated about 2,093.58. 3% of market value above this line would be 2,156.38, which would be above the all time high and the confirmation point.

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 trend line (lilac) 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. It is produced as an alternate, because all possibilities must be considered. Price managed to keep making new highs for years on light and declining volume, so it is possible that this pattern may continue to new all time highs for cycle wave V.

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.

Intermediate wave (2) may still be an incomplete flat correction. Minor wave A will subdivide as a three, a double zigzag, and minor wave B may be seen as a single zigzag.

The most likely point for intermediate wave (2) to end would be the 0.618 Fibonacci ratio at 1,920.

Intermediate wave (2) may not move beyond the start of intermediate wave (1) below 1,810.10.

While it is possible that intermediate wave (2) may be a complete double zigzag at the low labelled minor wave A, this would be a very shallow and rather quick second wave correction. The first reasonable second wave correction within a new bull market should be expected to be deeper and more time consuming for this bull wave count, so intermediate wave (2) is expected to continue.

TECHNICAL ANALYSIS

WEEKLY CHART

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

The reversal implication of the shooting star candlestick pattern for last week is now confirmed by a strong red weekly candlestick which gapped down. This week’s candlestick pattern may be considered to have completed an Evening Doji Star pattern, albeit with two doji at the high.

Along the way down, price may find some support about 2,040.

Upwards movement made an important new high last week but could not manage to break above the final lilac line of resistance. That line remains intact and is now strengthened.

Volume has increased for a downwards week, but as this includes an options expiry date it should not be considered as definitive. Volume for the two downwards weeks prior also showed some increase, although volume was light. It looks like so far the market may be falling of its own weight; selling pressure is light. If selling pressure increases, then look out for a strong increase in downwards momentum.

On Balance Volume trend lines are redrawn this week: support in yellow and resistance in purple. OBV would allow for a little further downwards movement before it finds support at the first yellow line. This may indicate where a bounce may turn up.

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.

Lighter volume for a green daily candlestick for today’s session is bearish. Volume declines as price moves slightly higher; the rise in price is not supported, so it is suspicious. This supports the Elliott wave count.

ADX now is clearly declining indicating the market is not trending. ADX has not indicated a trend change though; the -DX line remains above the +DX line. If ADX again increases, then a downwards trend would be indicated.

ATR may overall be slightly increasing from a low about 16 on 9th June to about 18 now. ATR overall indicates a trend may be developing. If ATR and ADX come to agreement, then more confidence may be had that the market is trending. Some disagreement between these two indicators at the start of a new trend is to be expected.

On Balance Volume found support at the upper yellow trend line and moved up from there. There is plenty of room for price to rise before OBV may find resistance at the purple trend line. A break below the yellow line would be a strong bearish signal from OBV.

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

Stochastics is returning from oversold, but this oscillator may remain extreme for reasonable periods of time during a trending market.

VOLATILITY – INVERTED VIX MONTHLY CHART

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

Several instances of large divergence between price and VIX (inverted) are noted here. Blue is bearish divergence and yellow is bullish divergence (rather than red and green, for our colour blind members).

Volatility declines as inverted VIX rises, which is normal for a bull market. Volatility increases as inverted VIX declines, which is normal for a bear market. Each time there is strong multi month divergence between price and VIX, it was followed by a strong movement from price: bearish divergence was followed by a fall in price and bullish divergence was followed by a rise in price.

There is still current multi month divergence between price and VIX: from the high in April 2016 price has made new highs in the last few days but VIX has failed so far to follow with new highs. This regular bearish divergence still indicates weakness in price.

VOLATILITY – INVERTED VIX DAILY CHART

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

There is now only one instance of hidden bearish divergence noted on this daily chart of price and VIX (blue lines). VIX makes higher highs as price makes lower highs. The decline in volatility is not matched by a corresponding rise in price. Price is weak.

VIX (inverted) has run away strongly from price. Volatility sharply increased beyond the prior point of 19th May (yellow lines) while price fell.

A divergence 101 interpretation of this is bullish. Volatility is stronger than it was on 19th of May, but this has not translated into a corresponding new low for price. Price is weak. Some upwards reaction would be a reasonable expectation about here to resolve this divergence. At this stage, it looks like that interpretation was correct as it has been followed by some upwards movement from price.

Price fell after the short term bearish divergence noted here (short blue lines). Now, after short term bullish divergence (yellow lines), price is rising.

Volatility increased today as price moved higher. This is not normal. This short term divergence between price and VIX is bearish and supports the Elliott wave count at least short term.

While I would not give much weight to divergence between price and many oscillators, such as Stochastics, I will give weight to divergence between price and VIX. Analysis of the monthly chart for the last year and a half shows it to be fairly reliable.

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.

Taking a look at the bigger picture back to and including the all time high on May 2015, the AD line is making substantial new highs but price so far has not. While market breadth is increasing beyond the point it was at in May 2015, this has not translated (yet) into a corresponding rise in price. Price is weak. This is hidden bearish divergence.

DOW THEORY

The last major lows within the bull market are noted below. Both the industrials and transportation indicies have closed below these price points on a daily closing basis; original Dow Theory has confirmed a bear market. By adding in the S&P500 and Nasdaq a modified Dow Theory has not confirmed a new bear market.

Within the new bear market, major highs are noted. For original Dow Theory to confirm the end of the current bear market and the start of a new bull market, the transportation index needs to confirm. It has not done so yet.

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 Nobember, 2015) – has now closed above this point on 8th June, 2016.

Nasdaq: 5,176.77 (2nd December, 2015) – has not closed above this point yet.

It is a reasonable conclusion that the indices are currently in a bear market. The trend remains the same until proven otherwise. Dow Theory is one of the oldest and simplest of all technical analysis methods. It is often accused of being late because it requires huge price movements to confirm a change from bull to bear. In this instance, it is interesting that so many analysts remain bullish while Dow Theory has confirmed a bear market. It is my personal opinion that Dow Theory should not be accused of being late as it seems to be ignored when it does not give the conclusion so many analysts want to see.

This analysis is published @ 09:41 p.m. EST.