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Upwards movement, which was expected for Wednesday’s session, produced a small green daily candlestick.

Summary: Intermediate wave (3) upwards should move above the end of intermediate wave (1) at 2,179.99. Upwards movement for today’s session lacks strength though, so this does not look like the start of a third wave. There is some bearish divergence today between price and VIX, so look out for a possible surprise to the downside tomorrow.

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 V must subdivide as a five wave structure. I have two wave counts for upwards movement of cycle wave V. This main wave count is presented first only because we should assume the trend remains the same until proven otherwise. Assume that downwards movement is a correction within the upwards trend, until proven it is not.

Primary wave 3 is shorter than primary wave 1, but shows stronger momentum and volume as a third wave normally does. Because primary wave 3 is shorter than primary wave 1 this will limit primary wave 5 to no longer than equality in length with primary wave 3, so that the core Elliott wave rule stating a third wave may not be the shortest is met. Primary wave 5 has a limit at 2,302.47.

Primary wave 2 was a shallow 0.40 expanded flat correction. Primary wave 4 may be exhibiting alternation as a more shallow combination.

Primary wave 4 may not move into primary wave 1 price territory below 2,111.05.

It is also possible to move the degree of labelling within cycle wave V all down one degree. It may be only primary wave 1 unfolding. The invalidation point for this idea is at 1,810.10. That chart will not be published at this time in order to keep the number of charts manageable. The probability that this upwards impulse is only primary wave 1 is even with the probability that it is cycle wave V in its entirety.

When the five wave structure upwards labelled primary wave 5 is complete, then my main wave count will move the labelling within cycle wave V all down one degree and expect that only primary wave 1 may be complete. The labelling as it is here will become an alternate wave count. This is because we should always assume the trend remains the same until proven otherwise. We should always assume that a counter trend movement is a correction, until price tells us it’s not.

DAILY CHART

S&P 500 daily 2016
Click chart to enlarge.

Primary wave 4 may be now complete as a double combination.

It is possible now that primary wave 4 could continue further as a triple, but because triples are very rare the probability of this is very low. If it is over here, then the proportion with primary wave 2 looks right. Within primary wave 5, no second wave correction may move beyond the start of its first wave below 2,119.12.

Primary wave 1 lasted 47 days, primary wave 2 was even in duration at 47 days, primary wave 3 lasted 16 days, and primary wave 4 has lasted 37 days. The proportions between these waves are acceptable.

If primary wave 5 has begun here, then at 2,233 it would reach 0.618 the length of primary wave 1.

At this stage, an impulse for primary wave 5 looks unlikely with invalidation of that idea at the hourly chart level. An ending diagonal now looks more likely for primary wave 5. Ending diagonals are choppy overlapping structures. The classic technical analysis equivalent is a rising wedge. They are terminal structures, doomed to full retracement at their end.

Ending diagonals require all sub-waves to subdivide as zigzags. Intermediate wave (1) fits as a zigzag and looks like a zigzag. Intermediate wave (2) will now fit as a completed zigzag. Intermediate wave (3) should now unfold as a zigzag upwards which must move above the end of intermediate wave (1) at 2,179.99.

If Super Cycle wave (V) is going to end in October, then it has only 14 days in which to complete. Ending contracting diagonals are much more common than the expanding variety, so intermediate waves (3), (4) and (5) are more likely to be shorter in both price and time than intermediate waves (1) and (2). Intermediate wave (3) may complete in a Fibonacci five days.

If primary wave 5 comes up to touch the upper edge of the maroon channel, it may end there.

HOURLY CHART

S&P 500 hourly 2016
Click chart to enlarge.

Intermediate wave (2) now fits as a completed zigzag. Minor wave B within it was a double combination: zigzag – X – flat. Intermediate wave (2), at 0.84, is slightly deeper than the normal depth of 0.66 to 0.81 the length of intermediate wave (1).

Within the zigzag of intermediate wave (2), minor wave C is 2.73 points longer than equality in length with minor wave A.

Intermediate wave (3) must move beyond the end of intermediate wave (1) above 2,179.58. If the ending diagonal is the more common contracting type, then intermediate wave (3) should end before it reaches equality with intermediate wave (1) at 2,189.30.

Intermediate wave (3) must subdivide as a zigzag.

So far a first wave up for minute wave i may be complete as a leading contracting diagonal. It is somewhat concerning today that upwards movement is not stronger because a third wave should exhibit more momentum and should have support from volume. Today’s small rise has neither. For this reason the invalidation point remains at 2,119.12.

If intermediate wave (2) continues any lower, it may not move beyond the start of intermediate wave (1) below 2,119.12.

ALTERNATE WAVE COUNT

WEEKLY CHART

S&P 500 weekly 2016
Click chart to enlarge.

What if an impulse upwards is complete? The implications are important. If this is possible, then primary wave 1 within cycle wave V may be complete.

With downwards movement from the high of primary wave 1 now clearly a three and not a five, the possibility that cycle wave V and Super Cycle wave (V) are over has substantially reduced. This possibility would be eliminated if price can make a new all time high above 2,193.81.

If an impulse upwards is complete, then a second wave correction may be unfolding for primary wave 2. Expectations on how deep primary wave 2 is likely to be are now adjusted. It may be expected now to more likely only reach the 0.382 Fibonacci ratio about 2,038.

At this stage, it looks like price has found strong support at the lilac trend line.

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

DAILY CHART

S&P 500 daily 2016
Click chart to enlarge.

If an impulse upwards is complete, then how may it subdivide and are proportions good?

Intermediate wave (1) was an impulse lasting 47 days. Intermediate wave (2) was an expanded flat lasting 47 days. Intermediate wave (3) fits as an impulse lasting 16 days, and it is 2.04 points short of 0.618 the length of intermediate wave (1). So far this alternate wave count is identical to the main wave count (with the exception of the degree of labelling, but here it may also be moved up one degree).

Intermediate wave (4) may have been a running contracting triangle lasting 22 days and very shallow at only 0.0027 the depth of intermediate wave (3). At its end it effected only a 0.5 point retracement. There is perfect alternation between the deeper expanded flat of intermediate wave (2) and the very shallow triangle of intermediate wave (4). All subdivisions fit and the proportion is good.

Intermediate wave (5) would be very brief at only 18.29 points. Intermediate wave (5) is 1.43 points longer than 0.056 the length of intermediate wave (1).

At this stage, primary wave 2 now has a completed zigzag downwards that did not reach the 0.236 Fibonacci ratio. It is very unlikely for this wave count that primary wave 2 is over there; the correction is too brief and shallow. Upwards movement labelled intermediate wave (X) is so far less than 0.9 the length of the prior wave down labelled intermediate wave (W). The minimum for a flat correction has not been met. Primary wave 2 may continue lower as a double zigzag. A second zigzag in the double may be required to deepen the correction closer to the 0.382 Fibonacci ratio.

Intermediate wave (W) lasted a Fibonacci 13 sessions. Intermediate wave (X) is now changed today to see a triangle unfolding sideways. X waves may subdivide as any corrective structure (including multiples), and a triangle is possible here.

If minor wave C within the triangle for intermediate wave (X) moves any higher, then it may not move beyond the end of minor wave A above 2,179.99. It is possible today that the triangle for intermediate wave (X) is over and the breakout downwards may come quickly.

Primary wave 2 may not move beyond the start of primary wave 1 below 1,810.10. A new low below this point would see the degree of labelling within cycle wave V moved up one degree. At that stage, a trend change at Super Cycle degree would be expected and a new bear market to span several years would be confirmed.

HOURLY CHART

S&P 500 daily 2016
Click chart to enlarge.

In the unlikely event that the main wave count is invalidated below 2,119.12 an hourly chart would be required for this alternate.

Intermediate wave (X) will fit as a regular contracting triangle. Intermediate wave (Y) should subdivide as a zigzag to deepen the correction. Within intermediate wave (Y), the correction for minor wave B may not move beyond the start of minor wave A above 2,169.60.

Upwards movement for today is choppy and overlapping, It looks corrective and will subdivide as a zigzag.

TECHNICAL ANALYSIS

WEEKLY CHART

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

The lilac trend line has strong technical significance. Price has broken through resistance, turned down to test support, and is now moving up and away from this line. It is reasonable to conclude that a new all time high is a likely consequence of this typical behaviour.

The week before last closed green and has some support from volume. A further rise in price overall would be expected to follow. Last week is an inside week and closes red on lighter volume. The decline in price was not as well supported as the prior rise in price. This supports a bullish outlook for the mid term at least.

On Balance Volume the week before last came up to touch the purple trend line. It has found resistance and moved down from there. A break above the purple line would be a reasonably strong bullish signal. If OBV moves lower, it should find support at the yellow lines.

RSI is not extreme and exhibits no divergence at the weekly chart level to indicate weakness in price. There is room for price to rise further.

DAILY CHART

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

Price has broken out of the triangle downwards on a strong downwards day with some increase in volume. Downwards movement for this session is stronger than the three prior sessions, and the move down from price is supported by volume.

Now a small upwards day comes with lighter volume than the prior strong downwards day. This upwards day looks like a small counter trend bounce and not the first day of a new upwards trend. The small range and light volume do not support the main Elliott wave count.

ADX is indicating there is a downwards trend in place. ATR does not agree as it is still overall flat. Bollinger Bands are still contracting, so they disagree. Overall, a downwards trend is not yet clearly indicated.

On Balance Volume remains constrained with resistance at the purple line and support at the yellow line. There is short term divergence between price and OBV today: price made a new low below the low of the 4th of October, five sessions ago, but OBV has failed to make a corresponding new low. This short term divergence is bullish and indicates weakness in price.

If price moves lower, then it may be stopped by OBV when it finds support at the yellow line.

RSI is still close to neutral. There is plenty of room for price to rise or fall. There is no short term divergence between price and RSI between today’s low and the low five sessions prior on the 4th of October.

MACD has given a short term sell signal with a cross of MACD line below the signal line.

Stochastics is not yet extreme, but today it is getting close. If price continues lower here, it may find support about 2,120 while Stochastics moves closer to oversold.

VOLATILITY – INVERTED VIX CHART

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

There are a few instances of multi day divergence between price and inverted VIX noted here. Bearish divergence is blue. Bullish divergence is yellow. It appears so far that divergence between inverted VIX and price is again working to indicate short term movements spanning one or two days.

Price had overall a small rise today, but inverted VIX moved reasonably lower. Normally, when price rises volatility should decline and inverted VIX should move higher. But today, while price moved higher, volatility increased as inverted VIX moved lower. This situation is not normal. VIX is giving a bearish signal with this divergence today.

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.

Short term bullish and bearish divergence is again working between price and the AD line to show the direction for the following one or two days.

There is still mid term divergence between price and the AD line: price has made a new low below the prior low of the 16th of September, but the AD line has not made a corresponding new low. This divergence is bullish and indicates weakness in price. It may be followed by one more day of upwards movement.

DOW THEORY

Major lows within the old 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 bear market from November 2014:

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 @ 08:29 p.m. EST.