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S&P 500 Elliott Wave Technical Analysis – 7th June, 2016

Downwards movement was again expected for the session and again failed to materialise.

Summary: Price is persistently weak but no trend change is yet indicated. Earliest confidence in a trend change would come with a new low below 2,085.36. A breach of the large black channel on the daily chart would provide further confidence. Finally, a new low below 2,025.91 would provide confirmation.

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.

Price may find resistance at the lilac trend line if it continues higher.

DAILY CHART

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

So far primary wave 2 would be a 0.95 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 still no Fibonacci ratio between intermediate waves (A) and (C).

Intermediate wave (C) must be a five wave structure. It may be either an impulse or an ending diagonal. It would be unfolding as an impulse, not a diagonal. The structure may be complete, but as yet there is no evidence of a trend change.

Draw a channel about primary wave 2 using Elliott’s technique for a correction: the first trend line from the start of the zigzag, then a parallel copy on the end of intermediate wave (A). When this channel is breached by downwards movement it would be indicating a possible trend change. A new low below 2,025.91 would provide 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 because at the end of this session there is no confirmation of a trend change. 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 1,593 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 0.95 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 1,269 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.

HOURLY CHART

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

The hourly chart shows the whole structure of intermediate wave (C). This upwards movement is seen as a five wave impulse for all wave counts, so this one hourly chart will suffice for both bear and the bull wave count. The degree of labelling only would be different.

A five wave impulse upwards from the low labelled intermediate wave (B) on 19th of May may now be complete, but the fifth wave may also continue higher.

This wave count at the hourly chart level agrees with MACD. The strongest piece of movement is the third wave. The fifth wave exhibits weaker momentum and divergence with MACD.

Minor wave 3 is 3.05 points longer than 1.618 the length of minor wave 1. If minor wave 5 is over at today’s high, then it would be 1.41 points longer than equality in length with minor wave 1.

The first indication of a potential trend change would come with a breach of the blue channel containing intermediate wave (C). Along the way down, expect to see some support, and a bounce, at the cyan bear market trend line.

A new low below 2,085.36 could not be a second wave correction within minor wave 5, so at that stage minor wave 5 would have to be over. This price point needs only to be passed by any amount at any time frame.

Thereafter, the same rule is used for the confirmation point at 2,025.91. A new low by any amount at any time frame below this point could not be a second wave correction within intermediate wave (C), so at that stage intermediate wave (C) would have to be over.

To the upside, price may find resistance at the lilac trend line now. It looks like today this line may be stopping price from moving any further.

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.

TECHNICAL ANALYSIS

WEEKLY CHART

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

Price is the final determinator and the most important aspect of market analysis. So what has price been doing since the all time high in May 2015?

Price today has made an important new high above the prior major high of November 2015. Price is now finding resistance at the lilac line. It can no longer be said that price is making lower highs and lower lows because it no longer has a lower high. This is the most bullish indication from price for many months.

Last week completes a small doji pattern with lighter volume. This represents a balance between bulls and bears for the week and indecision. The long lower wick is slightly bullish while the red colour is slightly bearish.

On Balance Volume no longer shows divergence with price: from the high in November 2015 to the high in April 2016 both OBV and price have now made new highs. The weakness up until today though still did exist.

Volume is declining while price has essentially moved sideways for the last ten weeks in a zone delineated by brown trend lines. The longer price meanders sideways the closer a breakout will be. During this sideways range, it is a downwards week which has strongest volume suggesting a downwards breakout may be more likely.

The strong green candlestick two weeks ago the most bullish signal for some time. With this now followed by a doji, some of this bullishness is dissipated.

The 40 week moving average has turned upwards, another bullish signal. However, this has happened before in October 2015 yet it was followed by a strong downwards wave. On its own this bullish signal does not necessarily mean price is going to make new all time highs.

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.

Some small increase in volume for today’s session offers some support for the rise in price. Volume, however, remains relatively light: during the last seven sessions it is still two downwards days which have strongest volume.

ADX still indicates an upwards trend is in place. ATR still disagrees. There is still something wrong with this trend; a sustainable trend should not come with declining daily range.

More data is shown today on the chart. On Balance Volume trend lines are redrawn. The purple line is essentially the same, so a break below it would be a strong bearish indicator. The yellow line is redrawn. This line is repeatedly tested, so it offers reasonable technical significance. A break above this line would be a reasonable bullish signal.

There is divergence between price and RSI now. Price has made a new high above the prior swing high of 20th of April but RSI has failed to make a corresponding new high. This regular bearish divergence indicates weakness in price and exhaustion of bulls. Divergence between price and RSI is usually a fairly reliable indicator. It does not say price must turn down here, but it does indicate a trend change is very likely to occur either here or very soon.

There is also divergence over the last few days between price and Stochastics. Stochastics is flat and today declined while price has made important new highs. However, this divergence is not very reliable.

There is also strong divergence between price and MACD at the daily chart level. Again, this divergence between price and MACD is not always very reliable. It is one more small piece of the puzzle only.

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.

The divergence noted yesterday between price and VIX is no longer evident with the hew high today above November 2015. 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.

There is also very short term regular bearish divergence (pink lines). VIX did not make a corresponding new high as price made a new high in the last two days. This indicates exhaustion for bulls and underlying weakness in price.

Now price has moved higher for two days in a row completing green daily candlesticks yet VIX has moved lower. This short term divergence between price and VIX is unusual. It indicates further exhaustion from bulls. This trend in price is weak, especially for the last two days.

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.

The hidden bearish divergence noted up to two days ago between price and the AD line no longer is evident with price now making new highs. The fact remains that it did exist though up until two days ago. Until two days ago price was exhibiting weakness in relation to market breadth.

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 not closed above this point yet.
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.

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