A green candlestick was expected for Tuesday’s session which is exactly what happened. We have a green doji candlestick.
Summary: I expect downwards movement tomorrow. The target for the bull wave count is at 1,866. The target for the bear wave count is at 1,846.
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Bullish Wave Count
All daily, weekly and monthly charts are viewed on a semi log scale.
The aqua blue trend lines are critical. Draw the first trend line from the low of 1,158.66 on 25th November, 2011, to the next swing low at 1,266.74 on 4th June, 2012. Create a parallel copy and place it on the low at 1,560.33 on 24th June, 2013. A breach of the lower trend line by more than 3% of market value would indicate a trend change. To see how I have drawn these trend lines go here.
There are a couple of things about this wave count of which I am confident. I see minor wave 3 within intermediate wave (1) as over at 1,729.86 (19th September, 2013). It has the strongest upwards momentum and is just 0.76 longer than 2.618 the length of minor wave 1. At 455 days duration this is a remarkably close Fibonacci ratio. The subdivisions within it are perfect.
Minor wave 5 is 20.24 points longer than 1.618 the length of minor wave 1. This is a 5.4% variation. I consider any variation less than 10% to be acceptable.
The large maroon – – – channel is copied over from the weekly chart. It is drawn in exactly the same way on bull and bear wave counts. For the bull wave count this channel is termed a base channel about primary waves 1 and 2. A lower degree second wave should not breach the lower edge of a base channel drawn about a first and second wave one or more degrees higher. The lower maroon – – – trend line differentiates the bull and bear wave counts at cycle degree and monthly chart level.
Intermediate wave (2) is expected to be a very shallow second wave correction. The support provided by the base channel should be stronger than the tendency of a second wave to be deep. Intermediate wave (1) lasted 35 months. At this stage it looks like intermediate wave (2) will be very brief, and may last only four weeks and so it may end this week.
I have managed to get Motive Wave today to draw my trend lines and channels correctly. The lower edge of the maroon channel is slightly overshot. If this lower maroon trend line is breached by a full daily candlestick that would be highly technically significant. I will be very cautious though and wait for a breach of this channel by one full weekly candlestick before calling a cycle degree trend change.
The strong overshoot of the channel about intermediate wave (2) indicates an unfolding third wave down, and so fits the bearish wave count better than this bullish wave count. But I will not swap them over until the bearish wave count is confirmed.
At 1,866 minute wave v would reach 0.618 the length of minute wave i. There is no Fibonacci ratio between minute waves iii and i so I would expect to see a Fibonacci ratio for minute wave v. I am calculating the highest target for this wave count because the maroon channel should not be breached by much and not for long. For this bullish wave count downwards movement should not be too much lower and should end very soon.
Once minute wave v completes the zigzag for intermediate wave (2) then subsequent movement above 1,926.03 would provide a lot of confidence in the bullish wave count. Only a new high above 2,019.26 would provide full confirmation.
Bearish Wave Count
We should always assume the trend remains the same, until it is proven otherwise. The trend is your friend. I will assume the S&P 500 remains in a bull market until this wave count is confirmed.
The differentiation between the bull and bear wave count is the maroon – – – channel. For the bear wave count this channel is a corrective channel about cycle wave b or x zigzag. When a channel drawn about a zigzag is breached that provides trend channel confirmation that the zigzag is over and the next wave is underway.
If this trend line is breached by a full weekly candlestick below it and not touching it then this bear wave count would be my main wave count and I would then calculate downwards targets at cycle degree.
Before final confirmation of this wave count we now have indication it may be correct with a clear breach of the lower aqua blue trend line. This line began in November 2011. It is reasonably shallow and repeatedly tested, and is extremely technically significant. A breach of this trend line by 3% of market value (60.58 points) would indicate a trend change.
At 1,846 minute wave v would reach equality in length of minute wave i. I am recalculating the target today for minor wave 3 to end because there is no Fibonacci ratio between minute waves iii and i, so I expect to see a ratio for minute wave v to either of iii or i. Equality with the first wave is the most common ratio for a fifth wave. At this point minor wave 3 would have no Fibonacci ratio to minor wave 1.
Minor wave 4 may not move into minor wave 1 price territory. When this current impulse downwards for minor wave 3 (and for the bull wave count for minor wave C) is complete then subsequent movement above 1,926.03 would invalidate an unfolding impulse downwards and reduce the probability of this bear wave count. At that stage it would be possible that a leading diagonal could be unfolding in a first wave position, with the first wave of the diagonal a zigzag. This is a much less likely structure than an impulse though. That idea would only be invalidated with a new high above 2,019.26.
This analysis is published about 09:47 p.m. EST.