This is the last analysis for 2015. The next analysis will be done after market close for Monday, 4th January, 2016.
This analysis will cover the bigger picture at the monthly chart level and will provide as many alternate ideas as I can see (within reason) at the daily chart level.
May you all have a very Merry Christmas and a Happy New Year!
Summary: A downwards trend is still expected to be in place while price remains below 2,104.27. In the short term, the current downwards wave is either an impulse or a leading diagonal; both are about equally as likely. There are two hourly charts in this analysis that look at these two possibilities and both require downwards movement to a minimum at 1,976.13. Additionally, both expect price is in the early stages of a big third wave down. But if the diagonal scenario is correct, we may yet see another deep second wave correction coming up soon.
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.
If I was asked to pick a winner (which I am reluctant to do) I would say the bear wave count has a higher probability. It is better supported by regular technical analysis at the monthly chart level, it fits the Grand Supercycle analysis better, and it has overall the “right look”.
New updates to this analysis are in bold.
BULL ELLIOTT WAVE COUNT
This wave count is bullish at Super Cycle degree.
The two big bear markets of 2000 – 2002 and 2007 – 2009 may have been waves A and C within a large flat correction for a Super Cycle wave IV. The bull market since 2009 may be Super Cycle wave V.
Cycle waves I, II and III are complete within Super Cycle wave V. Cycle wave II was a relatively shallow 0.41 zigzag lasting 12 weeks. Cycle wave III is 55.97 points short of 1.618 the length of cycle wave I. This is a reasonable difference, but as it is less than 10% the length of primary wave 3 (it is 5.2%) I consider this an acceptable Fibonacci ratio.
Draw an Elliott channel about this bull market: draw the first trend line from the ends of cycle waves I to III, then place a parallel copy on the end of cycle wave II. Cycle wave IV may find support at the lower edge of this channel.
Cycle wave IV may not move into cycle wave I price territory below 1,370.58. If this bull wave count is invalidated by downwards movement, then the bear wave count shall be fully confirmed.
Cycle wave III shows an increase in upwards momentum beyond cycle wave I.
Cycle wave II was a shallow 0.41 zigzag lasting three months. Cycle wave IV should exhibit alternation in structure and maybe also alternation in depth. Cycle wave IV may be a flat, combination or triangle. The two daily charts below look at these three possibilities.
Cycle wave IV may end within the price range of the fourth wave of one lesser degree. Because of the good Fibonacci ratio for primary wave 3 and the perfect subdivisions within it, I am confident that primary wave 4 has its range from 1,730 to 1,647.
DAILY CHART – COMBINATION OR FLAT
If a zigzag is complete at the last major low as labelled, then cycle wave IV may be unfolding as a flat, combination or triangle.
Primary wave C should subdivide as a five and primary wave Y should begin with a zigzag downwards. This downwards movement is either intermediate waves (1)-(2)-(3) of an impulse for primary wave C or minor waves A-B-C of a zigzag for intermediate wave (A). Both these ideas need to see a five down complete towards the target, so at this stage there is no divergence in expectations regarding targets or direction.
Primary wave A or W lasted three months. Primary wave C or Y may be expected to also last about three months.
Within the new downwards wave of primary wave C or Y, a first and second wave, or A and B wave, is now complete. Intermediate wave (2) or minor wave B lasted a Fibonacci 13 days exactly. At 1,850 intermediate wave (3) or minor wave C would reach 2.618 the length of intermediate wave (1). At this stage, this will be the sole target for this third (or C) wave to end as it fits better with more short term targets calculated at the hourly chart level.
No second wave correction may move beyond its start above 2,104.27 within intermediate wave (3) or minor wave C. This invalidation point allows for the possibility that there may be a leading diagonal unfolding for a first wave down (charted with the bear below).
DAILY CHART – TRIANGLE
Cycle wave IV may unfold as a shallow triangle. This would provide alternation with the 0.41 zigzag of cycle wave II.
The subdivisions within the triangle are changed today. This has a better fit.
The triangle may be either a regular contracting or regular barrier triangle. An expanding triangle would also be technically possible, but as they are the rarest of all Elliott wave structures I would only chart and consider it if it shows itself to be true. Prior to that, the probability is too low for consideration.
Primary wave B would be a complete zigzag. The subdivisions all fit and now it has a clearer three wave look to it.
Primary wave C should unfold downwards as a single or double zigzag. So far it may be a single zigzag, with intermediate wave (C) unfolding as an ending expanding diagonal. At 1,947 intermediate wave (C) would reach 1.618 the length of intermediate wave (A).
Primary wave C may not move below the end of primary wave A at 1,867.01. This invalidation point is black and white for both a contracting and barrier triangle.
When primary wave C is complete, then primary wave D upwards should unfold as a single or double zigzag. For a contracting triangle, primary wave D may not move beyond the end of primary wave B above 2,116.48. For a barrier triangle, primary wave D should end about the same level as primary wave B at 2,116.48. The triangle would remain valid as long as the B-D trend line remains essentially flat. This invalidation point is not black and white. This is the only Elliot wave rule with any grey area.
Thereafter, primary wave E downwards may not move beyond the end of primary wave C.
The whole structure moves sideways in an ever decreasing range. The purpose of triangles is to take up time and move price sideways. Price exits the triangle in the same direction that it entered, in this case up. When the triangle is complete, then the bull market would be expected to resume. This triangle should take several months yet to complete.
A third wave (or C wave) down is expected to be unfolding for both bull and bear wave counts. It is either beginning with a series of overlapping first and second waves, or it is beginning with a leading expanding diagonal for a first wave.
This first hourly wave count looks at the idea of overlapping first and second waves. The hourly wave count presented for the bear looks at a diagonal unfolding and works in the same way for this bull.
Both hourly wave counts work for bull and bear.
There may be two overlapping first and second waves complete. For the bull, this would be minor waves 1 and 2 and minute waves i and ii. For the bear, this degree of labelling would be one lower.
At 1,914 minute wave iii would reach 1.618 the length of minute wave i.
Although my direction arrow shows we should expect a bounce on Monday, this needs confirmation. First a breach of the small narrow channel about minuette wave (i) is required. If price opens on Monday with downwards movement, then subminuette wave v may be continuing. If that happens, redraw the Fiboancci retracement.
When the channel about minuette wave (i) is very clearly breached, then expect a bounce has begun. Expect minuette wave (ii) to retrace to either the 0.382 or 0.618 Fibonacci ratio of minuette wave (i). Minuette wave (ii) may not move beyond the start of minuette wave (i) above 2,076.71.
I have given some thought to what we would need to see to eliminate the diagonal idea and confirm the idea presented here. Because the diagonal is expanding there is technically no limit to the downwards end of it, and it may even overshoot its lower trend line. There is no lower price point which would confirm this idea and invalidate the diagonal. My conclusion must be to expect a strong third wave down and look out for surprises to the downside, UNLESS price breaks above 1,993.26 (after further downwards movement to 1,976.13 or below). When minute wave iii may be complete, then the following correction for minute wave iv may not move into minute wave i price territory above 1,993.26.
BULLISH ALTERNATE WAVE COUNT
I can again see the possibility that cycle wave IV is over and upwards movement may be the start of cycle wave V.
If cycle wave IV is over, as labelled, then there is inadequate alternation between cycle waves II and IV. Cycle wave II was a shallow 0.41 zigzag. Here, cycle wave IV is a more shallow 0.25 zigzag. Both are the same structure.
If cycle wave V has begun, then primary wave 1 within it may be an incomplete impulse. At 2,557 cycle wave V would reach equality in length with cycle wave I. If it also is the same in duration as cycle wave I, then it may last a year.
Intermediate wave (2) was a deep 0.94 expanded flat within primary wave 1. Intermediate wave (4) would be an incomplete zigzag which would also be relatively deep when it is complete. Minor wave C must complete as a five wave impulse downwards. Intermediate wave (4) may not move into intermediate wave (1) price territory below 1,948.04.
Intermediate wave (4) would be unfolding as a big zigzag. Within intermediate wave (4), the structure of minor wave C is incomplete and must complete as a five wave structure. It may be unfolding as an ending expanding diagonal. The fifth wave must end below 1,976.13, so that it is longer than the third wave and meets the rules for wave lengths of an expanding diagonal. It may find support at the cyan trend line.
This wave count does not have any support from regular technical analysis. I do not have any confidence in it. It is presented as a “what if?” only, to consider all possibilities.
BEAR ELLIOTT WAVE COUNT
What if the big flat correction labelled super cycle wave (w) or (a) was only the first three in a larger correction?
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.
There are two ideas presented in this chart: a huge flat correction or a double flat / double combination. The huge flat is more likely. They more commonly have deep B waves than combinations have deep X waves (in my experience).
A huge flat correction would be labelled super cycle (a)-(b)-(c). It now expects a huge super cycle wave (c) to move substantially below the end of (a) at 666.79. C waves can behave like third waves. This idea expects a devastating bear market, and a huge crash to be much bigger than the last two bear markets on this chart.
The second idea is a combination which would be labelled super cycle (w)-(x)-(y). The second structure for super cycle wave (y) would be a huge sideways repeat of super cycle wave (a) for a double flat, or a quicker zigzag for a double combination. It is also possible (least likely) that price could drift sideways in big movements for over 10 years for a huge triangle for super cycle wave (y).
Importantly, there is no lower invalidation point for this wave count. That means there is no lower limit to this bear market.
The downwards movement labelled intermediate wave (1) looks like a five. If minor wave 2 is seen as a double zigzag with a triangle for wave X within it, then the subdivisions all fit nicely.
Ratios within intermediate wave (1) are: minor wave 3 is 7.13 points short of 6.854 the length of minor wave 1, and minor wave 5 is just 2.82 points longer than 0.618 the length of minor wave 3. These excellent Fibonacci ratios add some support to this wave count.
Intermediate wave (2) was a very deep 0.93 zigzag (it will also subdivide as a double zigzag). Because intermediate wave (2) was so deep the best Fibonacci ratio to apply for the target of intermediate wave (3) is 2.618 which gives a target at 1,428. If intermediate wave (3) ends below this target, then the degree of labelling within this downwards movement may be moved up one degree; this may be primary wave 3 now unfolding and in its early stages.
Within intermediate wave (3), minor waves 1 and 2 are complete. The upwards movement for minor wave 2 does have a strong three wave look to it at the daily chart level. Minor wave 2 was another deep correction at 0.87 of minor wave 1. At 1,850 minor wave 3 would reach 2.618 the length of minor wave 1. If price falls through this first target, then the next Fibonacci ratio in the sequence is 4.236 which would be reached at 1,693. If minor wave 3 is very extended, then the degree of labelling for all downwards movement from the all time high will be moved up one degree.
It is still possible (but still less likely) that primary wave 1 is unfolding as a leading diagonal. I will keep that chart up to date and will publish it if and when it begins to diverge from the idea presented here. For now I want to keep the number of charts published more manageable.
A line from the ends of intermediate wave (2) to minor wave 2 is drawn. This line may show where any further upwards movement finds resistance.
From the end of minor wave 2, the following downwards movement is either a series of two overlapping first and second waves as labelled here (see detail for this idea on the hourly bull chart) or a leading expanding diagonal charted below.
ALTERNATE DAILY CHART
This bear wave count is identical to the first bear daily chart right up to the high labelled minor wave 2.
Thereafter, it looks at the possibility that a first wave leading diagonal may be unfolding.
When minute wave i is complete, then minute wave ii may not move beyond its start above 2,104.27. Second wave corrections to follow leading diagonals in first wave positions are commonly very deep. When the diagonal may be complete, then draw a Fibonacci retracement along its length. Look for minute wave ii to correct at least to the 0.618 Fibonacci ratio of minute wave i, but it may be even deeper. It should look like a clear three on the daily chart.
The target for minor wave 3 is still the same. At 1,850 it would reach 2.618 the length of minor wave 1.
At this stage, this overlapping downwards movement does look suspiciously like an expanding diagonal. This resolves the problem that the first hourly chart has of a breach of the base channel. All the subdivisions here fit well.
Leading diagonals require sub waves 2 and 4 to be zigzags. Subwaves 1, 3 and 5 are also most commonly zigzags but they may also be impulses. Ending diagonals require them to be zigzags.
Minuette wave (iii) does have a slightly better fit as a zigzag and does look more like a zigzag.
Second and fourth waves of diagonals are normally very deep. The normal range is from 0.66 to 0.81 of the first and third waves. Here, both minuette waves (ii) and (iv) are 0.83 of minuette waves (i) and (iii). Slightly deeper than normal but not by too much. This gives the structure a reasonably typical look for a diagonal.
Minuette wave (iii) is longer than minuette wave (i) and minuette wave (iv) is longer than minuette wave (ii). The trend lines diverge. The diagonal is expanding. Minuette wave (v) must end below the end of minuette wave (ii) as the fifth wave of a leading diagonal may not be truncated. It must also be longer than the third wave, so that the rules for wave lengths of an expanding diagonal are met. It must end below 1,976.13.
Minuette wave (v) is most likely to subdivide as a zigzag. Subminuette wave b may not move beyond the start of subminuette wave a above 2,076.71 within the zigzag. Subminuette wave b should find strong resistance at the upper (ii)-(iv) diagonal trend line. Diagonals normally adhere very well to their trend lines.
Again, this is unconfirmed although my arrow shows to expect upwards movement for Monday. First, expect that price can continue lower while it remains within the small channel drawn here about subminuette wave a. Only when that small channel is breached, then should a bounce for subminuette wave b be expected.
The diagonal may find support and may end about the lower cyan trend line which is copied over here from the daily chart. But in order to meet the minimum price of 1,976.13, the diagonal may need to overshoot that trend line. It depends how time consuming subminuette wave b turns out to be.
When the diagonal may potentially be complete, then the price point which will differentiate this diagonal idea from the other idea of overlapping first and second waves on the first hourly chart will be 1,993.26. The first idea will need to see a series of fourth wave corrections which may not move back into their first wave price territories, so for that idea price should remain below 1,993.26.
But for this diagonal idea a deep second wave correction should unfold upwards.
If price moves lower to 1,976.13 or below and then turns around and moves above 1,993.26, then this should be the wave count which is used. At that stage, a diagonal would be complete and a deep second wave should be underway.
Minute wave ii may find resistance at the upper cyan trend line copied over from the daily chart.
ALTERNATE BEAR ELLIOTT WAVE COUNT
Intermediate wave (2) may not be over. It may be continuing further as an even deeper zigzag.
This wave count is changed slightly today.
Minor wave B may be over as a double zigzag. Minor wave C upwards may have begun. Minor wave C may not exhibit a Fibonacci ratio to minor wave A. A target calculation using 0.618 of A is invalid and using 0.382 of A results in a truncation.
Minor wave C is highly likely to make at least a slight new high above the end of minor wave A at 2,116.48 to avoid a truncation.
Intermediate wave (2) may not move beyond the start of intermediate wave (1) at 2,134.71. This invalidation point may not be breached by any amount at any time frame for the bear wave count to remain valid.
Minor wave C must subdivide as a five wave structure. Within minor wave C, minute wave ii may not move beyond the start of minute wave i below 1,993.26.
At the end of this week, the depth and strength of the downwards move labelled minute wave ii does not look like a correction. This wave count has a low probability. It is presented only as a “what if” to consider all possibilities.
Click chart to enlarge. Chart courtesy of StockCharts.com.
The long trend line on price is drawn from the low of March 2009, at 666.79 to the low in October 2011. This trend line was repeatedly tested, breached, and then provided resistance in August 2015. Price has closed well over 3% of market value below it. Trend lines like this one which are reasonably shallow, long held and repeatedly tested are highly technically significant. The breach tells us the market has switched from bull to bear. This supports the bear wave count over the bull.
Volume has overall declined during the bull market spanning over 6 years. The rise in price was not supported by volume at the monthly chart level. This also supports the bear wave count over the bull.
RSI shows double negative divergence with price as the final highs were made. Finally, a failure swing on RSI completes a pattern which was last seen in September 2000, and October 2007. This pattern indicates a large bear market may begin from here and supports the bear wave count over the bull.
On Balance Volume also shows divergence with price (pink line) as the final highs were made. On Balance Volume has breached a very long held trend line (green). This is further support for the bear wave count over the bull.
Since the all time high in May, downwards movement is coming with an increase in volume at the monthly chart level. This further supports the bear wave count over the bull
Not only is there nothing bullish about this picture at the monthly chart level, it is very bearish indeed. It indicates that recent downwards movement is more likely to be the start of a large bear market than it is to be another correction within a continuing bull market.
Click chart to enlarge. Chart courtesy of StockCharts.com.
Volume for Friday’s downwards day strongly increased. The downwards move in price was supported by volume.
ADX turned upwards and is above 20 for Friday. There is a downwards trend indicated with the -DX line above the +DX line. ATR agrees. The range price is moving in is increasing which is typical this market when it is trending.
Price is below the 200 day moving average. The trend looks to be very clearly down.
On Balance Volume found strong resistance at the pink trend line. It may now find some support at the cyan trend line. A break below that cyan line would be further bearishness from OBV.
RSI is not yet oversold. There is plenty of room for this market to fall. I would not expect this downwards trend to have another major interruption until RSI shows oversold and then also shows some divergence with price. This is a common pattern at lows for the S&P.
For the bear wave count I am waiting for Dow Theory to confirm a market crash. I am choosing to use the S&P500, Dow Industrials, Dow Transportation, Nasdaq and I’ll add 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.
At this stage, if the S&P500 and Nasdaq also make new major swing lows, then Dow Theory would confirm a major new bear market. At that stage, my only wave count would be the bear wave count.
DJT: 7,700.49 – this price point was breached.
DJIA: 15,855.12 – this price point was breached.
Russell 2000: 1,343.51 – this price point was breached.
This analysis is published about 03:29 a.m. EST on 19th December, 2015.