The preferred bear Elliott wave count is better supported by classic technical analysis.
Summary: A downwards trend is still in place. The preferred bear wave count expects a big third wave is in the early stages. The final invalidation point is at 2,116.48. The target for this third wave is at 1,428. In the short term, a B wave may move higher tomorrow up to about 2,030. If price continues lower tomorrow, that idea may be discarded below 1,958.46. At that stage, expect surprises to the downside.
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.
Last published monthly charts can be seen 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
DAILY CHART – COMBINATION OR FLAT
This wave count is bullish at Super Cycle degree.
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 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 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.
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. Leading diagonals in first wave positions are often followed by very deep second wave corrections. When the structure of minor wave 1 is complete, then a deep zigzag for minor wave 2 would be expected which may find resistance at the upper cyan trend line.
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 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.
Today, both hourly charts will look at the structure of movement from the swing high on 29th December.
This hourly chart follows on directly from the labelling of the main daily chart.
The final fifth wave of the diagonal is underway. It is most likely to subdivide as a zigzag.
Within the zigzag, it would be very unlikely for minuette wave (b) to be over at Tuesday’s high. It would have lasted just one day and be too brief and shallow. What is much more likely for the possible B wave is for it to continue further.
There are 23 possible corrective structures a B wave may take. At this stage, it may be an expanded flat, combination or a running triangle. An expanded flat is more common, so that is how I am labelling it. But if it continues further, the labelling may change as the structure becomes clearer.
Of all Elliott waves, it is B waves which exhibit the greatest variety in form and structure, are the hardest to analyse, and the most difficult to trade. Low degree B waves should not be traded. They are too unpredictable, most especially the small movements within them which go against the trend one degree higher.
If minuette wave (b) is unfolding as an expanded flat as labelled, then within it subminuette wave a subdivides as a three. Subminuette wave b also subdivides as a three and is a 1.34 length of subminuette wave a. This is within the normal length of 1 to 1.38.
There is no maximum length for a B wave within a flat correction, but there is an Elliott wave convention which expects that when the possible B wave reaches 2 times the length of the A wave the probability that a flat is unfolding is so low the idea should be discarded. That price point would be reached at 1,958.46. A new low below this point would mean that minuette wave (b) was over and minuette wave (c) downwards is underway towards the target.
At 2,030 subminuette wave c would reach 1.618 the length of subminuette wave (a).
Minuette wave (b) may not move beyond the start of minuette wave (a) above 2,081.56.
The possible diagonal for minor wave 1 is expanding, so minute wave v must be longer than minute wave iii. Minute wave v must end below 1,980.98. This is a minimum, not a target. When minuette wave (b) can be confirmed as over, then the ratio between minuette waves (a) and (c) may be used to calculate the downwards target.
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 structure downwards, and at this stage it may be an incomplete ending expanding diagonal. Intermediate wave (4) may not move into intermediate wave (1) price territory below 1,948.04.
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
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.
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 flat 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. 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.
For the bear wave count today, I have two ideas for downwards movement from the end of intermediate wave (2): either a series of overlapping first and second waves or a leading expanding diagonal. This first chart looks at a series of overlapping first and second waves. The only problem with this idea is the brevity of minute wave ii when compared to minuette wave (ii) one degree lower which lasted ten times the duration.
The idea presented with the bull wave count also works in the same way for the bear wave count: a leading expanding diagonal may have begun at the high labelled minute wave ii.
It is possible to see the upwards movement to the high labelled subminuette wave ii as a complete zigzag.
If this idea of a series of overlapping first and second waves is correct, then subminuette wave ii should be over. There would now be a third wave down at five wave degrees. The third wave would now be getting very close to the middle strongest part. There should be enough of a strong downwards pull to force low degree second wave corrections such as subminuette wave ii to be more brief and shallow than normal.
At 1,919 minuette wave (iii) would reach 1.618 the length of minuette wave (i). If this target is wrong, it may not be low enough. The next Fibonacci ratio in the sequence is 2.618 which would be reached at 1,818.
Another first wave for micro wave 1 may now be complete. Micro wave 2 may move slightly higher. The preferred target for it would be the 0.382 Fibonacci ratio about 1,995. It should be over quickly.
This idea expects big surprises to the downside. A strong increase in downwards momentum should unfold over the next few days.
This is not my preferred wave count for short term movement, but the implications are very important. It is entirely viable and members must be mindful of the potential for very strong downwards movement very soon.
If the next three days price action does not see price move very strongly lower, then this idea of overlapping first and second waves may be discarded.
ALTERNATE DAILY CHART
This bear wave count is identical to the first bear daily chart right up to the high labelled intermediate wave (2).
Thereafter, it looks at the possibility that a first wave leading diagonal may be unfolding.
The diagonal would be expanding and may have begun earlier than the chart for the bull daily wave count. Minute wave iii is longer than minute wave i, and minute wave iv is longer than minute wave ii. The trend lines diverge, just.
Minute wave v must be longer than minute wave iii, so it must end below 1,970.55.
Leading diagonals in first wave positions are often followed by very deep second wave corrections. When minor wave 1 may be seen as complete, then minor wave 2 should unfold over a couple of weeks and may find resistance at the upper cyan trend line. It may not move beyond the start of minor wave 1 above 2,116.48.
The target for intermediate wave (3) is also the same, only the pathway along the way down here is seen differently.
In the short term, the structure on the hourly chart is also the same as the first hourly chart. A zigzag downwards for minute wave v would be unfolding. In the short term, minuette wave (b) may not move above the start of minuette wave (a) at 2,081.56.
Once the zigzag downwards is complete, then how high the next bounce goes and how long it lasts may begin to illuminate which of the three ideas for this move since the high on 2nd November (here labelled intermediate wave (2) ) is correct.
Click chart to enlarge. Chart courtesy of StockCharts.com.
Volume for Wednesday is respectably higher than the prior upwards day. Again, a fall in price is supported by volume although it was not stronger than the last downwards day. Since the high of 3rd November, 2015, there is a series of lower highs and lower lows. Each time price falls volume rises and each time price rises volume falls. This volume and price profile is bearish.
The long lower wick for Wednesday’s candlestick is a little bullish. The bears pushed price comfortably lower but were not able to keep price at lows for the day. The bulls rallied at the end of the session to push price upwards by a third of the daily range. Overall, the candlestick is bearish but with a slight bullish hue. This may be a warning that the first hourly Elliott wave chart could be correct; we may see a green candlestick tomorrow.
Price found support today at the purple horizontal trend line about 1,990, closing close to it. If price manages to close below this line, then I would expect some free fall to the next support line about 1,870. But while price has not closed below 1,990, it must be accepted that a bounce could occur here to the next line of resistance at 2,020.
Both ADX and ATR are in agreement today: there is a trend and it is down.
I have drawn a new very short term trend line on On Balance Volume in yellow. If tomorrow OBV breaks below that line, it would be further bearish indication. So far OBV keeps breaking trend lines to the downside and this is usually a fairly reliable indicator. OBV remains bearish.
Stochastics is now reaching oversold, but in a trending market this oscillator may remain extreme for long periods of time. The best use of it is to look for small divergences to warn of corrections against the trend.
RSI is still close to neutral. There is plenty of room for this market to fall.
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 07:04 p.m. EST.