Downwards movement continued as the preferred hourly chart expected.
Summary: Divergence (slight) with RSI and VIX indicates this downwards move is over for now. This increases the probability of the leading diagonal scenario. If price breaks above the upper edge of the base channel on the hourly bear wave count tomorrow, then this scenario will be preferred. The possibility that these two indicators are wrong and that price may yet rocket off to the downside tomorrow will remain while price remains below the upper edge of the base channel.
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.
There may now again be a complete downwards first wave leading expanding diagonal. Due to classic technical analysis, it is my judgement today that this idea should be taken very seriously. Price may be ready for a multi day bounce.
If price moves above 1,986.02, then this idea will be used for both bull and bear wave counts. If a leading diagonal is complete, then it should be followed by a very deep second wave correction which may not move beyond the start of the first wave above 2,104.27.
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) an ending expanding diagonal.
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.
Primary wave C may now be a complete zigzag. 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.
This hourly chart follows on directly from the labelling of the main daily chart.
The zigzag for minute wave v has again moved lower and again may be seen as complete.
Within the leading diagonal, minute wave iii was just 0.39 points longer than 1.618 the length of minute wave i. Minute wave v would now be 17.72 points longer than 1.618 the length of minute wave iii. This is just less than 10% the length of minute wave v, so still just an acceptable Fibonacci ratio (although in practical terms because these waves are big it is a big difference).
If price breaks above the green channel which contains this zigzag, that may be taken as confirmation that upwards movement will continue for several days, maybe about two weeks, for a very deep second wave correction.
Minor wave 2 should be deeper than the 0.618 Fibonacci ratio of minor wave 1. It may not move beyond the start of minor wave 1 above 2,104.27.
If price continues to fall on Tuesday, this idea will be discarded.
If this idea is discarded, then the main bull wave count will be relabelled from the high of intermediate wave (2) to see a series of first and second waves to start intermediate wave (3), exactly the same as the daily bear wave count.
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.
At 1,850 minor wave 3 would reach 2.618 the length of minor wave 1. This first target is removed now because it does not fit with the new target for minuette wave (iii). 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.
At 1,818 minuette wave (iii) would reach 2.618 the length of minuette wave (i).
Because minuette wave (ii) was a deep correction of minuette wave (i), it would be expected that the correction of minuette wave (iv), when it arrives, should be shallow against minuette wave (iii). Minuette wave (iv) may not move into minuette wave (i) price territory above 1,993.26.
The scenario of a leading diagonal now complete and a deep second wave correction to follow works in exactly the same way for this bear wave count.
It is my judgement that this labelling of the start of minuette wave (iii) has the best most typical look. It is not the only way to see this impulse so far though; the labelling may change as more structure unfolds.
What is clear is momentum is only slightly increasing so far within subminuette wave iii, which has yet to breach the base channel. Third waves most commonly breach base channels drawn about the first and second wave of the same degree. I would expect the base channel to be breached because this is the middle of a big third wave at intermediate degree.
At their ends, subminuette wave iii and minuette wave (iii) should show a clear and strong increase in downwards momentum beyond their respective first waves. So far momentum is only slightly increasing, so I would expect a further increase, if this wave count is correct.
Along the way down the upper edge of the base channel should provide resistance. This trend line is the line which differentiates this idea and the idea presented for the first hourly chart. If this line holds, then this bear hourly wave count should be preferred.
Micro wave 4 may not move into micro wave 1 price territory above 1,986.02, but it should not get anywhere near that point. The upper edge of the base channel should provide strong resistance.
Subminuette wave ii shows on the daily chart as a small green candlestick. Subminuette wave iv may also show on the daily chart (but it does not have to). The next very short lived interruption to the trend that may be large enough to possibly show up on the daily chart may be subminuette wave iv.
Minuette wave (iii) would reach 1.618 the length of minuette wave (i) at 1,818.
The middle has still not passed within minuette wave (iii). There is a very slight increase in downwards momentum today (there is no divergence warning of an end to downwards movement yet), but the increase is not convincing for a third wave. This may be resolved by a further increase in momentum.
At 1,873 subminuette wave iii would reach 1.618 the length of subminuette wave i. This target does not look to be low enough at this stage.
Again, if targets are wrong, they may not be low enough. Expect surprises to be to the downside for this wave count.
At the end of Monday’s session classic technical analysis indicators are pointing to a low in place, at least short term. If price moves higher tomorrow, then the bear wave count will be relabelled to see a leading diagonal complete and a deep second wave correction unfolding upwards. The idea presented for the main bull wave count works in exactly the same way for this bear.
Click chart to enlarge. Chart courtesy of StockCharts.com.
I am adding another trend line (thanks to John for pointing this one out to us) which may provide support. This cyan line is drawn from the October 2014 low to the August 2015 low. If and when price reaches that line, we may see a bounce.
Volume is slightly higher than Friday. The fall in price for the last several days is supported by volume. The volume profile is bearish.
ADX and ATR agree. There is a trend, it is down.
This longer term trend line for On Balance Volume may provide resistance and halt the bounce that ended Monday’s session. It is not too steep and has been tested four times. It has reasonable technical significance.
RSI is just beginning to move into oversold. Very importantly, at the end of Monday’s session, there is slight divergence between price and RSI. Monday saw price make new lows, but when we zoom in on RSI it can be seen that RSI moved slightly higher. That small divergence is bullish and suggests a bounce should unfold about here. This supports the scenario on the hourly bull wave count (which also works for the bear) which suggests a multi day bounce for a deep second wave correction to begin. This divergence is small but is often (not always) a fairly reliable indicator of a trend change, at least short term. It should be taken seriously.
There is slight divergence with price and Stochastics. Price made a new low, but Stochastics turned upwards.
Click chart to enlarge. Chart courtesy of StockCharts.com.
Note: StockCharts inverts VIX. This makes it easier to read (in my opinion).
At the end of Monday’s session price made a new low but VIX has turned upwards. I have noticed that each time this happens that is the end of the price swing (it works for both directions). I have noticed this divergence on this chart for the lows at 16th November 2015, and 14th December 2015.
This divergence between price and VIX is not always seen at price lows, but when it occurs it often signals a low.
I have found one instance on this chart where divergence between price and VIX was seen and was then followed by new lows. On 15th December 2014, price made a new low but VIX turned upwards. That was not the end of the price swing though. Price found a low the following day.
This indicator most often works, but not always. It favours the scenario of a leading diagonal complete now beginning a following deep second wave correction as presented for the hourly bull wave count.
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.
The lows below are from October 2014. These lows were the last secondary correction within the primary trend which was the bull market from 2009.
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 @ 08:53 p.m. EST.