Yesterday’s analysis warned that the S&P may bounce, which is what happened.
Summary: More upwards movement is most likely, which may last about two weeks and end above 2,027. This outlook would be confirmed with a new high above 1,947.38 and a breach of the upper edge of the base channel on the hourly chart tomorrow. Alternatively, a new low tomorrow below 1,901.1 would confirm the middle of a huge third wave is almost upon us. Today, this idea has slightly reduced in probability.
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. The target of 1,850 for intermediate wave (3) no longer looks low enough, because it does not allow enough room for minor wave 4 to unfold and remain below minor wave 1 price territory. The target is recalculated. At 1,692 intermediate wave (3) would reach 4.236 the length of intermediate wave (1).
There may now again be a complete downwards first wave leading expanding diagonal. Leading diagonals in first wave positions are often followed by very deep second wave corrections. Minor wave 2 may end about the upper cyan trend line.
Minor wave 2 may not move beyond the start of minor wave 1 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 may be seen as complete.
With Tuesday completing a green candlestick on the daily chart, the zigzag of minute wave v should definitely be complete. It looks like a three on the daily chart and it is longer than minute wave iii. All the rules for a leading expanding diagonal of minor wave 1 are met. Expanding diagonals most commonly end with the fifth wave falling a little short of the 1-3 trend line as this one does.
Minor wave 2 is most likely to be very deep and most likely to be a zigzag. The first move upwards should be a five. If minor wave 2 is not a zigzag, then it should still begin with a five up at the hourly chart level for a wave of this degree.
Within the first five up, minuette wave (ii) may not move beyond the start of minuette wave (i) below 1,901.1.
The hourly chart for the bear is adjusted today and the invalidation point may now be set very close. A new high above 1,947.38 would add confidence to this wave count, and at that stage price would also break above the trend channel providing further confidence.
Minor wave 2 may last about two weeks. If it exhibits a Fibonacci duration, it may last either a Fibonacci 8 or 13 days.
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.
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.
The labelling for downwards movement is again changed. This fits with the labelling on the first hourly chart and the subdivisions on the five minute chart all fit.
This wave count remains entirely valid while price has not yet managed to break above the upper edge of the base channel. The implications are very important. This wave count expects price to fall off a cliff tomorrow, for very strong downwards movement. The middle of a big third wave is still ahead.
If there is now another first and second wave complete for micro waves 1 and 2, then micro wave 3 has begun. Within micro wave 3, submicro wave (2) may not move beyond the start of submicro wave (1) at 1,947.38.
This wave count now requires price to break below the lower edge of a base channel. That would be confirmation of a third wave. A new low below 1,901.1 would provide price confirmation.
If that happens tomorrow, then expect surprises to the downside. If targets are wrong, they may not be low enough.
Click chart to enlarge. Chart courtesy of StockCharts.com.
An upwards day with lighter volume supports the Elliott wave counts which expect this upwards day is a correction.
Note: The candlestick pattern of the last three daily candles is not a viable Morning Star pattern because the star (middle candlestick) is within the real body of the first. (“Japanese Candlestick Charting Techniques”, second edition, Steve Nison, page 62.)
ADX still indicates a downwards trend is in place and ATR agrees as it is increasing. ADX indicates the trend is still young. Both these indicators are lagging as they are based upon averages. If a bounce is beginning, they will not indicate it.
RSI is returning from oversold. More upwards movement may be necessary to bring it closer to neutral in preparation for the next move down.
Stochastics is also returning from oversold.
Price may be expected to find strong resistance at the horizontal trend line about 1,990.
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 @ 11:25 p.m. EST.