A new low below 1,901.10 confirmed a third wave down was unfolding.
Thereafter, price continued lower.
Summary: The trend is definitely down. The middle of a huge third wave is close and has not yet passed. The new target is 1,655. The invalidation point is relatively close by at 1,949.95. Volume continues to support the fall in price. Alternatively, a new high above 1,949.45 would indicate a larger bounce is underway, but this has a low 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. At 1,693 intermediate wave (3) would reach 4.236 the length of intermediate wave (1).
The middle may have passed a few days ago within intermediate wave (3), but this has a lower probability than the scenario presented with the bear wave count. This idea is presented to consider all possibilities.
It is possible that minute wave iii is a complete five wave impulse. This has a low probability and should only be used if it is confirmed with a new high above 1,949.45. There would be no Fibonacci ratio between minute waves i and iii.
Minute wave iv may not move into minute wave i price territory above 1,993.26.
Price is finding support at the lower cyan trend line which is drawn from the October 2014 lows to the August 2015 lows.
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. All the subwaves must subdivide as zigzags within an ending diagonal. This fifth wave does not look like a zigzag but instead subdivides as and looks like an impulse.
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.
Minute wave iii may be over as an impulse. Minute wave iii does show an increase in momentum beyond that seen for minute wave i on the daily chart.
On the hourly chart, there are a few problems with this wave count which reduce its probability:
1. There is no alternation in either structure or depth between minuette waves (ii) and (iv), both are shallow zigzags.
2. Minuette wave (iii) shows only a slight increase in momentum on the hourly chart beyond that seen for minuette wave (i).
3. Minuette wave (iii) did not breach a base channel drawn about minuette waves (i) and (ii) (no longer shown for reasons of clarity in the chart).
4. There are no Fibonacci ratios between minuette waves (i), (iii) and (v).
5. There is no Fibonacci ratio between minute waves i and iii.
It is technically possible that this idea is correct. Alternation is a guideline, not a rule, and momentum is a guide and not a rule. This idea is presented to consider all possibilities, so that we are prepared for the unexpected.
This idea requires a new high above 1,949.45 for confirmation.
If that happens, then the upwards movement may be minute wave iv. It should last about two to three weeks. It should exhibit alternation with minute wave ii. It should be shallow, so most likely ending about the 0.382 Fibonacci ratio at 1,958. It would most likely a flat, combination or triangle.
If it is an expanded flat or running triangle, then it may include a new price extreme beyond its start. There is no lower invalidation point for this reason for this 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.
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 subdivisions on the hourly chart for both wave counts are the same, but here the degree of labelling within the impulse of micro wave 1 is moved down one degree.
Instead of the end subminuette wave iii this may be only another first and second wave complete.
Because micro wave 2 ends with a small overshoot of the base channel about subminuette waves i and ii, it should be over there.
Within micro wave 3, no second wave correction may move beyond the start of its first wave above 1,949.95.
At 1,655 minuette wave (iii) would reach 4.236 the length of minuette wave (i).
This wave count requires a further increase in downwards momentum. The base channel about subminuette waves i and ii should be breached to the downside. When that is done price should find resistance at the lower edge of the channel.
The lower cyan line is copied over from the daily chart. Price found some support at the end of Wednesday’s session there. If price breaks through this line tomorrow, then look for a throwback to the line. If price behaves like that, then it may offer a perfect entry point to join the trend.
This wave count expects price is not yet near the strongest part of this third wave down. It expects a huge downwards movement over the next couple of weeks. These waves are not exhibiting Fibonacci durations, so an expectation of when it may end would be a vague guess only. I am not prepared to do that. The trend is down. Expect surprises to the downside.
If this wave count is wrong and the scenario presented for the first hourly chart is right, then the first indication would be a breach of the base channel.
Click chart to enlarge. Chart courtesy of StockCharts.com.
Again, a strong downwards day on an increase in volume supports the bear wave count.
ADX is clear, the market is definitely trending. This is obvious by price action. ATR agrees as it is increasing.
On Balance Volume again led the way. It found resistance and bounced off the lower cyan trend line. OBV works well with trend lines.
OBV shows divergence with price today. Price made a new low but OBV did not. This is a bullish signal, but to date I have not found divergence between price and OBV to be a reliable signal.
RSI is again reaching into oversold territory, but this can be extreme for some time and be oversold yet the market can continue to fall over 100 points. RSI shows no divergence with price today.
Stochastics is oversold and shows weak bullish divergence today with price. Again, this signal is a weak warning; it is not always very reliable.
The two weak bullish signals and the cyan trend line offering support on the daily Elliott wave counts are the reason for the short term bullish scenario presented in the first hourly chart.
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 @ 12:06 a.m. EST on 14th January, 2016.