Downwards movement was expected, but a new high to 1,948 – 1,950 was also considered a possibility first. This did not happen.
Summary: Upwards movement is most likely over. A new low below 1,902.17 would provide reasonable confidence. A big third wave down is most likely unfolding. Sometimes these begin slowly and test our patience, but keep in mind surprises may occur to the downside. The target remains at 1,428.
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 – 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, or combination. This first daily chart looks at a flat correction.
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.
Primary wave C should subdivide as a five.
Within the new downwards wave of primary wave C, intermediate waves (1), (2) and now (3) may be complete.Intermediate wave (4) may now be over, finding resistance at the upper edge of the black channel. It is just within the fourth wave of one lesser degree still, which is a common place for a fourth wave to end.
Intermediate wave (2) was a deep double zigzag. Intermediate wave (4) may be a complete shallow 0.46 zigzag. There is alternation in depth and a little in structure.
At 1,790 intermediate wave (5) would reach 1.618 the length of intermediate wave (1). This would see intermediate wave (5) move below the end of intermediate wave (3) at 1,847 avoiding a truncation. Primary wave C would end below the end of primary wave A but not too far. Cycle wave IV would have a reasonable regular flat look.
The idea of a flat correction for cycle wave IV has the best look for the bull wave count. The structure would be nearly complete and at the monthly level cycle wave IV would be relatively in proportion to cycle wave II.
Both hourly charts are again the same, so comment will be with the preferred bear wave count.
DAILY CHART – COMBINATION
This idea is technically possible, but it does not have the right look. It is presented only to consider all possibilities.
If cycle wave IV is a combination, then the first structure may have been a flat correction. But within primary wave W, the type of flat is a regular flat because intermediate wave (B) is less than 105% of intermediate wave (A). Regular flats are sideways movements. Their C waves normally are about even in length with their A waves and normally end only a little beyond the end of the A wave. This possible regular flat has a C wave which ends well beyond the end of the A wave, which gives this possible flat correction a very atypical look.
If cycle wave IV is a combination, then the first structure must be seen as a flat, despite its problems. The second structure of primary wave Y can only be seen as a zigzag because it does not meet the rules for a flat correction.
If cycle wave IV is a combination, then it would be complete. The combination would be a flat – X – zigzag.
Within the new bull market of cycle wave V, no second wave correction may move beyond the start of its first wave below 1,810.10.
I do not have any confidence in this wave count. It should only be used if price confirms it by invalidating all other options above 2,104.27.
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.
Downwards movement so far within January still looks like a third wave. This third wave for intermediate wave (3) still has a long way to go. It has to move far enough below the price territory of intermediate wave (1), which has its extreme at 1,867.01, to allow room for a following fourth wave correction to unfold which must remain below intermediate wave (1) price territory.
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.
Intermediate wave (2) lasted 25 sessions (no Fibonacci number) and minor wave 2 lasted 11 sessions (no Fibonacci number). Minute wave ii may be complete in six sessions, which is not a Fibonacci number.
Minute wave ii may not move beyond the start of minute wave i above 2,104.27.
A clear breach of the channel containing minute wave ii is the earliest indication that minute wave ii may be over. However, the S&P often forms slow rounding tops. When it does that a channel is breached yet price continues in the same direction as the correction. For this reason channels about corrections are not always a reliable indicator that the correction is over for the S&P. Price is more reliable.
A new low below 1,902.17 could not be a second wave correction within minuette wave (c), so at that stage minuette wave (c) would have to be over. The start of minuette wave (c) should not be seen any lower than this point. A new low below 1,902.17 would provide reasonable confidence that the upwards correction for minute wave ii is over and a third wave down would then most likely be underway.
The next move for this wave count is a third wave at three degrees, which is the middle of a large intermediate degree third wave. The middle and end of this next wave down may be explosive. Look out for surprises to the downside.
When price reaches the lower cyan line, then it may find some support there.
When price confirms a trend change with a new low below 1,902.17, then the invalidation point may be moved down to the start of minute wave iii. For now it must be left where it is on the daily chart. The risk with this wave count today is that minute wave ii may not be over and may yet continue higher. It may not move beyond the start of minute wave i above 2,104.27.
A new low below 1,810.1 would provide final price confirmation that minute wave ii should be over.
At 1,653 minute wave iii would reach equality in length with minute wave i. This is a reasonable target, and it would expect both minute waves i and iii to be extended within the impulse of minor wave 3.
If price gets to the first target and the structure is incomplete, or if price just keeps dropping through the first target, then the next target is at 1,470 where minute wave iii would reach 1.618 the length of minute wave i.
ALTERNATE DAILY CHART
I have previously noted this idea in the text and now it is time to chart it, so that the implications are clear.
Within the downwards impulse unfolding, it may be that intermediate waves (1) and (2) are complete and now minor waves 1, 2 and 3 may also be complete within intermediate wave (3).
This wave count expects minor wave 5 to be extended within intermediate wave (3). Minor wave 5 should also show a strong increase in momentum, so that at its end intermediate wave (3) has clearly stronger momentum than intermediate wave (1).
There is no difference to the target for intermediate wave (3). This wave count makes a difference to the invalidation point. Minor wave 4 may not move into minor wave 1 price territory above 2,019.39.
This wave count also has a lower probability than the main bear wave count. This wave count would be more typical of commodities than the S&P.
Minor wave 2 lasted 11 days. Minor wave 4 may be over in 6 days, which is not a Fibonacci number.
Click chart to enlarge. Chart courtesy of StockCharts.com.
Today’s downwards movement completes a bearish engulfing candlestick pattern (the important part of a bearish engulfing pattern is the close of the second candle, which must be below the open of the first candle) even though the upper edge of the real body of the second candle is below the upper limit to the real body of the first candle. A bearish engulfing candlestick pattern is the strongest bearish reversal pattern. This supports the Elliott wave count.
Today’s downwards movement comes with slightly lighter volume. The fall in price was not supported by volume. This is only some small cause for concern. The start of the last big fall in price from 29th December to 20th January also began with the first downwards day on lighter volume than the prior upwards day. A market can fall of its own weight. An absence of buyers will force down price and a market does not need an increase in sellers to achieve the same outcome.
As price rose to the last high, it came on declining volume. A rise in price does need an increase in volume to be sustainable. The market cannot rise sustainably without increasing activity from buyers. A rise in price with a decline in volume is suspicious and indicates the movement is more likely corrective.
ADX is still declining indicating the market is consolidating and not trending. ADX has not indicated a trend change: the -DX line remains above the +DX line. At this stage, the trend should still be down when ADX catches up (it is a lagging indicator).
ATR is also still declining indicating the market is consolidating and not trending. This too is a lagging indicator.
On Balance Volume has not led the way and remains bound within the pink and dark blue trend lines. A break above or below either of these lines should be followed by price moving in the same direction. A break below the dark blue line would support the Elliott wave count.
There is no divergence today between price and RSI. Both turned lower. RSI is neutral. There is plenty of room now for this market to fall again.
Stochastics is returning from overbought.
Click chart to enlarge. Chart courtesy of StockCharts.com.
There is a longer term (still short, but not day to day) slight divergence with the last two swing highs in price and VIX (pink lines). Price has not yet made a new high yet VIX (inverted) has made a new high. This indicates weakness in price and is bearish. This may be an indication that the bear market rally is about to end here.
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.
I am aware that this approach is extremely conservative. Original Dow Theory has already confirmed a major trend change as both the industrials and transportation indexes have made new major lows.
At this stage, if the S&P500 and Nasdaq also make new major swing lows, then my modified 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.
These lows must be breached by a daily close below each point. So far the S&P has made a new low below 1,821.61, but it has not closed below 1,821.61.
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 @ 10:27 p.m. EST.