Downwards movement was expected but did not happen.
A new alternate Elliott wave count is published with this analysis.
Summary: The short / mid term trend remains up while price remains above 1,969.25. The target is 2,086 – 2,088. When the next impulse is over, then how low the following wave down goes will indicate which of three wave counts is correct.
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.
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
This wave count is bullish at Super Cycle degree.
The two big bear markets of 2000 – 2002 and 2007 – 2009 may have been waves A and C within a large flat correction for a Super Cycle wave IV. The bull market since 2009 may be Super Cycle wave V.
Cycle waves I, II and III are complete within Super Cycle wave V. Cycle wave II was a relatively shallow 0.41 zigzag lasting 12 weeks. Cycle wave III is 55.97 points short of 1.618 the length of cycle wave I. This is a reasonable difference, but as it is less than 10% the length of cycle wave III (it is 5.2%) I consider this an acceptable Fibonacci ratio.
Draw a best fit channel about this bull market as shown. Cycle wave IV may have ended just short of support at the lower edge.
If it continues any further, 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 III shows an increase in upwards momentum beyond cycle wave I.
Cycle wave II was a shallow 0.41 zigzag lasting three months. Cycle wave IV may be a complete shallow 0.19 regular flat correction, exhibiting some alternation with cycle wave II.
At 2,500 cycle wave V would reach equality in length with cycle wave I.
Price remains below the final bear market trend line. This line is drawn from the all time high at 2,134.72 to the swing high labelled primary wave B at 2,116.48 on November 2015. This line is drawn using the approach outlined by Magee in the classic “Technical Analysis of Stock Trends”. To use it correctly we should assume that a bear market remains intact until this line is breached by a close of 3% or more of market value. In practice, that price point would be a new all time high which would invalidate any bear wave count.
This wave count requires price confirmation with a new all time high above 2,134.72.
While price has not made a new high, while it remains below the final bear market trend line and while technical indicators point to weakness in upwards movement, this very bullish wave count comes with a strong caveat. I do not have confidence in it.
Upwards movement cannot now be a fourth wave correction for intermediate wave (4) as price is now back up in intermediate wave (1) territory above 2,019.39. This has provided some clarity.
For the bullish wave count, it means that primary wave C must be over as a complete five wave impulse.
Intermediate wave (2) is seen as an atypical double zigzag. It is atypical in that it moves sideways. Double zigzags should have a clear slope against the prior trend to have the right look. This double zigzag looks completely wrong. This further reduces the probability of this wave count.
If the bull market has resumed, it must begin with a five wave structure upwards at the daily and weekly chart level. So far that is incomplete.
At 2,088 minor wave 3 would reach 1.618 the length of minor wave 1. Within minor wave 3, at 2,086 minute wave v would reach 1.618 the length of minute wave iii. This gives a two point target zone calculated at two wave degrees which should have a reasonable probability.
The persistent divergence with price and MACD must disappear for this wave count to remain viable, even short term. If upwards movement is a third wave (and not a C wave), it should be stronger than the first wave; third waves almost always are stronger. Almost is not the same as always though. This may be a third wave, which indicates the fifth wave to come should be weaker still, so that the third wave is not the weakest.
Within minor wave 3, minute wave iii is slightly stronger than minute wave i but is not stronger than minor wave 1. Minute wave iii is 5.36 points longer than equality with minute wave ii. The rule that a third wave may not be the shortest is met.
Minute wave ii is a shallow 0.43 zigzag. Minute wave iv is a deeper 0.52 double combination. There is alternation between these two corrections.
Within minute wave v, no second wave correction may move beyond the start of its first wave below 1,969.25.
It must be assumed that price is likely to still rise while price remains above 1,969.25 and particularly while it remains within the best fit channel.
BEAR ELLIOTT WAVE COUNT
What if the big flat correction labelled super cycle wave (w) or (a) was only the first three in a larger correction?
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.
There are two ideas presented in this chart: a huge flat correction or a double flat / double combination. The huge flat is more likely. They more commonly have deep B waves than combinations have deep X waves (in my experience).
A huge flat correction would be labelled super cycle (a)-(b)-(c). It now expects a huge super cycle wave (c) to move substantially below the end of (a) at 666.79. C waves can behave like third waves. This idea expects a devastating bear market, and a huge crash to be much bigger than the last two bear markets on this chart.
The second idea is a combination which would be labelled super cycle (w)-(x)-(y). The second structure for super cycle wave (y) would be a huge sideways repeat of super cycle wave (a) for a double flat, or a quicker zigzag for a double combination. It is also possible (least likely) that price could drift sideways in big movements for over 10 years for a huge triangle for super cycle wave (y).
Importantly, there is no lower invalidation point for this wave count. That means there is no lower limit to this bear market.
This bear wave count now has two ways to see downwards / sideways movement from the all time high, so two weekly charts are presented below.
MAIN WEEKLY CHART
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.
Minute wave ii is now longer in duration that minor wave 2 one degree higher. This has now reduced the probability of this wave count this week, which is why the alternate is presented.
Intermediate wave (2) lasted 25 sessions (not a Fibonacci number) and minor wave 2 lasted 11 sessions (not a Fibonacci number).
Minute wave ii has now lasted 20 sessions, nine longer than minor wave 2. At this stage, the size of minute wave ii no longer gives the wave count the right look, so for this reason the alternate below is published. The S&P does not always exhibit perfect proportions, so this wave count remains entirely valid. However, at the end of this week, the proportions are beginning to look too far from even for this wave count because minute wave ii is almost twice the duration of minor wave 2. The probability is reduced.
A best fit channel is now drawn about minute wave ii. If this channel is breached by a full daily candlestick, it would be earliest indication that minute wave ii may be over.
Minute wave ii may not move beyond the start of minute wave i above 2,104.27.
At 1,428 intermediate wave (3) would reach 2.618 the length of intermediate wave (1).
A-B-C of a zigzag and 1-2-3 of an impulse subdivide in exactly the same way: 5-3-5. This upwards movement may be a completed zigzag, or the fifth wave of subminuette wave v may still move higher.
The invalidation point must remain at 2,104.27 while there is no confirmation or indication of a trend change.
Earliest indication of a possible trend change would come with a breach of the best fit channel.
Earliest price confirmation of a trend change would come with a new low below 1,969.25.
Final price confirmation would come with a new low below 1,930.68. At that stage, confidence may be had in a third wave down.
ALTERNATE WEEKLY CHART
This is a new wave count.
The impulse downwards for primary wave 1 is seen in the same way as the main bear wave count with the exception of degree. Here, the labelling is moved up one degree. Primary wave 1 may be complete and may have lasted 19 weeks, two short of a Fibonacci 21. So far primary wave 2 has lasted 22 weeks. It looks unlikely to continue for another 12 weeks to total a Fibonacci 34, so it may end in about two to five weeks time. This would still give reasonable proportion between primary waves 1 and 2. Corrections (particularly more time consuming flat corrections) do have a tendency to be longer lasting than impulses.
Primary wave 2 may be unfolding as an expanded or running flat. Within primary wave 2, intermediate wave (A) was a deep zigzag (which will also subdivide as a double zigzag). Intermediate wave (B) fits perfectly as a zigzag and is a 1.21 length of intermediate wave (A). This is within the normal range for a B wave of a flat of 1 to 1.38.
Intermediate wave (C) is likely to make at least a slight new high above the end of intermediate wave (A) at 2,116.48 to avoid a truncation and a very rare running flat. However, price may find very strong resistance at the final bear market trend line. This line may hold price down and it may not be able to avoid a truncation. A rare running flat may occur before a very strong third wave down.
Primary wave 2 may not move beyond the start of primary wave 1 above 2,134.72.
ALTERNATE DAILY CHART
This new alternate bear wave count avoids the large problem of a truncation for the last bear alternate. This new wave count has a higher probability for this reason, so the last alternate will not be published at this stage.
Intermediate wave (A) fits nicely as a single or double zigzag.
Intermediate wave (B) fits perfectly as a zigzag. There is no Fibonacci ratio between minor waves A and C.
Intermediate wave (C) must subdivide as a five wave structure. It is not unfolding as an ending diagonal, so it must be unfolding as a more common impulse.
The short / mid term target for minor wave 3 is exactly the same as the short / mid term target for the bull wave count. A-B-C of a zigzag and 1-2-3 of an impulse both subdivide 5-3-5. The labelling within this upwards movement of each subdivision is the same for both wave counts.
Price is approaching the 0.618 Fibonacci ratio at 2,030. It may find some resistance there.
When minor wave 3 is a complete impulse, then minor wave 4 downwards may not move into minor wave 1 price territory below 1,930.68.
Intermediate wave (C) does not have to move above the end of intermediate wave (A) at 2,116.48, but it is likely to do so to avoid a truncation. If it is truncated and primary wave 2 is a rare running flat, then the truncation is not likely to be very large. As soon as price is very close to 2,116.48 this wave count looks at the possibility of a trend change.
The next wave down for this wave count would be a strong third wave at primary wave degree.
An hourly chart is not published for this idea because it would look mostly the same as the hourly chart for the bull wave count.
If price continues any higher, this may be the only bear wave count. If price continues higher, the main bear wave count will further reduce in probability. It may be discarded before it is invalidated by price.
If this alternate bear wave count is correct, then upwards movement for Friday is the start of a fifth wave within a third wave. The decline in volume is acceptable and makes sense. Further, a third wave of a C wave is sometimes weaker than the first, with the fifth wave weaker still. This wave count would fit with volume and momentum as long as the third wave of minor wave 3 within intermediate wave (C) is not the weakest.
Click chart to enlarge. Chart courtesy of StockCharts.com.
The long trend line on price is drawn from the low of March 2009, at 666.79 to the low in October 2011. This trend line was repeatedly tested, breached, and then provided resistance in August 2015. Price has closed well over 3% of market value below it. Trend lines like this one which are reasonably shallow, long held and repeatedly tested are highly technically significant. The breach tells us the market has switched from bull to bear. This supports the bear wave count over the bull.
Volume has overall declined during the bull market spanning over 6 years. The rise in price was not supported by volume at the monthly chart level. This also supports the bear wave count over the bull.
RSI shows double negative divergence with price as the final highs were made. Finally, a failure swing on RSI completes a pattern which was last seen in September 2000, and October 2007. This pattern indicates a large bear market may begin from here and supports the bear wave count over the bull.
On Balance Volume also shows divergence with price (pink line) as the final highs were made. On Balance Volume has breached a very long held trend line (green). This is further support for the bear wave count over the bull.
Since the all time high in May 2015, downwards movement is coming with an increase in volume at the monthly chart level. This further supports the bear wave count over the bull.
Not only is there nothing bullish about this picture at the monthly chart level, it is very bearish indeed. It indicates that recent downwards movement is more likely to be the start of a large bear market than it is to be another correction within a continuing bull market.
Click chart to enlarge. Chart courtesy of StockCharts.com.
Volume data on StockCharts is different to that given from NYSE, the home of this index. Comments on volume will be based on NYSE volume data when it differs from StockCharts.
The strong green daily candlestick for Friday comes with a decline in volume on both StockCharts and NYSE data. The rise in price again is not supported by volume. This supports a bearish wave count over a bullish. If this rise in price is a third wave, it should show support from volume (third waves should not be this weak).
Overall, as price continues higher, volume is declining. The volume profile continues to be bearish. This looks more like a bear market rally than a new bull market. But the problem with bear market rallies is it is impossible to tell exactly where they will end, which is why price confirmation for this market is so important.
ADX is now turning upwards finally indicating the market is trending. The trend is up. ADX is a lagging indicator as it is based on a 14 day average. ATR finally agrees. With these two indicators now in agreement, it should be assumed that the trend (at least short term) is up until proven otherwise by price confirmation of a trend change.
On Balance Volume has provided a fairly strong bullish signal with a breach of the pink trend line. This line is almost horizontal, repeatedly tested and long held. It is highly technically significant. The next line to provide some possible resistance for OBV is the green line, but this is not very technically significant.
With ADX and ATR now indicating the market is trending, it should be expected that Stochastics may remain extreme for some time.
RSI is not yet overbought. There is further room for the market to rise.
Price may find some resistance here about the 200 day moving average and the horizontal line about 2,020. If price reacts from resistance here, it may offer an opportunity to join the short term trend. However, a warning is given: with the larger technical picture so very bearish any short / mid term trades with the short / mid term upwards trend must be carefully managed. The larger bearish picture sees a strong crash coming, but not yet here. Any long positions must have stops, so that your account is not wiped out if a crash occurs earlier than expected.
Along the way up, expect price to find support about the 9 day moving average.
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 @ 05:55 p.m. EST on 12th March, 2016.