Select Page

Downwards movement was expected to continue. This is what happened.

Summary: This is still a bear market rally until proven otherwise. A final fifth wave up is required to complete the structure. On Balance Volume strongly suggests that downwards movement for Thursday is over. The target is 2,124. The invalidation point for this rally is 2,134.72.

To see last published monthly charts click here.

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.

New updates to this analysis are in bold.

BEAR ELLIOTT WAVE COUNT

WEEKLY CHART

S&P 500 weekly bear 2016
Click chart to enlarge.

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.

Primary wave 1 may be complete and may have lasted 19 weeks, two short of a Fibonacci 21. So far primary wave 2 is in its 24th week. It looks unlikely to continue for another 10 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.

If price moves above 2,116.48, then the new alternate bear wave count would be invalidated. At that stage, if there is no new alternate for the bear, then this would be the only bear wave count.

Primary wave 2 may not move beyond the start of primary wave 1 above 2,134.72.

DAILY CHART

S&P 500 daily bear 2016
Click chart to enlarge.

Intermediate wave (A) fits 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.

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.

A bull market trend line for this rally is drawn across the first two small swing lows as per the approach outlined by Magee. This upwards sloping cyan line may provide support for corrections along the way up. Price broke below the cyan line today. It may now provide resistance. The S&P has a tendency to break out of channels or below lines and then continue in the prior direction. It may do this again here.

At 2,124 minor wave 5 would reach 0.618 the length of minor wave 3. Intermediate wave (C) would avoid a truncation and the wave count would remain valid. Primary wave 2 would fulfill its purpose of convincing everyone that a new bull market is underway, and it would do that right before primary wave 3 surprises everyone.

If it continues lower, then minor wave 4 downwards may not move into minor wave 1 price territory below 1,930.68.

The cursory count is now nine within intermediate wave (C). This is impulsive. Intermediate wave (C) could be counted as a complete impulse. However, if this wave count is correct to see intermediate wave (C) over here, it would require a massive truncation of 59.88 points. For an intermediate degree wave, this would have an exceptionally low probability. The probability is so low it should not be considered.

HOURLY CHART

S&P 500 daily bear 2016
Click chart to enlarge.

The structure of minor wave 4 can be seen as complete and the proportion looks good on the daily chart.

There is no Fibonacci ratio between minute waves a and c within minor wave 4.

Price has broken out of the small Elliott channel containing this zigzag. This is an early indication that minor wave 4 may be over.

At 2,124 minor wave 5 would reach 0.618 the length of minor wave 3. If minor wave 4 moves any lower, then this target must be recalculated. It is provisional only.

At this stage, from an Elliott wave perspective, it is about a 50:50 probability that minor wave 4 is over or it may continue lower.

If minor wave 4 continues lower, it may do so as a double zigzag and still provide alternation with the expanded flat of minor wave 2. Double zigzags are very common structures. Minor wave 4 may end when price finds support at the lower edge of the Elliott channel.

Double zigzags should have a slope against the prior trend. To achieve this their X waves are normally shallow and should not make a new price extreme beyond the start of the first zigzag. A new high above 2,056.60 would confirm that minor wave 4 is not continuing lower as a double zigzag.

However, minor wave 4 may also continue sideways as a triangle and still exhibit alternation with the expanded flat of minor wave 2. 40% of triangles are running triangles which see wave B make a new price extreme beyond the start of wave A. A new high above 2,056.60 would not eliminate a running triangle.

A new high above 2,056.60 would add confidence to the idea that minor wave 4 is most likely over, but it cannot confirm it. At that stage, the structure of upwards movement (is it a three or a five?) would be analysed to see if it would be minor wave 4 continuing or minor wave 5 upwards underway. A five up on the hourly chart would be required for confirmation that minor wave 4 is over.

In the short term, a new high above 2,038.21 would add some confidence to the idea that minor wave 4 is over, and would add substantial confidence to the idea that we do not have a high in place yet. At that stage, upwards movement could not be a fourth wave correction within an impulse unfolding lower. At that stage, the wave down labelled minor wave 4 would be confirmed as a complete three (which may or may not be minor wave 4 in its entirety).

If minor wave 4 continues any lower, it may not move into minor wave 1 price territory below 1,930.68.

ALTERNATE WEEKLY CHART

S&P 500 weekly bear 2016
Click chart to enlarge.

Primary wave 1 may subdivide as one of two possible structures. The main bear count sees it as a complete impulse. This alternate sees it as an incomplete leading diagonal.

The diagonal must be expanding because intermediate wave (3) is longer than intermediate wave (1). Leading expanding diagonals are not common structures, so that reduces the probability of this wave count to an alternate.

Intermediate wave (4) must continue higher and may find resistance at the cyan bear market trend line. Intermediate wave (4) may not move above the end of intermediate wave (2) at 2,116.48.

ALTERNATE DAILY CHART

S&P 500 daily bear 2016
Click chart to enlarge.

Within a leading diagonal, subwaves 2 and 4 must subdivide as zigzags. Subwaves 1, 3 and 5 are most commonly zigzags but may also sometimes appear to be impulses.

Intermediate wave (3) down fits best as a zigzag.

In a diagonal the fourth wave must overlap first wave price territory. The rule for the end of a fourth wave is it may not move beyond the end of the second wave.

Expanding diagonals are not very common. Leading expanding diagonals are less common.

Intermediate wave (4) must be longer than intermediate wave (2), so it must end above 2,059.57. If this minimum is not met, this wave count would be invalid. The trend lines must diverge.

Leading diagonals may not have truncated fifth waves. Intermediate wave (5) would most likely be a zigzag, must end below 1,810.10, and must be longer in length than intermediate wave (3) which was 306.38 points.

BULL ELLIOTT WAVE COUNT

WEEKLY CHART

S&P 500 weekly 2016
Click chart to enlarge.

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.

DAILY CHART

S&P 500 daily 2016
Click chart to enlarge.

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. Within a double zigzag, the second zigzag exists to deepen the correction when the first zigzag does not move price deep enough. Not only does this second zigzag not deepen the correction, it fails to move at all beyond the end of the first zigzag. This structure technically meets rules, but it looks completely wrong. This gives the wave count a low probability.

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.

Downwards movement may not be a lower degree correction within minute wave v because it is in price territory of the first wave within minute wave v. This downwards movement must be minor wave 4. At 2,143 minor wave 5 would reach equality in length with minor wave 1.

Minor wave 4 may not move into minor wave 1 price territory below 1,930.68.

TECHNICAL ANALYSIS

DAILY CHART

S&P 500 daily 2016
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.

NYSE volume data shows a decline in volume as price fell yesterday and now an increase in volume for a green daily candlestick. Overall, price moved upwards for Thursday on slightly increased volume. The rise in price is supported by volume. This supports the idea that price should continue to rise; a countertrend movement has lighter and declining volume. This supports the Elliott wave count short term.

Thursday’s green candlestick indicates that although the bears started out the session strongly they were unable to hold the lows of the day. The bulls rallied and overcame the bears. The long lower shadow and shaven head indicate the bulls finished very strongly. But the real body is small, so this market is still anaemic.

ADX is today flat indicating the market is no longer trending. It is finally in agreement with ATR.

ATR is indicating this upwards movement in price is weak, and it is coming on a clearly declining range. This is not normal for sustained price movement.

On Balance Volume is today finding support at the pink trend line. This line is long held, horizontal and repeatedly tested. It offers strong technical significance. If OBV turns up from here, it will be providing a strong bullish signal. If that happens on the first trading session next week, then more confidence may be had in the target at 2,124.

Because this trend line on OBV is so significant it is very likely to hold and stop price falling further. This indicates that minor wave 4 is likely to be over, or at least the lowest price extreme within it has been reached.

RSI has not yet reached overbought, so some more upwards movement to bring this indicator higher would complete the picture.

Stochastics may remain extreme for reasonable periods of time during a trending market.

Since the all time high in 20th May, 2015, price has made a series of lower highs and lower lows. Price broke below a long held bull market trend line indicating a new bear market. The 200 day moving average slowly turned from increasing to decreasing. Price remains below the bear market trend line drawn on the Elliott wave charts. All these technical indicators still point to price being in a bear market currently.

If price closes 3% or more of market value above the bear market trend line, then the analysis will change from bearish to bullish. While this has not happened, it should be assumed that the trend remains the same until proven otherwise.

ADVANCE DECLINE LINE

S&P 500 daily 2016
Click chart to enlarge. Chart courtesy of StockCharts.com.

The Advance Decline line shows no short term (day to day basis) divergence with price. With the AD line increasing, this indicates the number of advancing stocks exceeds the number of declining stocks. This indicates that there is breadth to this upwards movement.

Longer term, looking back over the last five months, there are two cases of hidden bearish divergence between price and the AD line.

From November 2015 to December 2015 the AD line made a new high while price failed to make a corresponding high. This indicated weakness in price and preceded new lows for price.

Now again from 29th December, 2015, to now the AD line is making new highs but price has so far failed to also make corresponding new highs. This again is an indication of weakness in price. Despite price rising with market breadth increasing, the breadth increase is not translating to substantial rises in price.

It remains to be seen if price can make new highs beyond the prior highs of 29th December, 2015. If price can manage to do that, then this hidden bearish divergence will no longer be correct, but the fact that it is so strong at this stage is significant. The AD line will be watched daily to see if this bearish divergence continues or disappears.

The 200 day moving average for the AD line is now increasing. Even if the 200 day MA points up this alone would not be enough to indicate a new bull market. During November 2015 the 200 day MA for the AD line turned upwards and yet price still made subsequent new lows.

DOW THEORY

I am choosing to use the S&P500, Dow Industrials, Dow Transportation, Nasdaq and 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.

S&P500: 1,821.61
Nasdaq: 4,117.84
DJIA: 15,855.12 – close below on 25th August 2015.
DJT: 7,700.49 – close below on 24th August 2015.
Russell 2000: 1,343.51 – close below on 25th August 2015.

This analysis is published @ 07:03 p.m. EST.