Price moved lower to breach the short term invalidation point on the first hourly Elliott wave count and provide first confidence for the alternate hourly Elliott wave count.
Summary: How price behaves on Monday, now that it is close to the support line, will indicate whether or not there is a high in place. A breach of the support line would indicate a trend change from bull to bear and that a third wave down would then be most likely. A new high above 2,111.05 would indicate a little more upwards movement for a few days to end above 2,116.48 but not above 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
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 has ended its 28th week. It looks unlikely to continue for another 6 weeks to total a Fibonacci 34, so it may end either this week or possibly early next week. 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. That looks possible today. The whole structure is now complete down to the five minute chart level. The hourly alternate looks at this possibility that intermediate (C) is over today and truncated by 5.43 points. The truncation is small and acceptable.
If price moves above 2,116.48, then the 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.
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 unfolding as an 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 intermediate wave (C) is over, then the truncation is small at only 5.43 points. This may occur right before a very strong third wave pulls the end of intermediate wave (C) downwards. However, it is unconfirmed today although this is possible. Confirmation is required.
The next wave down for this wave count would be a strong third wave at primary wave degree.
The target is for intermediate wave (C) to end just above the end of intermediate wave (A) at 2,116.48, so that a truncation is avoided.
Redraw the channel about the impulse of intermediate wave (C) using Elliott’s second technique: draw the first trend line from the ends of the second to fourth waves at minor degree, then place a parallel copy on the end of minor wave 3. Minor wave 5 may end midway within the channel. When this channel is breached by downwards movement, that will be the earliest indication of a possible end to primary wave 2.
Because expanded flats do not fit nicely within trend channels, a channel about their C waves may be used to indicate when the expanded flat is over. After a breach of the lower edge of the channel, if price then exhibits a typical throwback to the trend line, then it may offer a perfect opportunity to join primary wave 3 down. This does not always happen, so if it does in this case take the opportunity.
Within minor wave 5, no second wave correction may move beyond the start of its first wave below 2,039.74. A new low below 2,039.74 could not be a second wave correction within minor wave 5, so at that stage minor wave 5 would have to be over. This would confirm a trend change.
Primary wave 1 lasted 98 days (not a Fibonacci number). So far primary wave 2 has lasted 142 days. Tuesday next week would be the 144th day. Up to two either side of 144 would be close enough for a Fibonacci relationship in terms of duration.
Price may find final resistance and end upwards movement when it comes to touch the lilac trend line.
The easiest alternate idea is to always reduce or increase the degree of labelling for a movement. What if the impulse upwards which ended on 20th April was only minute wave i of minor wave 5?
Downwards movement may not be a fourth wave correction because it is back in what would be first wave price territory now labelled minuette wave (i).
Minute wave ii may end when price touches the lower edge of the blue channel. The lower edge of this blue channel is the same as the support line on the technical analysis chart. This line should provide support if minor wave 5 is incomplete.
So far minute wave ii is an incomplete zigzag. Minuette wave (a) subdivides neatly as a five. Minuette wave (b) may now be a complete zigzag, but it may also move higher when markets open next week.
Minute wave ii may not move beyond the start of minute wave i below 2,039.74. A new low below this price point would invalidate this first hourly Elliott wave count and confirm the alternate below.
ALTERNATE HOURLY CHART
The entire structure of primary wave 2 may now be complete. This alternate wave count absolutely requires some confirmation before any confidence may be had in it.
Ratios within intermediate wave (C) would be: minor wave 3 has no Fibonacci ratio to minor wave 1, and minor wave 5 (if it is over) would be 3.21 points short of 0.618 the length of minor wave 1.
Ratios within minor wave 5 would be: minute wave iii would be just 0.67 points longer than 0.618 the length of minute wave i, and minute wave v would be just 0.59 points longer than 0.618 the length of minute wave iii and just 1 point longer than 0.382 the length of minute wave i.
For the first wave down, which may be minute wave i, ratios are: minuette wave (iii) is 0.75 points short of equality in length with minuette wave (i), and minuette wave (v) has no Fibonacci ratio to either of minuette waves (i) or (iii).
The pink channel is breached by downwards movement giving earliest indication of a possible trend change. Now there is earliest price indication of a trend change. A little confidence may be had in this wave count with the breach of 2,087.84.
A clear and strong breach of the dark blue channel would provide further confidence in a trend change. If that happens, then reasonable confidence may be had in this wave count, enough to use the lower edge of the blue channel as an entry point. If price throws back to find resistance at the blue channel after breaching it, that would be a low risk high reward opportunity to enter short. The risk would be at 2,111.05 or for the more adventurous trader at 2,134.72.
Finally, a new low below 2,039.74 would provide reasonable confidence in a trend change. The only question at that stage would be of what degree?
The first hourly wave count will remain valid while price remains above 2,039.74; it would be possible that price will continue higher. That is the risk with entering prior to confirmation of a trend change.
At 2,044 minute wave iii would reach 1.618 the length of minute wave i. This target may be met by the end of next week, depending on how time consuming the second and fourth wave corrections within the impulse of minute wave iii may be.
If primary wave 2 is over, then the target for primary wave 3 would be 2.618 the length of primary wave 1 at 1,423. That is the appropriate Fibonacci ratio to use when the second wave correction is so very deep, and here primary wave 2 would be 0.91 the length of primary wave 1.
Primary wave 1 lasted 98 days (not a Fibonacci number). Primary wave 2 may have lasted 140 days (four short of a Fibonacci 144). Primary wave 3 may be quick, but it still would have two sizeable corrections for intermediate waves (2) and (4) within it. An initial expectation may be for it to total a Fibonacci 144 or 233 days.
ALTERNATE WEEKLY CHART
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) may continue higher now and may find resistance at the bear market trend line.
ALTERNATE DAILY CHART
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.
Within diagonals the second and fourth waves are commonly between 0.66 to 0.81 the prior wave. Here, intermediate wave (2) is 0.93 of intermediate wave (1) and intermediate wave (4) is 0.98 of intermediate wave (3). This is possible, but the probability of this wave count is further reduced due to the depth of these waves.
Expanding diagonals are not very common. Leading expanding diagonals are less common.
Intermediate wave (5) must be longer than intermediate wave (3), so it must end below 1,804.67. Confirmation of the end of the upwards trend for intermediate wave (4) would still be required before confidence may be had in a trend change, in the same way as that for the main bear wave count.
BULL ELLIOTT WAVE COUNT
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 still do not have confidence in it.
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. That may today be complete. The possible trend change at intermediate degree still requires confirmation in the same way as the alternate hourly bear wave count outlines before any confidence may be had in it.
If intermediate wave (2) begins here, then a reasonable target for it to end would be the 0.618 Fibonacci ratio of intermediate wave (1) about 1,920. Intermediate wave (2) must subdivide as a corrective structure. It may not move beyond the start of intermediate wave (1) below 1,810.10.
In the long term, this wave count absolutely requires a new high above 2,134.72 for confirmation. This would be the only wave count in the unlikely event of a new all time high. All bear wave counts would be fully and finally invalidated.
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 line in the sand for a trend change is the upwards sloping purple support line. This is the same as the lower edge of the blue channel on the main daily Elliott wave count. A breach of this bull market trend line would indicate the trend (at least short to mid term) has changed from bull to bear. While price remains above that support line it should be expected that price may find support there.
An Evening Doji Star candlestick pattern is completed at the last high. This is a reversal pattern and offers some support for expecting a high is in place.
How price behaves if it comes down to this line will indicate which hourly Elliott wave count is correct and if price is beginning either a large correction (bull wave count) or a new big wave down (bear wave count). For clues as to whether the line may be breached sooner or later we can look to volume, momentum, breadth, strength and sentiment.
Volume: Overall, now volume declines as price has been rising for over 40 days. In the short term, the downwards day of 21st April comes with an increase in volume supporting the downwards movement in price. Downwards volume for 21st of April is stronger than the prior three upwards days. Volume for Friday’s small green doji is lighter than the prior downwards day, offering some slight support for a trend change. The overall rise in price to complete a green candlestick was not as well supported by volume than the prior downwards day. Volume indicates the upwards movement is unsupported and unsustainable. A relatively large correction at least would be expected.
On Balance Volume: To date this indicator has been providing bullish signals along with rising price. OBV will remain bullish while OBV finds support at all the trend lines drawn here. A break below the yellow line would be a weak bearish signal. A break below the purple lines would be reasonable bearish indication. A break below the pink line would be a strong bearish signal. OBV has not given any bearish signals yet, only bullish. In this instance, unfortunately, OBV may not lead price for us.
Momentum: MACD shows divergence with price (green line) back to 22nd March. With reasonably long held divergence, this indicates momentum is weak.
Breadth: As given in charts below, the AD Line and Bullish Percent both indicate breadth to this upwards movement, but there is hidden bearish divergence. The increase in breadth is not translating to a corresponding increase in price; price is weak.
Strength: RSI has some slight divergence with price (green line). RSI has failed to make corresponding highs as price has made new highs. This indicates weakness in price.
Sentiment: As given in COT charts below, up to 18th April, commercials are more strongly short than long and non commercials more strongly long than short. This is bearish.
Conclusion: The bearish case at least short / mid term is supported by volume analysis but not On Balance Volume. The divergence in momentum, breadth and strength indicators supports a bearish outlook over a bullish outlook. Sentiment of commercials is also bearish. Overall, the balance of this picture is predominantly bearish. The support line should be expected to most likely be breached if price again comes down to it. But first it may provide some support for a small bounce. If it is breached, then look for a potential throwback to find resistance. If price behaves like that, then take the opportunity to enter short there.
INVERTED VIX DAILY CHART
Click chart to enlarge. Chart courtesy of StockCharts.com.
Volatility declines as inverted VIX climbs. This is normal for an upwards trend.
What is not normal here is the divergence over a reasonable time period between price and inverted VIX (green lines). The decline in volatility is not translating to a corresponding increase in price. Price is weak. This divergence is bearish.
Price made a new short term high, but VIX has failed to make a corresponding high (pink lines). This is regular bearish divergence. It indicates further weakness in the trend.
Friday’s small green doji candlestick overall saw sideways movement in price, closing very slightly up for the day. Yet inverted VIX has made new highs above the prior high of 20th and 19th of April. Volatility declined for Friday, but this was not translated into a corresponding rise in price. Again, further indication of weakness in price is indicated. This is further hidden bearish divergence.
BULLISH PERCENT DAILY CHART
Click chart to enlarge. Chart courtesy of StockCharts.com.
With this indicator measuring the percentage of bullish equities within the index, it is a measurement of breadth and not sentiment as the name suggests.
There is strong hidden bearish divergence between price and the Bullish Percent Index (orange lines). The increase in the percentage of bullish equities is more substantial than the last high in price. As bullish percent increases, it is not translating to a corresponding rise in price. Price is weak.
As price made a new short term high 20th April, BP did not (pink lines). This is regular bearish divergence. It indicates underlying weakness to the upwards trend.
ADVANCE DECLINE LINE
Click chart to enlarge. Chart courtesy of StockCharts.com.
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.
From November 2015 to now, the AD line is making new highs while price has so far failed to make a corresponding new high. This indicates weakness in price; the increase in market breadth is unable to be translated to increase in price.
It remains to be seen if price can make new highs beyond the prior highs of 3rd November, 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.
At the end of this week, price has made new short term lows for Thursday and Friday yet the AD line has made a new high on Friday. Friday saw more stocks advancing than declining, but this was unable to translate into a rise in price. Again, this is hidden bearish divergence (short term) indicating price is weak.
The 200 day moving average for the AD line is now increasing. This alone is not 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.
COMMITMENT OF TRADERS (COT)
Click chart to enlarge. Chart courtesy of Qandl.
This first COT chart shows commercials. Commercial traders are more often on the right side of the market. Currently, more commercials are short the S&P than long. This supports a bearish Elliott wave count, but it may also support the bullish Elliott wave count which would be expecting a big second wave correction to come soon. Either way points to a likely end to this upwards trend sooner rather than later. Unfortunately, it does not tell exactly when upwards movement must end.
*Note: these COT figures are for futures only markets. This is not the same as the cash market I am analysing, but it is closely related enough to be highly relevant.
Click chart to enlarge. Chart courtesy of Qandl.
Non commercials are more often on the wrong side of the market than the right side of the market. Currently, non commercials are predominantly long, and increasing. This supports the expectation of a trend change soon.
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.
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.
To the upside, DJIA has made a new major swing high above its prior major high of 3rd November, 2015, at 17,977.85. But DJT has so far failed to confirm because it has not yet made a new major swing high above its prior swing high of 20th November, 2015, at 8,358.20. Dow Theory has therefore not yet confirmed a new bull market. Neither the S&P500, Russell 2000 nor Nasdaq have made new major swing highs.
This analysis is published @ 12:05 a.m. EST on 23rd April, 2016.