Downwards movement was expected for Tuesday’s session but did not happen.
Upwards movement invalidated the hourly Elliott wave count, but the daily Elliott wave count remains on track.
Summary: A five down on the daily chart for minor 1 is complete. Minor 2 upwards has begun. It is possible that minor wave 2 is over at today’s high, but it is also possible it may continue higher. If it does, look for it to end if price touches the bear market trend line. This is the point at which surprises to the downside may show up in a big way. Risk to short positions must be at 2,111.05.
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 is complete and lasted 19 weeks. Primary wave 2 is either over lasting 28 weeks, or it may continue for another one or two weeks.
An expectation for duration of primary wave 3 would be for it to be longer in duration than primary wave 1. If it lasts about 31 weeks, it would be 1.618 the duration of primary wave 1. It may last about a Fibonacci 34 weeks in total, depending on how time consuming the corrections within it are.
At the last high in April, the weekly candlestick has a long upper shadow which is bearish. The next candlestick completes a bearish engulfing pattern. That pattern is now followed by another downwards week, so it is reinforced.
Primary wave 2 may be complete as a rare running flat. Just prior to a strong primary degree third wave is the kind of situation in which a running flat may appear. 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.
Within primary wave 3, no second wave correction may move beyond its start above 2,111.05.
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. At the end of last week, price has confirmed a trend change with a new low slightly below 2,039.74.
The next wave down for this wave count would be a strong third wave at primary wave degree. At 1,423 primary wave 3 would reach 2.618 the length of primary wave 1. This is the appropriate ratio for this target because primary wave 2 is very deep at 0.91 of primary wave 1. If this target is wrong, it may be too high. The next Fibonacci ratio in the sequence would be 4.236 which calculates to a target at 998. That looks too low, unless the degree of labelling is moved up one and this may be a third wave down at cycle degree just beginning. I know that possibility right now may seem absurd, but it is possible.
Alternatively, primary wave 3 may not exhibit a Fibonacci ratio to primary wave 1. When intermediate waves (1) through to (4) within the impulse of primary wave 3 are complete, then the target may be calculated at a second wave degree. At that stage, it may change or widen to a small zone.
Draw a small channel about the new downwards movement using Elliott’s first technique: draw the first trend line from the ends of minute waves i to iii, then place a parallel copy on the end of minute wave ii. With upwards movement today clearly breaching the channel, this confirms that minor wave 1 is over and minor wave 2 has begun.
After reexamination, the equivalent minor wave 2 within the last big bear market was a 0.495 depth of minor wave 1 and lasted two days to minor wave 1’s five days.
The next possible equivalent minor wave 2 lasted one day longer than its minor wave 1 and was very deep at 0.81.
Overall, it is impossible to tell with certainty how deep and long lasting this minor wave 2 will be. Expect surprises to the downside with a big third wave in its infancy.
Minor wave 2 may be deep enough to find resistance at the bear market trend line. This line should now offer very strong resistance; I would not expect price to break above it.
Minor wave 1 lasted 12 days, one short of a Fibonacci 13. So far minor wave 2 has lasted only two days. If it continues for another few days and has a clear three wave look to it, then it would very likely be complete. The risk today is that it could be over here or very soon indeed.
Minor wave 2 may not move beyond the start of minor wave 1 above 2,111.05.
Upwards movement back into minute wave i price territory cannot be minute wave iv, so minor wave 1 must be over.
Ratios within minor wave 1 are: minute wave iii is just 0.09 points longer than 1.618 the length of minute wave i, and minute wave v is just 0.06 points longer than 0.618 the length of minute wave i. There is some alternation between the deep 0.68 double zigzag of minute wave ii and the shallow 0.27 single zigzag of minute wave iv.
The most difficult question today is whether or not minor wave 2 could be over. It certainly could be, and we may be surprised by very strong downwards movement tomorrow.
At this stage, the wave count is labelled with an incomplete minor wave 2. In order for the wave count to have a more typical look at the daily chart level minor wave 2 may be a little longer lasting and a clearer three wave structure. A small red candlestick or doji tomorrow may complete a zigzag down for minute wave X. That may be followed by one or two upwards days for a second zigzag labelled minute wave y to end when price touches the bear market trend line.
Alternatively, the degree of labelling within minor wave 2 may be moved up one degree and it may be over at the high today. Tomorrow may see the start of minor wave 3 downwards with very swift strong movement.
Only a five down on the hourly chart would confirm that minor wave 2 is over. Unfortunately, impulses and zigzags can often look the same and it is sometimes impossible to tell which one a movement subdivides as.
On balance, my conclusion is the high of Tuesday still represents a good entry price for this large third wave. Trying to perfectly time a better entry risks missing this opportunity right now. Some risk must be accepted. Risk at this stage is firmly at 2,111.05. Minor wave 2 may not move beyond the start of minor wave 1.
BULL ELLIOTT WAVE COUNT
Within primary wave C downwards, 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.
This part of the structure is highly problematic for the bull wave count. It is not possible to see cycle wave IV as complete without a big problem in terms of Elliott wave structure.
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.
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.
There is a bearish engulfing candlestick pattern at the last high. This has occurred at the round number of 2,100 which increases the significance. Volume on the second candlestick is higher than volume on the first candlestick, which further increases the significance. That it is at the weekly chart level is further significance.
Engulfing patterns are the strongest reversal patterns.
Now this pattern is followed by another red weekly candlestick. The reversal implications of the pattern are confirmed.
This is a very strong bearish signal. It adds significant weight to the expectation of a trend change. It does not tell us how low the following movement must go, only that it is likely to be at least of a few weeks duration.
There is a weak bearish signal from On Balance Volume at the weekly chart level with a break below the green line. A stronger bearish signal would be a break below the purple line. At the end of last week, OBV has come down to almost touch the purple line. Some support may be expected about here, so this may prompt minor wave 2 to bounce higher.
There is hidden bearish divergence between Stochastics and price at the last high and the high of November 2015. Stochastics has moved further into overbought territory, but this has failed to translate into a corresponding new high in price. Price is weak. MACD exhibits the same hidden bearish divergence.
After a period of declining ATR, it should be expected to turn and begin to increase.
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.
Volume data today on StockCharts differs from NYSE. NYSE data shows today’s upwards day has lighter volume than the prior two upwards days. There are now three upwards green daily candlesticks in a row on declining volume. The rise in price is not supported by volume, so it is suspicious. This is more likely a small bear market rally than the start of a new upwards trend.
Price has sliced through resistance at the horizontal line about 2,070. The next significant horizontal line is at 2,100. This round number should be expected to offer very strong resistance at this stage. If price reaches up that high, expect an end to upward movement there.
ADX is declining and indicating a possible trend change. The +DX line today has slightly crossed over the -DX line.
ATR is increasing today indicating a possible trend beginning.
The picture from ADX and ATR today is unclear, which is to be expected if this upwards movement is a small rally.
On Balance Volume did in fact assist to show where minor wave 1 ended. It ended when OBV touched the purple line. Now OBV is moving strongly away from the line. In looking for a line to offer resistance for OBV the best I can find is the yellow line. This line does not offer good technical significance; it is not very long held and has been breached. But it has been tested three times before. It may be that it is being tested a fourth time today. This may assist to stop price moving higher about here; this suggests that minor wave 2 may be over today more quickly than expected.
RSI is just above neutral. There is room for price to rise or fall.
Stochastics is returning from oversold.
MACD has not indicated a trend change yet.
VOLATILITY – 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.
Inverted VIX today has made a new high above the prior swing high of 27th April, but price has failed to make a corresponding new high. This indicates that volatility today declined to below the prior point on 27th April, but this decline in volatility has not translated into a corresponding increase in price. Price again is weak.
Upwards rallies continue to exhibit persistent weakness..
BREADTH – 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 20th April, the AD line made new highs while price 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 (orange lines).
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.
The AD line is now declining and has breached a support line (cyan). There is breadth to downwards movement; more stocks are declining than advancing which supports the fall in price.
Now for three days in a row price increases while the AD line also increases. There is breadth to this upwards movement.
ANALYSIS OF LAST MAJOR BEAR MARKET OCTOBER 2007 – MARCH 2009
In looking back to see how a primary degree third wave should behave in a bear market, the last example may be useful.
Currently, the start of primary wave 3 now may be underway for this current bear market. Currently, ATR sits about 19. With the last primary degree third wave (blue highlighted) having an ATR range of about 18 to 76, so far this one looks about right.
The current wave count sees price in an intermediate degree first wave within a primary degree third wave. The equivalent in the last bear market (yellow highlighted) lasted 39 days and had a range of ATR from 16 – 27.
This chart is shown on an arithmetic scale, so that the differences in daily range travelled from the start of primary wave 3 to the end of primary wave 3 is clear.
Primary wave 3 within the last bear market from October 2007 to March 2009 is shown here. It started out somewhat slowly with relatively small range days. I am confident of the labelling at primary degree, reasonably confident of labelling at intermediate degree, and uncertain of labelling at minor degree. It is the larger degrees with which we are concerned at this stage.
During intermediate wave (1), there were a fair few small daily doji and ATR only increased slowly. The strongest movements within primary wave 3 came at its end.
It appears that the S&P behaves somewhat like a commodity during its bear markets. That tendency should be considered again here.
This chart will be republished daily for reference. The current primary degree third wave which this analysis expects does not have to unfold in the same way, but it is likely that there may be similarities.
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 @ 08:40 p.m. EST.