More downwards movement was expected for Thursday’s session, which is what happened.
Summary: The main wave count expects to see downwards movement accelerate in the next week or so as a third wave unfolds. The first short term target is at 1,988. The long term target remains at 1,423. Risk to short positions is now at 2,071.88. The alternate hourly wave count today has a reasonable probability with some support from classic technical analysis. Be warned: tomorrow may print a green candlestick. If that happens, it presents an opportunity to add to short positions.
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 over lasting 28 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.
Primary wave 2 may be 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. 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.
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.
At this stage, it looks slightly more likely that minor wave 3 is underway considering On Balance Volume at the weekly chart level, resistance at the short term cyan trend line, and structure at the hourly chart level.
At this stage, it looks extremely likely that minor wave 2 was over on 10th of May, lasting just two days and 0.63 the length of minor wave 1.
A short term bear market trend line is added from the high of primary wave 2 to the first small swing high of minute wave ii in cyan. This trend line is about where price is finding resistance. It is copied over to the hourly chart and the daily technical analysis chart.
The invalidation point is moved lower today. With the short term bear market trend line holding and two days in a row which managed to make new lows below the end of minor wave 1, it looks like minute waves i and ii are also complete. Within minute wave iii, no second wave correction may move beyond the start of its first wave above 2,071.88.
MAIN HOURLY CHART
It is my judgement today that this main hourly wave count has about a 65% probability, with the alternate hourly wave count the remaining 35% probability.
Within minor wave 3 downwards, there are now five overlapping first and second waves. This indicates a winding up of potential energy, which may be released in explosive downwards movement as the middle of the third wave down unfolds. This may now happen very soon, either tomorrow or early next week.
This whole structure is still within intermediate wave (1) of primary wave 3 downwards.
So far within minor wave 3 price has not managed to break below and stay below support of any of the three base channels drawn here.
Draw a base channel about each first and second wave at minor, minute and minuette wave degrees. Draw the first trend line of a base channel from the start of the first wave to the end of the second wave, then place a parallel copy on the end of the first wave. The following third wave should have the power to break below support of these base channels. Along the way down, upwards corrections should find resistance at the upper edge of each base channel.
Minuette wave (ii) is very likely complete as a deep 0.64 zigzag. Now that minuette wave (ii) is complete any further corrections should find resistance at the upper edge of the green base channel drawn about minuette waves (i) and (ii).
As the lower edge of each base channel is breached, then it should provide resistance for any throwbacks.
Along the way down, corrections present an opportunity to join the trend at a good price. Price today could not reach up to touch the upper edge of the green base channel. It could only get halfway (a midline is added). This may now be where upwards corrections at this stage find resistance. If price breaks below the lower pink line tomorrow, then look for that line to provide resistance to a small upwards correction. That may offer another good entry point to add to short positions.
At 1,988 minute wave iii would reach 2.618 the length of minute wave i.
The targets for minor wave 3 remain the same. At 1,969 minor wave 3 would reach 1.618 the length of minor wave 1. If price gets to this first target and the structure is incomplete, or if price keeps falling through this first target, then the second target will be used. At 1,897 minor wave 3 would reach 2.618 the length of minor wave 1.
The small correction of micro wave 2 may move higher tomorrow. Although, if it does, then it will be more disproportionate to subminuette wave ii one degree higher, so it is most likely to be over at today’s high. If it does continue, then it may not move beyond the start of micro wave 1 above 2,048.65.
If price breaks above 2,048.65, then use the alternate hourly wave count below.
ALTERNATE HOURLY CHART
What if minuette wave (ii) is not over? Downwards movement labelled subminuette wave b now fits as a zigzag, and it would be a 1.75 length of subminuette wave a. This is longer than the common range of 1 to 1.38 but within the allowable conventional maximum of 2.
If minuette wave (ii) is incomplete, it may be an expanded flat, repeating the structure of minute wave ii one degree higher.
The target is removed. For this alternate, tomorrow, the upper pink trend line should be used. It would be most likely that subminuette wave c would move at least slightly above the end of subminuette wave a at 2,060.61 to avoid a truncation. It may just be able to do this and remain within the pink channel.
The short and mid term targets are exactly the same for this alternate.
Minuette wave (ii) may not move beyond the start of minuette wave (i) above 2,071.88.
BULL ELLIOTT WAVE COUNT
Cycle wave IV is seen as a complete flat correction. Within cycle wave IV, primary wave C is still seen as a five wave impulse.
Intermediate wave (3) has a strong three wave look to it on the weekly and daily charts. For the S&P, a large wave like this one at intermediate degree should look like an impulse at higher time frames. The three wave look substantially reduces the probability of this wave count. Subdivisions have been checked on the hourly chart, which will fit.
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.
The invalidation point will remain on the weekly chart at 1,370.58. Cycle wave IV may not move into cycle wave I price territory.
This invalidation point allows for the possibility that cycle wave IV may not be complete and may continue sideways for another one to two years as a double flat or double combination. Because both double flats and double combinations are both sideways movements, a new low substantially below the end of primary wave C at 1,810.10 should see this wave count discarded on the basis of a very low probability long before price makes a new low below 1,370.58.
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.
Last week’s candlestick has a long upper shadow and is again red which is bearish.
Thank you to our member John for pointing out there is also a Three Black Crows pattern here on the weekly chart. The first three red weekly candlestick patterns are all downwards weeks. The pattern is not supported by increasing volume and only the third candlestick closes at or near its lows; these two points decrease the strength of this pattern in this instance. That the pattern occurs at the weekly chart level increases its strength.
There is another bearish signal from On Balance Volume this week with a break below the purple line. This does not indicate which hourly wave count is correct, but it does add weight to a downwards trend.
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.
Today’s candlestick completes a hammer pattern. This comes after some decline and warns that the trend may reverse. A trend reversal does not mean from down to up but may also mean only from down to sideways.
Hammer candlestick patterns in downwards trends often work to show a low, but not always. Recent examples of hammers not working can be found for 24th September, 2015, 28th April, 2015, and 9th December, 2014. Members would be able to find more going back further. The point is they often work, but often is not the same as always. It is a warning. It is not definitive.
Today’s session also comes with lighter volume. The fall in price was not supported by volume today giving some cause for concern.
For these two reasons the alternate hourly Elliott wave count must be understood to be entirely possible. Risk to long positions is calculated today at 2,071.88. There is a very real risk that tomorrow may see a green daily candlestick as price moves higher to end the week.
Price is testing support at the neck line of the head and shoulders pattern, but is unable to stay below this point. That two new lows in a row have been made below the neckline indicates that support will give way soon. Price may bounce up a little first though before coming back and breaching support.
If price bounces up, then expect very strong resistance at the short term bear market trend line drawn here in blue.
ADX is increasing today indicating the market is trending. The trend is down. ATR agrees as it too is trending. There is little doubt about the downwards trend, so analysis is currently focussed on identifying small bounces along the way: when may they turn up and how high they may go.
On Balance Volume is finding support again at the purple trend line. This line has been tested several times. This may provide support again today for another bounce up tomorrow. The lower pink line is removed. A new pink line is drawn across the last highs on OBV. If OBV turns up tomorrow, it may find resistance initially at the pink line. If that is breached, then it should find final resistance at the yellow line.
There is almost but not quite divergence between price and RSI today: price made a lower low below the low of 13th May and RSI has also made a lower low but just barely. RSI is still close to neutral. There is still plenty of room for price to fall.
Stochastics today exhibits divergence with price: price today made a new low below the prior low of 6th May while Stochastics made a higher low. This is regular bullish divergence and indicates underlying strength. This divergence supports the alternate hourly wave count over the main hourly wave count.
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 did not translate to a corresponding increase in price. Price is weak. This divergence is bearish.
The slight bullish divergence noted yesterday between inverted VIX and price has disappeared and did not lead to an upwards day for Thursday’s session. This is an illustration of why divergence should be noted as a warning, but it is not definitive. It must be weighed up with all other pieces of information.
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 prior 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.
The bullish divergence noted yesterday disappeared also for the AD line and did not yield a green daily candlestick for Thursday’s session. Again, this is an illustration of why divergence should be noted as one piece of evidence; on its own, it is not definitive.
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.
Looking more closely at early corrections within primary wave 3 to see where we are, please note the two identified with orange arrows. Minor wave 1 lasted a Fibonacci 5 days and minor wave 2 was quick at only 2 days and shallow at only 0.495 the depth of minor wave 1.
Minute wave ii, the next second wave correction, was deeper. Minute wave i lasted 3 days and minute wave ii was quick at 2 days but deep at 0.94 the depth of minute wave i.
What this illustrates clearly is there is no certainty about second wave corrections. They do not have to be brief and shallow at this early stage; they can be deep.
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 @ 10:36 p.m. EST.