A small inside day does not clarify the situation.
Summary: The downwards trend is not in doubt but short term how high a bounce goes is unclear. The main hourly wave count expects upwards movement for another two days (or maybe a little longer) to a target at 2,099 to complete minor wave 2. A new high above 2,058.35 would now add confidence. The alternate hourly wave count expects an acceleration of downwards movement towards a target at 1,988 (short term). This would be confirmed below 2,025.91.
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.
If minor wave 2 is incomplete, then it may not move beyond the start of minor wave 1 above 2,111.05.
If minor wave 2 continues higher, then it may end when price finds resistance again at the bear market trend line. First, it needs to break above resistance at the short term bear market trend line.
MAIN HOURLY CHART
Minor wave 2 may be still unfolding as an expanded flat correction. Within the flat, minute wave a is a complete three, a zigzag. Minute wave b is also a three, a double zigzag, and at 1.30 length of minute wave a is nicely within the normal range of 1 to 1.38.
The subdivisions of minute wave b fit perfectly on the hourly and five minute charts. Within the double zigzag, minuette wave (x) is brief and shallow and minuette wave (y) moves below minuette wave (w) deepening the correction and achieving its purpose. The structure has a downwards slope and looks like a reasonable double zigzag.
At 2,099 minute wave c would reach 1.618 the length of minute wave a. This would see minor wave 2 end with a slight overshoot of the bear market trend line and close to the round number pivot of 2,100, both of which should provide very strong resistance.
If this wave count is right, then we may be offered a gift from the market for the perfect short entry to ride primary wave 3 down.
A new high above 2,058.35 now would invalidate the alternate below and confirm this main wave count at the hourly chart level.
In the short term, minuette wave (ii) may be a complete zigzag. It may be over at Monday’s low, or it may yet continue lower when the next session opens for Tuesday. If it does continue lower, then it may end about either the 0.382 or 0.618 Fibonacci ratios. The 0.382 ratio is favoured in this instance because there subminuette wave c would be close to equality in length with subminuette wave a.
Within minute wave c, minuette wave (ii) may not move beyond the start of minuette wave (i) below 2,025.91.
If minor wave 2 is to total a Fibonacci thirteen daily candlesticks, then it has only two days left in which the structure must complete. It may be able to do so if tomorrow moves price strongly higher, but at this stage it looks unlikely. It looks like minor wave 2 may need more than two more sessions to complete.
ALTERNATE HOURLY CHART
This was the main wave count up to the end of last week. It is relegated to an alternate now for two main reasons:
1. Minuette wave (ii) is seen as a rare running flat. This reduces the probability of the wave count.
2. At the weekly chart level, On Balance Volume is no longer clearly bearish short term.
If minor wave 2 is over, then it is a more brief zigzag. Within downwards movement from the start of primary wave 3, this wave count sees three overlapping first and second waves.
Minuette wave (ii) has a complete structure but subminuette wave c has failed to move beyond the end of submineutte wave a at 2,060.61. It is truncated by 2.26 points. This is possible, but it does not have a very good probability.
Downwards and sideways movement for Monday’s session is not part of the upwards wave labelled subminuette wave c, because it is too far out of proportion with all other small corrections within it. This looks like a new wave. It is unconvincing for the start of a third wave at three degrees.
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.
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.
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.
On Balance Volume broke below the purple line and is now returning to just above it. The bearishness of the break below the purple line is negated.
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 hammer of Thursday’s candlestick is working to show a trend change, so far from down to up. It should be expected that price may find resistance initially at the sloping blue line and after that at the horizontal line about 2,080 and finally at the horizontal line at 2,100.
The Head and Shoulders pattern has not been confirmed with a breach of the neckline. Price cannot move below and stay below it. The neckline is drawn across the two lows between shoulders and head, from the low of 7th April to the low of 6th May.
There was some support for the rise in price for Friday’s session by volume. This usually indicates that the rise in price is not finished. Now for Monday’s session the small fall in price comes with lighter volume. A small inside day which closes red on lighter volume looks like a small countertrend movement, indicating it is reasonably likely that price shall continue higher until it finds resistance.
ADX is now slightly declining indicating the market is not trending. ATR is also slightly declining in agreement.
On Balance Volume has found strong support at the purple line. This line has very strong technical significance. The pink line is redrawn today to sit across the last three highs for OBV. A break above this new pink line would have some technical significance. It would be a short term bullish signal. If the pink line is breached, then the yellow line (which has reasonable technical significance) may provide resistance. A break below the purple line would be a strong bearish signal.
RSI is close to neutral. There is room for price to rise or fall.
Stochastics is returning from oversold.
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.
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.
To see some discussion of this primary degree third wave in video format click here.
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 @ 09:41 p.m. EST.