The target at 2,099 was slightly overshot at the start of today’s session, but price then turned down to breach the channel on the hourly chart.
So far price is behaving as expected and offering what looks like a perfect trade set up during today’s session.
Summary: The wave count now expects to see a third wave down. The short term target is now at 1,916. The long term target remains at 1,423. Risk should still be calculated at 2,111.05, but for the less adventurous it may now be set at 2,103.48. Persistent weakness in upwards movement is noticed and volume favours more downwards movement. This looks like a very good low risk high reward opportunity. Nothing is ever 100% certain though, so always manage risk: never invest more than 5% of equity on any one trade and always use a stop loss to protect your account.
To see last published monthly charts click here.
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.
Minor wave 2 fits perfectly as a very common expanded flat correction. Minute wave b is a 1.3 length of minute wave a, nicely within normal range of 1 to 1.38. Minute wave c is 4.08 points longer than 1.618 the length of minute wave a. Minute wave c has a clear five wave look to it on the daily chart.
At 1,916 minor wave 3 would reach 2.618 the length of minor wave 1. This is the appropriate ratio to use for this target because minor wave 2 is very deep at 0.9 the length of minor wave 1.
Notice that the bear market trend line has been overshot before at the high labelled primary wave 2, so it may be overshot again. A parallel copy of the bear market trend line is drawn in gold and placed on the high labelled primary wave 2. This line was almost touched with today’s high. At this time, this line may be the final line of resistance.
Minor wave 2 may not move beyond the start of minor wave 1 above 2,111.05. This is the risk to short positions at this stage.
If any members are choosing to enter short positions here, then manage risk carefully: Do not invest more than 3-5% of equity on any one trade and always use a stop loss to contain losses.
Draw a channel about minute wave c using Elliott’s technique: draw the first trend line from the highs labelled minuette waves (i) to (iii), then place a parallel copy on the low labelled minuette wave (ii).
Minor wave 2 began the session by moving slightly higher, then price turned and breached the green channel containing minute wave c providing trend channel confirmation of a trend change. Now that there is some confirmation of a trend change the invalidation point at the hourly chart level may be moved lower. Within minor wave 2, no second wave correction may move beyond its start above 2,103.48.
When there is a clear five down on the hourly chart, then the invalidation point (and final risk) may be moved down also at the daily chart level. That cannot be done today.
Price turned for a throw back to find resistance at the lower edge of the trend line after the trend channel was breached. When price behaves like that it offers a low risk entry point to join the new trend, in this case down. Risk is lowered because entry is made after some confirmation of a trend change and stops may be set just above the prior high, in this case 2,103.48.
A new low below 2,058.35 would provide price confirmation of a trend change. This is the high of minuette wave (i) within minute wave c. A new low below 2,058.35 could not be a fourth wave correction within an impulse unfolding upwards because it may not move into first wave price territory.
At 1,916 now minor wave 3 would reach 2.618 the length of minor wave 4.
For position traders who prefer to hold a position for weeks or months, the final target of 1,423 may also be considered for short positions entered here. Minor wave 2 was a very deep and relatively time consuming expanded flat correction. When minor wave 4 arrives it may be a relatively quick and shallow zigzag. The S&P can behave a little like a commodity during big third waves of bear markets: momentum accelerates at the middle of a third wave and remains strong towards the end, forcing fourth wave corrections to be brief and shallow with final fifth waves ending on swift strong movement.
This does not mean that this is how the S&P will behave this time, but it does mean that the probability of it doing so is high.
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.
Intermediate wave (2) may be an incomplete zigzag. Within the zigzag, minor wave B may now be a complete expanded flat. At 1,988 minor wave C would reach 1.618 the length of minor wave A. This ratio is used for this target because intermediate wave (2) should be expected to be relatively deep. If this target is wrong, it may not be low enough. The next likely target would be the 0.618 Fibonacci ratio at 1,920.
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 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.
Last week completes a strong bullish candlestick, but it comes on declining volume. Price was not supported by volume although price managed to move substantially higher.
This pattern was seen back in July 2015 on this weekly chart. The week ending 13th of July, 2015, completed a strong bullish candlestick after a week immediately prior which completed a candlestick with a small real body and a long lower wick. The second candlestick there too came on declining volume. The following week managed to make a slight new high, but the advance of the bullish candlestick was fully retraced within two weeks.
The conclusion must be that this candlestick is bullish and would support more upwards movement. But the decline in volume is very concerning and indicates that if price does continue higher, it may not be by much.
On Balance Volume trend lines have been redrawn. OBV is constrained within two larger lines (green and orange). A break above the green line would be a strong bullish signal. A break below the orange line would be a strong bearish signal. OBV is constrained more short term between the two pink lines. The upper line may provide resistance; a break above it would be a weak bullish signal. The lower line has been tested and breached; this line is weak. A break below the lower pink line would be a weak bearish signal.
There is some long held divergence here between On Balance Volume and price. Between the last two major swing lows in price at the end of August 2015 and early February 2016, price made new lows but OBV made a higher low. This regular bullish divergence indicated the February low in price was weak. It was followed by a major upwards swing from price.
Now, from the major swing high for price in early November 2015 to the last major swing high in April 2016, price has made a lower high but OBV has made a higher high. Price cannot make a corresponding new high despite OBV making a new high. Price is weak. This hidden bearish divergence now supports the Elliott wave count.
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 is a hanging man. This is a reversal pattern, but the bullish implications of the long lower shadow mean that it requires bearish confirmation with either an open below the real body of the hanging man or preferably a close below the real body.
Volume for today’s downwards day is higher. The fall in price was supported by volume. Volume for today is higher than the last five trading days.
Price looks like it has again found resistance about the round number pivot of 2,100, the purple horizontal resistance line.
ADX still indicates an upwards trend is in place. This indicator is lagging as it is based on a 14 day average.
ATR today is still declining, disagreeing with ADX. During the last rally of seven days, ATR overall declined which indicates the rally is more likely a bear market rally than part of a bull market. Declining ATR is normal for counter trend movements and not normal for a sustainable trend.
RSI is not extreme and exhibits no divergence with price.
Stochastics is overbought. If this rally is a countertrend movement, then it may end here or very soon.
On Balance Volume has come down to find support at the short pink trend line. This line has some significance as it is horizontal and has been tested a few times. This may provide some support to initiate a small bounce. There is not a lot of room for upwards movement though; OBV is finding resistance at the yellow line.
A break below the pink line would be a reasonable bearish signal from OBV. A break below the purple line would be a strong bearish signal.
A break above the yellow line would be a weak bullish signal from OBV. Weak because this line has been breached before yet OBV returned below it.
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.
There is now double negative hidden bearish divergence between price and VIX (pink lines). At the end of last week, VIX has made a new high above the prior swing high of 20th of April yet price has failed to make a corresponding new high. This indicates weakness in price. Volatility has declined below the point it was at on 20th of April, but this has failed to be translated into a corresponding rise in price.
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.
There is now double hidden bearish divergence between price and the AD line at the end of this week (dark blue lines). The AD line has made a new swing high above the prior high of 20th of April. This increase in breadth to upwards movement has failed to translate into a corresponding rise in price. Price has failed to make a new high above 20th of April. This indicates weakness in price.
Price today moved lower to complete a red daily candlestick yet the AD line moved upwards. The increase in market breadth today could not be translated into an increase in price. Price is weak. This divergence (although only daily) is bearish.
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.
Put / Call ratios are added from data published at CBOE. This ratio is the index ratio published, not the ratio specifically for the S&P500. It should be a reasonable indicator of sentiment. Only values above 2 and below 1, extremes, are noted. A low P/C ratio indicates more long positions than short, so it is interpreted as bearish, a contrarian indicator. A high P/C ratio indicates more short than long positions, so it is interpreted as bullish, a contrarian indicator.
There were two instances where the P/C ratio gave a bullish extreme above 2 during primary wave 3. One instance happened right at the end of the middle of the third wave. My conclusion is that the P/C ratio may be a reasonable sentiment indicator, but it is not to be taken definitively. It should be one piece of information weighed up alongside other information. Currently, the index P/C ratio is not extreme. Only extremes will be noted.
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.
It is important to note here that traditional Dow Theory (using only DJT and DJIA) has confirmed a bear market and not confirmed the end of that bear market and the start of a new bull market. I would consider Dow Theory to be a solid and effective tool to determine overall market direction. This is another reason why I have little confidence in the alternate bullish Elliott wave count.
This analysis is published @ 06:02 p.m. EST.