Upwards movement invalidated the main hourly Elliott wave count and confirmed the alternate, which was judged to have a very low (5%) probability.
Summary: Divergence with price and VIX (inverted) supports a high in place today or very soon tomorrow. A third wave down is still most likely. Risk and the invalidation point remain at 2,111.05. Some confidence may be had in this outlook if price makes a new low below 2,088.59. A new alternate is published today (it has been published before and is resurrected today) which places risk at 2,116.48 but also expects an imminent trend change.
Last published monthly charts are here.
New updates to this analysis are in bold.
BEAR ELLIOTT WAVE COUNT
The box is added to the weekly chart. Price has been range bound for months. A breakout will eventually happen. The S&P often forms slow rounding tops, and this looks like what is happening here at a monthly / weekly time frame.
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. If minute wave c is complete, it would be 5.86 points longer than 1.618 the length of minute wave a. If it continues a little higher tomorrow, then it may find resistance at the gold trend line which is a copy of the bear market trend line placed on the high labelled primary wave 2.
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. Today short positions must now consider the alternate bear wave count published below. Both this main and the alternate expect new lows below 1,810.10, but their invalidation points are slightly different.
Minute wave c may be complete. I have two hourly wave counts today and this is the preferred wave count because it sees alternation between minuette waves (ii) and (iv). Minuette wave (ii) fits as a zigzag and minuette wave (iv) may have been a regular contracting triangle.
Minuette wave (iii) is 3.05 points longer than 1.618 the length of minuette wave (i). There is no adequate Fibonacci ratio between minuette wave (v) and either of (i) or (iii).
The channel here is drawn using Elliott’s second technique: the first trend line from the ends of the second to fourth waves, then a parallel copy on the end of the third wave. A breach of the lower edge of the channel would indicate a possible trend change.
A new low below 2,088.59 would invalidate the alternate below and provide some price confirmation of a trend change.
Minor wave 2 may not move beyond the start of minor wave 1 above 2,111.05.
At 1,919 minor wave 3 would reach 2.618 the length of minor wave 1. If minor wave 2 moves higher, then this target must also move correspondingly higher.
ALTERNATE HOURLY CHART
This alternate differs in the structure of minuette wave (iv). Here it is seen as a zigzag. There is no alternation in structure between minuette waves (ii) and (iv) which reduces the probability of this wave count to an alternate.
If minuette wave (iv) ended earlier as a zigzag, then minuette wave (v) would be incomplete. It must be a five wave structure. It may be either an ending diagonal or an impulse. Within minuette wave (v), subminuette wave iv may not move beyond the end of submineutte wave ii below 2,088.59 (the rule for a fourth wave of a diagonal).
There is no target given for minuette wave (v) because it has passed 0.618 the length of minuette wave (i). The next targets which may be calculated would all give a figure above the invalidation point at 2,111.05. Minuette wave (v) may not exhibit a Fibonacci ratio to minuette waves (i) or (iii).
When subminuette waves iii and iv are complete, then a target may be calculated at subminuette wave degree. That cannot be done yet.
ALTERNATE BEAR ELLIOTT WAVE COUNT
This alternate has been published before. It was not published for some time to minimise the number of charts and keep the analysis a little simpler. It is again necessary though.
There are two possible structures for the start of a new trend, either an impulse (main wave count) or a leading diagonal (this alternate).
An impulse is more common than a leading diagonal which reduces the probability of this wave count to an alternate. However, the main wave count also has a rare running flat, so on balance this alternate should still be considered.
Within a leading diagonal, subwaves 2 and 4 must subdivide as zigzags. They are commonly very deep, between 0.66 to 0.81 the prior wave. Here intermediate wave (2) is 0.93 of intermediate wave (1) and so far intermediate wave (4) is 0.98 of intermediate wave (3). Both these subwaves are much deeper than normal, so this reduces the probability of this wave count a little more.
While leading diagonals are not as common as impulses for first waves, leading expanding diagonals are less common still. They are not exactly rare structures, but they are not common. This diagonal would be expanding: the third wave is longer than the first, the fourth wave is longer than the second, and the trend lines diverge. All rules are met.
Subwaves 1, 3 and 5 are most commonly zigzags within leading diagonals, but sometimes they may also appear to be impulses. Here so far intermediate waves (1) and (3) fit perfectly as zigzags.
Intermediate wave (4) may end a little higher when price comes to touch the (1) – (4) trend line. This line is drawn from the end of intermediate wave (1) along to the high of minor wave A within intermediate wave (4).
Intermediate wave (4) may not move beyond the end of intermediate wave (2) above 2,116.48.
Leading diagonals may not have truncated fifth waves. Intermediate wave (5) must move below the end of intermediate wave (1) at 1,810.10. Intermediate wave (5) must be longer in length than intermediate wave (3) which was 306.38 points.
If the next wave down does not show an increase in momentum or volume beyond intermediate wave (3), then this would be an explanation.
Intermediate wave (4) must subdivide as a zigzag. Within the zigzag, minor wave C is likely to move at least slightly above the end of minor wave A at 2,111.05 to avoid a truncation.
No target is given for intermediate wave (4) to end because the best guide is likely to be the (1) – (4) trend line.
This wave count must see the downwards wave labelled minute wave c within minor wave B as a five wave structure. This is possible, but it looks forced on the daily and hourly chart levels. This reduces the probability of this wave count.
Momentum and volume of the next wave down would indicate which bear wave count is correct (if price remains below 2,111.05). A new high above 2,111.05 would invalidate the main bear wave count and confirm this alternate.
When the leading diagonal is complete, then a very deep second wave correction would be expected. This alternate wave count expects the box on the first weekly chart to remain essentially intact several more months.
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.
The hanging man candlestick has either not worked or was an early warning of an approaching high.
Price has moved higher on declining volume for two days in a row. The rise in price is not supported by volume, so it is suspicious. It is not sustainable. However, we can see prior examples on this daily chart where price moved up on declining volume and it did not indicate an end to upwards movement: 19th and 22nd February, 24th and 25th of February, 11th and 12th of March, and 6th and 9th of May. Lighter volume is concerning for a bullish wave count, but it will not tell us when and where a bear market rally will end. It just indicates weakness.
The day with strongest volume recently is the downwards day of 31st of May. This was the strongest volume seen back to 29th of April, which was also a downwards day.
The volume profile is bearish.
ADX still indicates an upwards trend is in place. ATR still disagrees as it is declining. This upwards movement looks more like a bear market rally than a bull market advance; there is something wrong with it.
On Balance Volume has today come up to touch the yellow line. This line could be redrawn with a shallower slope, depending on which highs it is drawn across. This line has been broken before and yet OBV returned below it, so it does not have strong technical significance. A break above this line would be a bullish indicator, but not a strong one.
A break below the pink line would be a weak bearish signal. A break below the purple line would be a strong bearish signal.
There is no divergence between price and RSI today to indicate any weakness to this upwards trend. RSI is not yet extreme. There is further room for price to rise.
Price made a new high today above the prior high of 31st of May yet Stochastics did not. This divergence is bearish, but it is weak and unreliable. I would not put much weight on short term divergence between price and Stochastics.
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.
Again, there is divergence today with price and VIX (yellow lines). Price made a new high above the prior high of 27th of May yet VIX has not made a new high (VIX has made a lower high). This divergence is clear and strong. I would put a lot of weight on divergence between price and VIX. This indicates that price has made a slight new high, but it does not come with a corresponding decline in volatility. This is regular bearish divergence and indicates exhaustion for bulls.
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.
There is now double hidden bearish divergence between price and the AD line (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.
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.
The last major lows within the bull market are noted below. Both the industrials and transportation indicies have closed below these price points on a daily closing basis; original Dow Theory has confirmed a bear market. By adding in the S&P500 and Nasdaq a modified Dow Theory has not confirmed a new bear market.
Within the new bear market, major highs are noted. For original Dow Theory to confirm the end of the current bear market and the start of a new bull market, the transportation index needs to confirm. It has not done so yet.
Major lows within the prior bull market:
DJIA: 15,855.12 (15th October, 2014) – closed below on 25th August, 2015.
DJT: 7,700.49 (12th October, 2014) – closed below on 24th August, 2015.
S&P500: 1,821.61 (15th October, 2014) – has not closed below this point yet.
Nasdaq: 4,117.84 (15th October, 2014) – has not closed below this point yet.
Major highs within the new bear market:
DJIA: 17,977.85 (4th November, 2015) – closed above on 18th April, 2016.
DJT: 8,358.20 (20th November, 2015) – has not closed above this point yet.
S&P500: 2,116.48 (3rd Nobember, 2015) – has not closed above this point yet.
Nasdaq: 5,176.77 (2nd December, 2015) – has not closed above this point yet.
It is a reasonable conclusion that the indices are currently in a bear market. The trend remains the same until proven otherwise. Dow Theory is one of the oldest and simplest of all technical analysis methods. It is often accused of being late because it requires huge price movements to confirm a change from bull to bear. In this instance, it is interesting that so many analysts remain bullish while Dow Theory has confirmed a bear market. It is my personal opinion that Dow Theory should not be accused of being late as it seems to be ignored when it does not give the conclusion so many analysts want to see.
This analysis is published @ 01:04 a.m. EST on 3rd June, 2016.