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Downwards movement was expected.

Price made a lower high and a lower low for the session.

Summary: Downwards movement is still expected for next week; a first wave down is unfolding. The mid term target at 1,916 may be met in another 20 sessions. The long term target at 1,423 may still be another 25 or 28 weeks away. The bottom line: price has so far made a series of lower lows and lower highs since May 2015, and so far each rally has been more than fully retraced. Until proven otherwise, this market is a bear market.

Last published monthly charts are here.

New updates to this analysis are in bold.



S&P 500 weekly bear 2016
Click chart to enlarge.

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. But it may not exhibit a Fibonacci duration, so the expectations given here can be a rough guide only.

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.


S&P 500 daily bear 2016
Click chart to enlarge.

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 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.


S&P 500 daily bear 2016
Click chart to enlarge.

Minor wave 2 may be a complete expanded flat correction. Minor wave 3 down, within intermediate wave (1), may have begun on Friday.

Minuette wave (ii) so far has found resistance at the lower edge of the parallel channel about minute wave c.

At 2,070 minuette wave (iii) would reach 1.618 the length of minuette wave (i).

A new low on Monday below 2,085.36 would add confidence to this wave count.

Minuette wave (ii) may not move beyond the start of minuette wave (i) above 2,105.26.

At 1,919 minor wave 3 would reach 2.618 the length of minor wave 1.


S&P 500 daily bear 2016
Click chart to enlarge.

It is still possible that minor wave 2 is not over and may continue higher on Monday.

Within minute wave c, here minuette wave (iv) is now seen as a double combination: zigzag – X – flat. At 2,105 minuette wave (v) would reach 0.618 the length of minuette wave (i).

Within minuette wave (v), no second wave correction may move beyond the start of its first wave below 2,085.36.

The channel is redrawn using Elliott’s second technique. A breach of the lower edge of this channel would now provide reasonable indication of a trend change.



S&P 500 weekly bear 2016
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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.


S&P 500 daily bear 2016
Click chart to enlarge.

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.



S&P 500 weekly 2016
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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.


S&P 500 daily 2016
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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.



S&P 500 daily 2016
Click chart to enlarge. Chart courtesy of

Price is the final determinator and the most important aspect of market analysis. So what has price been doing since the all time high in May 2015?

Price has so far made lower lows and lower highs. Price continues to find resistance about the cyan trend line, and has not been able to come up to test the lilac line. So far each time price comes up to the cyan line it has been repelled there.

This week completes a small doji pattern with lighter volume. This represents a balance between bulls and bears for the week and indecision. The long lower wick is slightly bullish while the red colour is slightly bearish. Price is finding resistance about the cyan trend line.

On Balance Volume still shows divergence with price: from the high in November 2015 to the high in April 2016, price made a lower high while OBV made a higher high. This is hidden bearish divergence; it indicates weakness in price.

Volume is declining while price has essentially moved sideways for the last ten weeks in a zone delineated by brown trend lines. The longer price meanders sideways the closer a breakout will be. During this sideways range, it is a downwards week which has strongest volume suggesting a downwards breakout may be more likely.

The strong green candlestick for last week was the most bullish signal for some time. With this now followed by a doji, some of this bullishness is dissipated.

The 40 week moving average has turned upwards, another bullish signal. However, this has happened before in October 2015 yet it was followed by a strong downwards wave. On its own this bullish signal does not necessarily mean price is going to make new all time highs.


S&P 500 daily 2016
Click chart to enlarge. Chart courtesy of

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.

Price is range bound between support about 2,040 and resistance about 2,100. Overall, volume is declining as price moves sideways. During this range, it is three downwards days which have strongest volume (ignoring the options expiry date of 18th of March): 29th of April, 28th of April, and 31st of May. This suggests a downwards breakout is more likely than upwards.

Friday’s candlestick completes another hanging man pattern. There are two of these now at or close to the high of 2nd June: the first was on 31st of May and now another on 3rd June. The long lower wick of a hanging man is bullish, so this pattern requires bearish confirmation in the next session. Bearish confirmation would come with an open below the real body of the hanging man, or preferably a close below the real body of the hanging man.

ADX still indicates an upwards trend is in place.

ATR is overall flat, but at the end of the week may be slightly increasing. It may be beginning to indicate a new trend, but this is not yet clear. What is clear is during the last upwards swing ATR declined. Overall, during this range, ATR increases on downwards swings and declines on upwards swings. This indicates more activity from selling pressure than buying pressure.

On Balance Volume has again found resistance at the yellow line, which is reinforced. It now has some reasonable technical significance; although it has been broken before, yet OBV returned back below it. A break below the pink line would be a weak bearish signal. A break below the purple line would be a strong bearish signal. A break above the yellow line would be a reasonable bullish signal.

There is some divergence between OBV and price: from the high of 10th of May, price has made a higher high but OBV has made a slightly lower high. This is regular bearish divergence and indicates exhaustion for the bulls and underlying weakness in price.

RSI exhibits no divergence with price to indicate weakness. RSI is not yet overbought. There is room for price to rise further.

Stochastics exhibits weak bearish divergence with price at the end of this week, but I have learned to not give this too much weight.


VIX Monthly 2016
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Several instances of large divergence between price and VIX (inverted) are noted here. Blue is bearish divergence and yellow is bullish divergence (rather than red and green, for our colour blind members).

Volatility declines as inverted VIX rises, which is normal for a bull market. Volatility increases as inverted VIX declines, which is normal for a bear market. Each time there is strong multi month divergence between price and VIX, it was followed by a strong movement from price: bearish divergence was followed by a fall in price and bullish divergence was followed by a rise in price.

At this stage, inverted VIX shows hidden bearish divergence with price: the high in April for price has not yet been exceeded yet VIX has made a higher high. This indicates underlying weakness in price, which is normal to see during a bear market rally.


VIX daily 2016
Click chart to enlarge. Chart courtesy of

There are two instances of hidden bearish divergence noted on this daily chart of price and VIX (blue lines). VIX makes higher highs as price makes lower highs. The decline in volatility is not matched by a corresponding rise in price. Price is weak.

There is also very short term regular bearish divergence (pink lines). VIX did not make a corresponding new high as price made a new high this week. This indicates exhaustion for bulls and underlying weakness in price.

While I would not give much weight to divergence between price and many oscillators, such as Stochastics, I will give weight to divergence between price and VIX. Analysis of the monthly chart for the last year and a half shows it to be fairly reliable.


S&P 500 daily 2016
Click chart to enlarge. Chart courtesy of

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.

Price made a lower high and a lower low on the last day of this week, finishing with a red candlestick. Price moved lower yet the AD line moved higher. This indicates that although market breadth was strong for Friday it could not translate into a corresponding rise in price. Again, price is weak.


Bear Market 2007 - 2009
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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.

Bear Market 2007 - 2009
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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. If another primary degree third wave is about to unfold, then the historic equivalent point would be early on within intermediate wave (1). There were many small range days and quite a few doji during this movement. Intermediate wave (1) moved relatively slowly and with some hesitancy. With this historic context we must now allow for deep second wave corrections and small range days in the current wave count.

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 @ 04:57 a.m. EST on 4th June, 2016.