Select Page

Downwards movement was expected.

The main Elliott wave count was invalidated with a new high above 2,111.05.

Summary: There is still weakness to upwards movement; a pullback is still expected sooner rather than later. How low the next wave down goes and how strong it is should indicate which of the three wave counts is correct. For now a new bear wave count allows more upwards movement up to but not above 2,134.75. While this market has made a series of lower lows and so far lower highs from the all time high in May 2015, and while Dow Theory has confirmed a bear market, then a bear wave count will remain more likely than any bullish wave count. In the short term, strong and persistent divergence with VIX indicates downwards movement for tomorrow.

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.

This wave count is new today. Primary wave 1 is still seen as complete, but as a leading expanding diagonal. Primary wave 2 would be expected to be complete here or very soon indeed.

Leading diagonals are not rare, but they are not very common either. Leading diagonals are more often contracting than expanding. This wave count does not rely on a rare structure, but leading expanding diagonals are not common structures either.

Leading diagonals require sub waves 2 and 4 to be zigzags. Sub waves 1, 3 and 5 are most commonly zigzags but sometimes may appear to be impulses. In this case all subdivisions fit perfectly as zigzags and look like threes on the weekly and daily charts. There are no truncations and no rare structures in this wave count.

The fourth wave must overlap first wave price territory within a diagonal. It may not move beyond the end of the second wave.

Leading diagonals in first wave positions are often followed by very deep second wave corrections. Primary wave 2 would be the most common structure for a second wave, a zigzag, and fits the description of very deep. It may not move beyond the start of primary wave 1 above 2,134.72.

Price may find resistance at the lilac trend line if it continues higher.


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

So far primary wave 2 would be a 0.93 correction of primary wave 1. Second wave corrections following first wave leading diagonals are commonly very deep, so this fits the most common pattern if primary wave 1 was a leading diagonal.

The most common structure for a second wave correction is a zigzag.

There is no Fibonacci ratio between intermediate waves (A) and (C).

Intermediate wave (C) must be a five wave structure. It may be either an impulse or an ending diagonal. It would be unfolding as an impulse, not a diagonal. The structure may be complete, but as yet there is no evidence of a trend change.

Draw a channel about primary wave 2 using Elliott’s technique for a correction: the first trend line from the start of the zigzag, then a parallel copy on the end of intermediate wave (A). When this channel is breached by downwards movement it would be indicating a possible trend change. A new low below 2,025.91 would provide price confirmation of a trend change. At that stage, downwards movement could not be a second wave correction within intermediate wave (C) and so intermediate wave (C) would have to be over.

Only when there is some confirmation of a trend change would I be prepared to calculate a target for the next wave down.


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

The hourly chart shows the whole structure of intermediate wave (C). This upwards movement is seen as a five wave impulse for all wave counts, so this one hourly chart will suffice for both bear and the bull wave count. The degree of labelling only would be different.

A five wave impulse upwards from the low labelled intermediate wave (B) on 19th of May may now be complete, but the fifth wave may also continue higher.

This wave count at the hourly chart level agrees with MACD. The strongest piece of movement is the third wave. The fifth wave exhibits weaker momentum and divergence with MACD.

Minor wave 3 is 3.05 points longer than 1.618 the length of minor wave 1. If minor wave 5 is over, then it would not exhibit a Fibonacci ratio to either of minor waves 1 or 3. If minor wave 5 continues a little higher, then the most likely target would be 2,118 where it would reach equality in length with minor wave 1.

The first indication of a potential trend change would come with a breach of the blue channel containing intermediate wave (C). Along the way down, expect to see some support, and a bounce, at the cyan bear market trend line.

To the upside, price may find resistance at the lilac trend line now.



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

This alternate wave count still sees a leading diagonal unfolding, but only intermediate wave (4) may be completing.

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
Click chart to enlarge.

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 has now broken a little above the 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. Now that the line is breached, the price point at which it is breached is calculated about 2,093.58. 3% of market value above this line would be 2,156.38, which would be above the all time high and the confirmation point.

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 trend line (lilac) 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. It is produced as an alternate, because all possibilities must be considered. Price managed to keep making new highs for years on light and declining volume, so it is possible that this pattern may continue to new all time highs for cycle wave V.

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
Click chart to enlarge.

Intermediate wave (2) may still be an incomplete flat correction. Minor wave A will subdivide as a three, a double zigzag, and minor wave B may be seen as a single zigzag.

The most likely point for intermediate wave (2) to end would be the 0.618 Fibonacci ratio at 1,920.

Intermediate wave (2) may not move beyond the start of intermediate wave (1) below 1,810.10.



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 today has moved above the cyan trend line for the first time with a full daily candlestick above the line. This is the most bullish signal to date; resistance at that line has weakened. Price has not yet made a new major swing high above the high of 2,116.48 in November 2015. This price point is very important. It may offer resistance.

Last 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.

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 two weeks ago 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.

Again, upwards movement comes on light volume; volume does not support the rise in price. Within the last seven sessions, it is two downwards days which have strongest volume indicating the bears were more active on those two days than the bulls have been in the other five days. The volume profile continues to be bearish.

ADX is still increasing indicating an upwards trend is in place. ATR still disagrees. Normally, during a trend the range travelled increases but here it is flat to declining. This is not normal for a trend and indicates the trend is weak.

On Balance Volume has again come up to touch the yellow trend line. There is still divergence between price making a new high above the prior high of 10th of May, but OBV has not managed to make a corresponding new high. This indicates price is weak. A break above the yellow line would be a reasonable bullish signal. A break below the purple line would be a bearish signal.

There is no divergence between price and RSI to indicate any weakness. RSI is not yet extreme. There is room for price to rise or fall.

Stochastics remains flat while price has made new highs for the last few sessions. There is some weak divergence here. But divergence between price and Stochastics is not very reliable. This is a bearish signal but a weak and unreliable one.


VIX Monthly 2016
Click chart to enlarge. Chart courtesy of

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.

There is still multi month divergence with price and inverted VIX currently: from the high in November 2015 price has not yet made a new high but inverted VIX has. Volatility at this stage is lower than it was in November 2015, but this has not yet translated into a new high for price. Price is still weak.


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 today. This indicates exhaustion for bulls and underlying weakness in price.

Price today turned upwards to new highs to complete a green daily candlestick but VIX (inverted) turned down. Volatility increased while price moved higher. This is not normal and indicates further exhaustion for bulls. This divergence again is bearish.

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 today, 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 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 @ 10:50 p.m. EST.