Select Page

Downwards movement did materialise as expected but not by much. Confirmation points have not been breached and price remains within the channel on the hourly chart.

Summary: Price is persistently weak but no trend change is yet indicated. Earliest confidence in a trend change would come with a new low below 2,085.36. A breach of the large black channel on the daily chart would provide further confidence. Finally, a new low below 2,025.91 would provide confirmation.

Last published monthly charts are here.

New updates to this analysis are in bold.

BEAR ELLIOTT WAVE COUNT

WEEKLY CHART

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 seen as complete 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.

So far it looks like price is finding resistance at the lilac trend line. Price has not managed to break above it for the last three days.

DAILY CHART

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

So far primary wave 2 would be a 0.96 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 still 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.

If intermediate wave (C) was over yesterday, then it would have lasted a Fibonacci thirteen days. Intermediate wave (B) lasted a Fibonacci twenty-one days and intermediate wave (A) lasted forty seven days (not a Fibonacci number). Primary wave 2 would have lasted eighty one days (also not a Fibonacci number). If primary wave 3 exhibits a Fibonacci duration, then a reasonable estimate would be a Fibonacci 144 days.

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.

The targets calculated are provisional only because at the end of this session there is still no confirmation of a trend change. They come with the caveat that price may yet move higher which means the targets would move correspondingly higher. They also come with the caveat that at this very early stage a target for primary wave 3 may only be calculated at primary degree. When intermediate waves (1) through to (4) within primary wave 3 are complete, then the targets may change as they can be calculated at more than one wave degree. Primary wave 3 may not exhibit a Fibonacci ratio to primary wave 1.

The first target at 1,595 is where primary wave 3 would reach 1.618 the length of primary wave 1. This target would most likely not be low enough because primary wave 2 is very deep at 0.96 the length of primary wave 1. Primary wave 3 must move below the end of primary wave 1, and it must move far enough below to allow subsequent room for primary wave 4 to unfold and remain below primary wave 1 price territory. Normally, there is a gap between first wave and fourth wave price territory, particularly in a bear market.

The next target may be more likely. At 1,271 primary wave 3 would reach 2.618 the length of primary wave 1.

If primary wave 3 does not exhibit a Fibonacci ratio to primary wave 1, then neither of these targets would be correct.

Well before these targets, it should be obvious if the next wave down is a primary degree third wave. It should exhibit increasing ATR, strong momentum, and a steep slope. However, please note that although it may begin very strongly it does not have to. It may also be that intermediate wave (1) maintains an ATR about 20 – 30 and has some deep time consuming corrections within it. That was how the last primary degree third wave began within the last bear market, so it may happen again.

HOURLY CHART

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.

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 be 2.6 points longer than equality in length with minor wave 1.

Ratios now within minor wave 5 are: there is no Fibonacci ratio between minute waves i and iii, and minute wave v is just 0.05 points short of 0.382 the length of minute wave i. There is perfect alternation between the shallow 0.34 zigzag of minute wave ii and the very shallow 0.13 triangle of minute wave iv.

The very earliest indication of a trend change may come tomorrow, if price can manage to break below the small blue trend channel which contains intermediate wave (C). This would be a relatively weak and unreliable indication though. The wider black channel would provide better indication. Price has bounced off the lower edge of this blue channel at the end of this session, so it is still providing some support. The gap at the open should provide resistance if a high is in place. At 2,097 minuette wave (iii) would reach 1.618 the length of minuette wave (i).

Minuette wave (ii) may not move beyond the start of minuette wave (i) above 2,120.40. A new high above this point obviously would indicate intermediate wave (C) is not over. If that happens, then a target for it to end may be very close indeed to the invalidation point where minor wave 5 would be close to 1.618 the length of minor wave 1. Primary wave 2 can touch the start of primary wave 1, so that it is a 100% correction, but it may not move beyond the start of primary wave 1. The invalidation point is black and white. Any breach by any amount at any time frame would invalidate the bear wave count completely (Note: This applies to this cash market and not futures which may have a slightly different price point for the ATH, so a slightly different invalidation point).

The first reasonable 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.

A new low below 2,085.36 could not be a second wave correction within minor wave 5, so at that stage minor wave 5 would have to be over. This price point needs only to be passed by any amount at any time frame.

Thereafter, the same rule is used for the confirmation point at 2,025.91. A new low by any amount at any time frame below this point could not be a second wave correction within intermediate wave (C), so at that stage intermediate wave (C) would have to be over.

To the upside, price may find resistance at the lilac trend line now. It looks like today this line held the rise in price to only another 2 points.

BULL ELLIOTT WAVE COUNT

WEEKLY CHART

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 and lasting nine months. Cycle wave IV would be grossly disproportionate to cycle wave II, and would have to move substantially out of a trend channel on the monthly chart, for it to continue further sideways as a double flat, triangle or combination. For this reason, although it is possible, it looks less likely that cycle wave IV would continue further. It should be over at the low as labelled.

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.

DAILY CHART

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.

While it is possible that intermediate wave (2) may be a complete double zigzag at the low labelled minor wave A, this would be a very shallow and rather quick second wave correction. The first reasonable second wave correction within a new bull market should be expected to be deeper and more time consuming for this bull wave count, so intermediate wave (2) is expected to continue.

TECHNICAL ANALYSIS

WEEKLY CHART

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

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 made an important new high above the prior major high of November 2015. Price is now finding resistance at the lilac line. It can no longer be said that price is making lower highs and lower lows because it no longer has a lower high. This is the most bullish indication from price for many months. This supports the bull wave count over the bear.

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.

Further comment on On Balance Volume will be suspended at the weekly chart level until the current week is over and OBV is updated for the week. Because price has made a new high above the prior swing high of April 2016, OBV should also make a new high at the end of this week.

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. However, price is breaking out upwards. This breakout should come with an increase in volume for it to be reliable (as opposed to potentially a false breakout). That cannot yet be determined because the week is not yet complete.

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.

DAILY CHART

S&P 500 daily 2016
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.

A slight rise in volume for a red daily candlestick offers some small support for the overall fall in price today. The doji candlestick indicates a balance between bulls and bears, so indecision. Price is finding resistance about 2,115.

Overall, price comes on a decline in volume as it moved higher for 14 days from the last swing low, with the exception of one strong downwards day. The rise in price is not supported by volume, so it is suspicious.

However, this does not indicate when and where price may turn and only indicates weakness. Rising price on declining volume is normally corrective, but like divergence can be sustained for reasonable periods of time. The weakness indicates it is very likely to be more than fully retraced.

ADX still indicates an upwards trend is in place. ATR still disagrees: price comes with declining range while price rises. The bulls look exhausted. Daily, the range they are able to push price up in reduces. This is not normal and is further indication that this trend looks to be unsustainable.

On Balance Volume gave a weak bullish signal with a break above the yellow line and now it may be giving a weak bearish signal with a return back below that line. A break below the purple line would be a stronger bearish signal.

There is still regular bearish divergence between price and OBV between the high dated 27th of April and this new high for yesterday. Price has made a new high but OBV has made a lower high. This indicates weakness in price.

There is still also regular bearish divergence between price and RSI from the high of 20th of April. Price has made a higher high but RSI has made a lower high. This is further indication of weakness in price. Divergence between RSI and price is usually a reliable indicator of a trend change, but it will not pinpoint when and where price will turn. It only indicates weakness which is usually followed by a trend change.

Stochastics has been flat for several days, but divergence between price and Stochastics is not very reliable.

VOLATILITY – INVERTED VIX MONTHLY CHART

VIX Monthly 2016
Click chart to enlarge. Chart courtesy of StockCharts.com.

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 current multi month divergence between price and VIX: from the high in April 2016 price has made new highs in the last few days but VIX has failed so far to follow with new highs. This regular bearish divergence still indicates weakness in price.

VOLATILITY – INVERTED VIX DAILY CHART

VIX daily 2016
Click chart to enlarge. Chart courtesy of StockCharts.com.

There is now only one instance 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 two days ago. This indicates exhaustion for bulls and underlying weakness in price.

Price moved higher for three days in a row (6th, 7th and 8th of June) completing green daily candlesticks yet VIX moved lower. This short term divergence between price and VIX is unusual. It indicates further exhaustion from bulls. This trend in price is weak, especially for the last three days up to the last high.

VIX today has made a new low below the prior low of 1st June, yet price has not made a corresponding low. This contradicts other signals from VIX. The picture with VIX today is not as clear as it was yesterday.

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.

BREADTH – ADVANCE DECLINE LINE

S&P 500 daily 2016
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.

Taking a look at the bigger picture back to and including the all time high on May 2015, the AD line is making substantial new highs but price so far has not. While market breadth is increasing beyond the point it was at in May 2015, this has not translated (yet) into a corresponding rise in price. Price is weak. This is hidden bearish divergence.

It is also noted that the AD line diverged for the four months prior to the all time high; this was regular bearish divergence (first set of shorter blue lines).

DOW THEORY

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 now closed above this point on 8th June, 2016.
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 @ 08:45 p.m. EST.