A small bounce began mostly as expected, but it did not begin with a final low first.
Summary: The trend is down; look out for surprises to the downside. There is now enough technical indication of a trend change for a short position to be entered. Corrections are an opportunity to join the trend. In the short term, a small multi day bounce may continue tomorrow for a few days. It should find strong resistance at the lower edge of the black channel on the daily chart, and at the cyan trend line.
Trading advice (not intended for more experienced members): Short positions entered above 2,100 should at least have stops moved to break even if not a little below. Position traders holding short positions opened reasonably above 2,100 may like to hold onto those; 2,100 should offer strong resistance now for any bounce.
Looking at the bigger picture, any short positions entered here should be profitable within a week and may still offer a very good risk / reward set up. However, any members entering short here must understand there is a risk the position may be underwater for several days before becoming profitable. With that in mind, it is essential to manage risk: no more than 2-3% of equity should be risked if entering short here.
Choosing to be patient and wait may offer a better entry but runs the risk of missing a strong downwards movement. On balance, it is still my judgement that price will continue up for a reaction to test the trend line, so I will still not be adding to my short position for another two or so days. If I did not yet have a short position, I may choose to enter a small position here and wait to enter another slightly larger position higher up.
Stops (and risk) for new positions must be just above 2,120.55
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 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.
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 no Fibonacci ratio between intermediate waves (A) and (C).
Draw a channel about primary wave 2 using Elliott’s technique for a correction: draw the first trend line from the start of the zigzag, then a parallel copy on the end of intermediate wave (A).
Intermediate wave (C) is a complete impulse and primary wave 2 is a complete zigzag. With a full daily candlestick below the wide black channel and not touching the lower edge, there is some confidence that primary wave 2 is over.
Intermediate wave (C) 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.
A new low below 2,025.91 would provide final 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. 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.
Normally, the first second wave correction within a new trend is relatively time consuming and deep. Even to start primary wave 3, this should be expected as fairly likely. Although it is possible today that minor wave 2 was over as a very brief shallow correction, it is still more likely that it will continue for a few days more to have a more typical look on the daily chart. I would expect at least one green candlestick or doji within it. So far it has lasted one day. It may continue for a further two or four to total a Fibonacci three or five.
MAIN HOURLY CHART
Both hourly wave counts today will see minor wave 1 as over. The channel about it is breached. This may still be a fourth wave correction, but at this stage that does look less likely due to the size of it. That possibility will be kept in mind and published if it begins to look correct. At this stage, it would not diverge much in terms of expected direction (I choose to not publish it today to keep the number of charts manageable and present a simpler picture).
This main wave count sees minor wave 2 as incomplete because it would most likely be longer lasting and deeper than today’s small upwards movement. This is supported a little by lighter volume for today’s red candlestick.
Minor wave 2 may unfold as any corrective structure except a triangle. So far the first movement within it subdivides as a zigzag. This eliminates a larger zigzag for minor wave 2 if it is continuing and leaves a flat or combination open.
If minor wave 2 is a flat correction, then minute wave b within it must reach down to a minimum 0.9 length of minute wave a at 2,066.26.
If minor wave 2 is a flat correction, then the normal range for minute wave b within it is 1 to 1.38 the length of minute wave a, giving a range from 2,064.10 to 2,055.91. Minute wave b may make a new price extreme beyond the start of minute wave a below 2,064.10 as in an expanded flat. A new low tomorrow does not mean minor wave 2 is over.
If minor wave 2 is a double combination, then the first structure in the double would be a completed zigzag labelled minute wave w. The double needs to be joined now by a three in the opposite direction labelled minute wave x. There is no minimum requirement for X waves within combinations and they may make a new price extreme beyond the start of the first structure in the double. X waves may subdivide as any corrective structure.
If minor wave 2 is a double combination, then minute wave y may be either a flat (most likely) or a triangle (least likely). A double combination would be a very choppy overlapping sideways movement that continues for at least another two days, and maybe longer.
There is no Elliott wave rule which gives a limit for a B wave within a flat (or an X wave within a combination). There is a convention within Elliott wave that states when the potential B wave is more than twice the length of the A wave the probability that a flat is unfolding is so low the idea should be discarded. Here, that price point would be 2,042.55.
If the next wave down subdivides as a three and exhibits weaker momentum than the end of minor wave 1, then this wave count would be supported. Structure of the next wave down and MACD will be watched closely tomorrow.
If the next wave down shows a strong increase in momentum beyond that seen at the end of minor wave 1, then use the alternate wave count below.
ALTERNATE HOURLY CHART
This wave count is identical to the main hourly wave count with the sole exception of the degree of labelling for today’s upwards movement. It is possible but less likely that minor wave 2 is over as a quick shallow 0.382 zigzag.
At any stage, a new high by any amount above 2,085.65 would invalidate this wave count. No second wave correction may move beyond the start of its first wave within minor wave 3.
At 1,994 minor wave 3 would reach 1.618 the length of minor wave 1.
Minor wave 1 lasted four days (not a Fibonacci number) and minor wave 2 may have lasted just one day. Minor wave 3 may be expected to last a Fibonacci eight or thirteen days. It would most likely show its subdivisions on the daily chart, so two small corrections within it for minute waves ii and iv may turn up as doji or green candlesticks with small real bodies.
If price falls strongly tomorrow and MACD shows stronger momentum than the end of minor wave 1, then this wave count would increase in probability.
A new low below 2,042.55 would see the main wave count discarded in favour of this alternate.
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 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.
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.
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 shooting star candlestick, which is bearish but on its own not overly so. In this instance, because the upper wick of the shooting star is touching an important trend line, the strength of that line is reinforced and should hold if price again comes up to test it.
On Balance Volume this week gives a bearish signal with a move down and away from the upper pink trend line. There is bearish divergence between the last two highs and OBV: OBV could not make a corresponding new high while price this week made a new high above the prior high of 20th of April. This indicates weakness in upwards movement from 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. Last week price overshot the upper edge of this range, but could not break out as it closed back within the range completing a red candlestick.
There is some increase in volume for last week’s red candlestick indicating there was some support for the overall fall in price.
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.
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 red daily candlestick after the doji would normally not be confirmation of the reversal implications of the doji, but in this case today has a higher high and a higher low than the doji. The situation short term is unclear: price moved higher, which may support a reversal, but ended the session lower to complete a red candlestick which indicates the reversal may be over already. This is essentially the same situation as outlined by the two Elliott wave hourly counts.
Price is finding resistance at the cyan trend line and the 13 day moving average. The first bounce within a new trend does not always find support or resistance about the 13 day moving average. If tomorrow’s session closes higher above this average, then a further few days of corrective upwards movement may be expected.
Volume for today’s session was lighter than yesterday, but looking “inside” this daily candlestick shows overall more volume for downwards hours than upwards hours. This is indicated by On Balance Volume moving lower today. The fall in price at the end of the session had more support than the rise in price in the first hours. At the daily chart level, the decline in volume may be read as bullish short term supporting the main hourly Elliott wave count, but at the hourly chart level the volume profile looks bearish and would support the alternate hourly Elliott wave count.
Overall, volume for the session is still lighter than the prior downwards day; the bears were less active. Overall, it is my judgement that on balance short term this is bullish.
ADX today has flattened off indicating the market is not yet trending. ATR agrees as it too has flattened off today.
The cyan trend line has been redrawn on On Balance Volume. This may provide some support and halt a fall in price. The break below the purple line was a strong bearish signal from OBV.
RSI is still close to neutral. There is plenty of room for price to fall.
Stochastics is not oversold yet. There is plenty of room for price to fall.
MACD has offered a sell signal at the daily chart level with the shorter average crossing below the longer average.
VOLATILITY – INVERTED VIX MONTHLY CHART
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
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 (short blue lines). VIX did not make a corresponding new high as price made a new high. 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 (inverted) has run away strongly from price. Volatility sharply increased beyond the prior point of 19th May (yellow lines) while price fell (yellow lines).
A divergence 101 interpretation of this is bullish. Volatility is stronger than it was on 19th of May, but this has not translated into a corresponding new low for price. Price is weak. Some upwards reaction would be a reasonable expectation about here to resolve this divergence. At this stage, it looks like that interpretation was correct as it has been followed by some upwards movement from price.
Volatility has declined for the last two days. Yesterday, this decline in volatility came with overall downwards movement from price creating short term divergence between price and VIX. Today, the decline in volatility comes with a red daily candlestick but one which made a higher high and a higher low. It looks like price today moved overall upwards for most of the session along with declining volatility. Price and VIX are mostly in agreement today. The decline in volatility today may be followed by more upwards movement short term. It is my interpretation (subject to change pending new information) that short term this supports the main Elliott wave count slightly.
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
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.
For four sessions, price moved lower and the AD line has also moved lower. There is breadth to this downwards movement from price. There is currently no bullish divergence between price and the AD line.
Price today moved overall upwards with a higher high and a higher low from the prior session. The AD line also moved upwards. There was breadth to the overall rise in price for the session.
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 @ 06:58 p.m. EST.