A correction was expected to continue during Friday’s session. A small range day with a higher low fits the expectation overall.
Summary: Upwards movement is most likely to continue early next week for another two sessions to a target at 2,092 – 2,094 or alternatively (less likely) to 2,099 – 2,102. It is possible still that a big surprise to the downside may begin on Monday. This would increase in probability below 2,050.37.
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 next 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 until the trend line is again touched. 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 two full daily candlesticks below the wide black channel and not touching the lower edge, there is some confidence that primary wave 2 is over.
At this stage, it looks like minor wave 1 may have more likely ended at the low for this week and minor wave 2 may have begun there. Minor wave 2 would be very likely to come up to test resistance at the lower edge of the black channel; that would be very typical behaviour, so it should be expected. A throw back would offer a good low risk entry opportunity to join the downwards trend.
So far minor wave 2 may have lasted one day. It may be expected to continue for another two to four days to total a Fibonacci three or five.
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.
MAIN HOURLY CHART
Ratios within minor wave 1 are: minute wave iii is just 0.24 points longer than 1.618 the length of minute wave i, and minute wave v is 1.69 points short of 2.618 the length of minute wave iii.
Ratios within minute wave v are: minuette wave (iii) is 1.72 points short of 2.618 the length of minuette wave (i), and minuette wave (v) is 1.26 points longer than equality in length with minuette wave (iii).
With excellent Fibonacci ratios, this labelling has a good probability. The only problem is the proportion of minuette wave (iv) to minuette wave (ii), but the S&P does not always exhibit good proportions.
Minor wave 2 may be any corrective structure except a triangle. At this stage, it looks like it may be unfolding as a zigzag with minute wave a upwards within it subdividing as either a five wave impulse or a three wave double zigzag on the five minute chart. It is impossible to tell with certainty which structure this is, so both possibilities, a three or a five, must be considered.
For this reason, unfortunately, there is no lower invalidation point for minor wave 2 for next week.
If minor wave 2 is a zigzag (most likely), then within it minute waves a and b may be complete. At 2,092 minute wave c would reach equality in length with minute wave a. This is very close to the 0.618 Fibonacci ratio at 2,094 giving a two point target zone with a good probability. If minute wave b moves lower (and it may), then the lower edge of this target zone no longer applies.
If minor wave 2 is a zigzag, then within it minute wave b may not make a new low below the start of minute wave a at 2,050.37.
If minor wave 2 is a flat correction, then within it minute wave b would be incomplete. Minute wave b would have to retrace a minimum 0.9 length of minute wave a at 2,053.30. The normal range for minute wave b within a flat would be 1 to 1.38 the length of minute wave a at 2,050.37 to 2,039.26. The maximum limit for minute wave b (not a rule but a convention, the difference is important) would be 2,021.12. This hourly wave count would be discarded below this point; minor wave 2 would be over.
Draw a trend channel about the start of minor wave 2. If this labelling is correct, then along the way up to the target corrections within minute wave c should find support at the lower edge of this small green channel. A breach of the lower edge of the channel would indicate minute wave b is not over and is continuing sideways and / or lower. If that happens, then minor wave 2 may be longer lasting and more complicated than this chart suggests.
If price comes up to touch the lower edge of the black channel next week, then short positions should be entered there with stops just above 2,120.40.
Minor wave 2 may not move beyond the start of minor wave 1 above 2,120.40.
A new high above 2,079.62 now would invalidate the second alternate below and provide some confidence for this main hourly wave count and the first alternate hourly wave count.
FIRST ALTERNATE HOURLY CHART
Minor wave 2 may be unfolding as an expanded flat correction. Divergence between price and MACD at the hourly chart level supports this wave count, but it is not supported at lower time frames.
Minor wave 2 may also be unfolding as a combination but at this stage that structure looks less likely, so for clarity’s sake it will not be charted.
Ratios within minor wave 1 are: minute wave iii is just 0.24 points longer than 1.618 the length of minute wave i, and minute wave v has no Fibonacci ratio to either of minute waves i or iii.
Ratios within minute wave v are: there is no Fibonacci ratio between minuette waves (i) and (iii), and minuette wave (v) is just 0.06 short of 0.382 the length of minuette wave (i) (ratios here calculated on the five minute chart).
With reasonable Fibonacci ratios for this labelling, it has a reasonable probability.
Within minor wave 2, minute wave b would be a 1.69 length of minute wave a. This is longer than the common length but within allowable limits.
At 2,102 minute wave c would reach 2.618 the length of minute wave a. This is close to the 0.618 Fibonacci ratio of minor wave 1 at 2,099 giving a 3 point target zone.
If it lasts long enough, this target may be met when price comes up again to touch the lower edge of the black channel.
A new high above 2,079.62 would invalidate the second alternate below and provide some price confirmation of this wave count.
Within minute wave c, no second wave correction may move beyond the start of its first wave below 2,050.37.
SECOND ALTERNATE HOURLY CHART
Look out for a possible surprise to the downside early next week. This wave count must be understood to be possible, although it is my judgement that it has a lower probability.
Low probability does not mean no probability; sometimes low probability outcomes occur. When they do, they are never what was expected as most likely.
If minor wave 2 was over already, then it would be a very quick shallow correction, but it did retest the lower edge of the black channel. It would have corrected to 0.383 of minor wave 1, just above the 0.382 Fibonacci ratio. It would have subdivided as a single zigzag which is the most common structure for a second wave.
The reason why I judge this wave count to have the lowest probability is the brevity of minor wave 2. It would have lasted just one session to the four sessions of minor wave 1; it would barely show on the daily chart.
The implications of this alternate are important. It is possible that there may now be a series of three overlapping first and second waves. If price makes a new low below 2,050.37 on Monday with a strong increase in downwards momentum (preferably at the hourly chart level), then this wave count would increase in probability. If price breaks below the lower edge of the dark blue base channel, then this wave count would be preferred. At that stage, the middle of a third wave would be expected to be underway.
At 1,994 minor wave 3 would reach 1.618 the length of minor wave 1.
Minuette wave (ii) may not move beyond the start of minuette wave (i) above 2,079.62.
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.
The reversal implication of the shooting star candlestick pattern for last week is now confirmed by a strong red weekly candlestick which gapped down. This week’s candlestick pattern may be considered to have completed an Evening Doji Star pattern, albeit with two doji at the high.
Along the way down, price may find some support about 2,040.
Upwards movement made an important new high last week but could not manage to break above the final lilac line of resistance. That line remains intact and is now strengthened.
Volume has increased for a downwards week, but as this includes an options expiry date it should not be considered as definitive. Volume for the two downwards weeks prior also showed some increase, although volume was light. It looks like so far the market may be falling of its own weight; selling pressure is light. If selling pressure increases, then look out for a strong increase in downwards momentum.
On Balance Volume trend lines are redrawn this week: support in yellow and resistance in purple. OBV would allow for a little further downwards movement before it finds support at the first yellow line. This may indicate where a bounce may turn up.
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.
Overall, volume increased (ignore volume for the options expiry date of Friday) as price fell for the week. The one green daily candlestick during the week came with relatively light volume. Overall, the fall in price has some slight support from volume, but the market appears to be falling mostly of its own weight.
At the low for this week is a bullish engulfing candlestick pattern: although volume for that session was relatively light, it was slightly stronger than the prior downwards session. This indicates a bounce from this point and supports the first two hourly Elliott wave counts over the third. Friday’s session did not move above the bullish candlestick for Thursday, so some more upwards movement would be a reasonable expectation to follow this reversal signal.
ADX is increasing now indicating a downwards trend is in place. At the end of the week, ATR is not clearly agreeing as it is mostly flat. Some disagreement for these two indicators at the start of a trend is to be expected. If ATR begins to be clearer in an upwards direction, then a trend would be more clearly indicated.
Trend lines today for On Balance Volume have been redrawn on the daily chart: yellow for support and purple for resistance. OBV for Friday has come down to find support at a significant trend line. This may hold price up here for a bounce early next week. A break below this line would be a strong bearish signal. A break below the lower yellow line would be a further bearish signal. At this stage, no more support lines can be found for OBV. Below the lower yellow line is free fall territory.
There is divergence at the last high between price and RSI indicating weakness to upwards movement at the last high. There is also divergence between price and MACD indicating weakness.
Stochastics is not oversold. There is room for price to fall further.
RSI is still close to neutral. There is plenty of room for price to fall. A low may be found when RSI reaches oversold and then shows divergence with price between lows.
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.
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 this week while overall now price has moved mostly sideways. Sideways movement may not be enough to resolve the bullish divergence seen, so it is still my interpretation that at least some more upwards movement is likely. This supports the first two hourly Elliott wave counts over the third.
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.
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 @ 08:33 p.m. EST on 18th June, 2016.