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Another small range day moved price lower, which the main Elliott wave count expected, but today classic technical analysis strongly suggests the price direction for tomorrow and so a new hourly chart is published today.

Summary: VIX today strongly suggests higher prices tomorrow (and maybe for a few days yet) with strong bullish divergence which should be taken seriously. A new hourly wave count expects more upwards movement tomorrow to continue to find resistance about the black trend line, but to not move above 2,120.55.

Trading advice (not intended for more experienced members): Any short positions which are positive may take profits now. Higher prices present another opportunity to join the trend.

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 5% of equity should be risked if entering short here.

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.



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.


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

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 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 ended at the low for last week and minor wave 2 may yet continue higher and would very likely continue to find resistance about the lower edge of the black channel. If it takes long enough and gets high enough, it should find final resistance at the lilac trend line which stopped primary wave 2.

So far minor wave 2 may have lasted four days. If it ends tomorrow, it may total a Fibonacci five days. The next number in the sequence is eight which would see minor wave 2 continue now for another four days in total.

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.


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

This wave count is new. Yesterday’s alternate is discarded as it expects essentially the same movement as this new wave count. This idea has better proportions and better Fibonacci ratios.

Minor wave 2 may be continuing higher as a double zigzag. The first zigzag in the double is complete labelled minute wave w. The double looks like it is joined by an incomplete three in the opposite direction labelled minute wave x. Minute wave x may move slightly lower if it is a flat correction, or it may move sideways if it is a triangle. Both structures are equally as possible for minute wave x.

If minute wave x continues lower or sideways, then redraw the best fit channel about minor wave 2. Draw the first trend line from the start of minor wave 2 to the end of minute wave x, then place a parallel copy on the end of minute wave w. After some more upwards movement, then a subsequent breach of the lower edge of this channel by clear downwards movement (not sideways) would be an indicator of a possible trend change.

Minute wave y as the second zigzag in the double should deepen the correction, that would be its purpose. It may be expected to find resistance at the black trend line which is copied over from the daily chart. A parallel copy is placed higher up to show where minute wave w found resistance. If the first black line is breached, then look for upwards movement to end if price touches the second higher black line.

This wave count expects minor wave 2 to be reasonably in proportion to minor wave 1 in terms of duration. That would give the wave count the right look at the daily chart level. It expects minor wave 2 to be very deep. Second wave corrections often are very deep.

Minor wave 2 may not move beyond the start of minor wave 1 above 2,120.55.


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

Tis was the main hourly wave count Yesterday and today VIX relegates it to an alternate.

Minor wave 2 may have been over as a quick deep zigzag lasting only a Fibonacci two days. This is still possible while price remains below 2,100.66 but today looks highly unlikely given strong bullish divergence from VIX.

At 1,987 minor wave 3 would reach 1.618 the length of minor wave 1.

This wave count expects to see an increase in downwards momentum over the next few days as a third wave unfolds at three degrees.

Within minor wave 3, minute wave ii may not move beyond the start of minute wave i above 2,100.66.



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 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.


S&P 500 daily 2016
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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.



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

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.


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.

A small red candlestick with lighter volume is bullish short term. The fall in price today was not supported by volume, so it is suspicious (although the market can fall of its own weight). The long upper wick of today’s small red candlestick is bearish.

Price has essentially been range bound since about 18th March, 2016, finding support at the horizontal line about 2,040 and resistance about 2,115. It is downwards days of 29th of April and 31st of May during this range bound movement which have strongest volume (ignoring the options expiry date of 17th of June). This suggests a downwards breakout from this range is more likely than upwards.

On Balance Volume is also range bound. A new purple line is added today. A break above the first purple line would be bullish. A break below the yellow line would be bearish.

ADX today is declining indicating the market is not trending; it is consolidating. The -DX and +DX lines today have come together. A cross over would indicate a possible trend change, although these directional indicators do tend to fluctuate about each other during consolidations.

ATR is today overall flat to declining, in agreement with ADX that this market is not trending.

RSI is neutral. There is plenty of room for price to rise or fall.

Stochastics is also neutral. If this market is range bound, then a swing trading approach would expect an upwards swing to continue from here to end only when Stochastics reaches overbought and price reaches resistance at the same time.


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.

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.


VIX daily 2016
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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.

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.

Price fell after the short term bearish divergence noted here (short blue lines). Now, after short term bullish divergence (yellow lines), price is rising.

The last two yellow lines indicate hidden bullish divergence now between price and VIX. Inverted VIX today moved lower; volatility increased as price moved lower. However, volatility is now stronger than it was a few days ago yet price has not made a corresponding new low. Price is weak. This divergence is strong and may require more than one day of upwards movement from price to resolve it. It may be resolved after a few days of upwards movement with small range and slow movement.

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.

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 @ 01:32 a.m. EST on 23rd June, 2016.