A little more upwards movement was expected as likely, but a warning was given that price looked weak. Downwards movement was not expected but was allowed for.
Summary: Downwards movement should continue from here with lower lows and lower highs. A short term target for tomorrow is 2,047. A mid term target is 1,912.
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. If price continues higher, then look for upwards movement to end again if it comes up to the lilac trend line.
For today’s analysis, the main and first alternate daily wave counts in last analysis are swapped over again. All three daily wave counts remain valid and all expect the same direction next: down. They will begin to diverge in coming weeks, so at that stage the differences will be important. Eventually, price behaviour will tell us which one is correct.
MAIN DAILY CHART
This was the main wave count up to very recently and it will be so again today, mostly through the alternates now reducing in probability.
If primary wave 2 was over earlier on 8th of June, then primary wave 3 has begun. At 1,595 primary wave 3 would reach 1.618 the length of primary wave 1. At 1,271 it would reach 2.618 the length of primary wave 1. Primary wave 1 lasted 38 weeks and primary wave 2 lasted 17 weeks. Primary wave 3 may be expected to be longer in length and duration than primary wave 1. In the first instance, a Fibonacci 55 weeks is expected, but maybe also 89 weeks is possible.
Within primary wave 3, intermediate wave (1) may be incomplete. It may have begun with a series of two overlapping first and second waves for minor waves 1 and 2 then minute waves i and ii. This indicates minor wave 3 may be extending, which is common.
Within the middle of intermediate wave (1), a mid term target for minute wave iii is at 1,912 where it would reach 1.618 the length of minute wave i.
If minute wave ii moves any higher (and it may), then it may not move beyond the start of minute wave i above 2,113.32. If minute wave ii continues higher, then it would have a clearer three wave look to it. It may end if price again comes to almost touch the lilac final line of resistance.
Upwards movement subdivides 5-3-5 and fits as a complete zigzag. But it may also be seen as an impulse, so it is ambiguous and cannot be determined with certainty which structure it is. If the invalidation point here is breached tomorrow or the day after, then minute wave ii may be moving higher. Expect it to end if price comes close to the lilac trend line.
If minute wave ii is over, then at 1,912 minute wave iii would reach 1.618 the length of minute wave i.
So far within minute wave iii the first wave of minuette wave (i) would probably be incomplete. Downwards movement for the first day of the new trading week may be only subminuette wave i. Subminuette wave ii may be over finding resistance at the cyan trend line. If subminuette wave iii begins here, then at 2,047 it would reach 1.618 the length of subminuette wave i.
If subminuette wave ii moves higher, it may not move beyond the start of subminuette wave i above 2,108.42.
At the end of Tuesday’s session, it looks like the cyan trend line is being respected as an area of resistance. I have labelled subminuette wave ii complete for this reason.
ALTERNATE DAILY CHART
Primary wave 2 may be a complete zigzag, but intermediate wave (C) would be truncated by 2.34 points. This is possible right before a strong third wave down, but the truncation does reduce the probability of this wave count today. The small red candlestick looks like intermediate wave (C) for this wave count should be over.
Intermediate wave (B) may have been over at the last low as a regular flat correction. Minor wave B within it is a 1.02 length of minor wave A, shorter than the 1.05 requirement for an expanded flat but longer than the minimum requirement of 0.9. There is no Fibonacci ratio between minor waves A and C; minor wave C is shorter than 1.618 the length of minor wave A and was not truncated.
This wave count still has better proportions than the other two wave counts. Intermediate wave (C) may be over in a few days. This is more acceptable for a C wave within a zigzag than it would be for a second wave within a new trend. Overall, primary wave 2 would have lasted months as a primary degree wave should. This proportion looks about right.
The cyan line has been overshot a few times. It continues to provide some resistance and then support after price breaks above it. The lilac line has been tested only twice, last time at the high of 8th of June. If price comes up to it again, then it should be expected to offer very strong resistance, and that should be where upwards movement ends if a bear market is intact.
At 1,583 primary wave 3 would reach 1.618 the length of primary wave 1. At 1,259 primary wave 3 would reach 2.618 the length of primary wave 1. The lower target should have a higher probability because primary wave 2 was very deep.
SECOND ALTERNATE DAILY CHART
Primary wave 2 may have ended on 23rd of June. Primary wave 3 may have begun there.
Within primary wave 3, intermediate waves (1) and now (2) may be complete.
If upwards movement does not move above 2,111.05, this may be the preferred wave count.
If price begins to move strongly lower this week, then a target would be 1,790 for intermediate wave (3) to reach 2.618 the length of intermediate wave (1). This is the appropriate ratio to calculate the target in this instance because intermediate wave (2) is 0.96 of intermediate wave (1).
This wave count does not look right with the channel about primary wave 2. If that channel is correctly drawn, then intermediate wave (2) would most likely have ended when price came up to touch the lower edge for a typical throwback after a breach.
At 1,588 primary wave 3 would reach 1.618 the length of primary wave 1. At 1,263 primary wave 3 would reach 2.618 the length of primary wave 1. The lower target is more likely because primary wave 2 was very deep.
Intermediate wave (2) for this alternate wave count should be over here. It may not move beyond the start of intermediate wave (1) above 2,113.32.
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.
Two changes are made today to the bull wave count at the daily chart level.
The degree of movement is moved up one degree for the impulse now labelled primary wave 1. This fits better with the final target of 2,500 for cycle wave V to end.
The second change is to the correction now labelled at primary degree. While primary wave 2 may be a complete regular flat correction over at the low of intermediate wave (A), with continuing weakness to upwards movement and price remaining range bound, it looks like for a bull wave count primary wave 2 may not be over.
Primary wave 2 may be continuing sideways as a longer lasting flat, with intermediate wave (A) a complete three and now intermediate wave (B) also a complete three. Intermediate wave (C) may end slightly below the end of intermediate wave (A) at 1,991.68 to avoid a truncation.
Primary wave 2 may not move beyond the start of primary wave 1 at 1,810.10.
Click chart to enlarge. Chart courtesy of StockCharts.com.
Volume analysis is very important, so I will give it a lot of weight. If the volume profile does not give us a picture we want to see, then we gloss over the message it is giving us at our peril.
So what has volume been telling us?
For the period prior to this chart see analysis of volume on the monthly chart level here.
For the bull market spanning 2009 to 2015, volume very clearly declined as price rose to the all time high. That is not normal for a bull market. It indicates weakness and it is unsustainable. It is possible that this situation could occur again, and the Elliott wave bull wave count looks at this possibility but the probability must be judged to be low. At some stage, the rise in price will prove itself to be unsustainable by turning into a fully fledged bear market.
Now, since the all time high, (almost) each time price falls volume rises. Each rally has not managed to make a new all time high and has consistently shown declining volume as price rises. Here, a yellow trend line has been added to the volume profile for the rally from February to June 2016.
The rise in price from February to June also came with declining ATR. Again, this is not normal for a sustained rise in price. It indicates exhaustion from bulls. The bulls were only able to push it up by a smaller and smaller range as price moved higher.
There is divergence with price and RSI at the high in June, with price and MACD and with price and On Balance Volume. This indicates a lack of strength, weaker momentum, and weakness in volume at the high. Price has made a series so far of lower lows and lower highs since that high.
Price has been range bound on a smaller time frame since about March, delineated by purple lines providing resistance about 2,120 and support about 2,040. During this time, it is three downwards days of 29th April, 24th June, and 27th June which have strongest volume (ignoring the options expiry date of 17th June). Volume indicates that a downwards breakout from this consolidation is more likely than upwards.
Currently, ATR is declining and the +DX and -DX lines are whipsawing about each other. This indicates the market is not currently trending. ATR overall agrees, as currently it is also declining.
On Balance Volume today gave a weak bearish signal with a turn down from the purple trend line. This line was weakened in June when OBV moved above it only to then turn back below it. A break below the lower yellow line would be a strong bearish signal from OBV.
RSI is neutral. There is plenty of room for price to rise or fall.
Stochastics has reached overbought. In a range bound market, a downwards swing may be expected from here as price reached very close to resistance while Stochastics reached overbought. A downwards swing may continue until price finds support and Stochastics reaches oversold.
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 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.
VIX from Stochastics is inverted. As price moves higher, inverted VIX should also move higher indicating a decline in volatility which is normal as price moves higher. As price moves lower, inverted VIX should also move lower indicating an increase in volatility which is normal with falling price.
As price moved higher last week for four days in a row, inverted VIX moved strongly higher. Volatility declined last week to a point which was lower than at the last swing high on 23rd of June. This is hidden bearish divergence and indicates weakness in price.
I would give a lot of weight to price and VIX. It is usually a reliable guide to an impending trend change.
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, 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 (long blue lines).
There is divergence between price and the AD line indicated by short yellow lines. Price made new lows but the AD line failed to make corresponding new lows. This indicates some weakness to downwards movement from price. There is less breadth to downwards movement this time. This divergence is bullish and also supports the hourly Elliott wave count. Upwards movement over the last four days may be enough to resolve this bullish divergence.
The AD line has now made a new high above its prior high of 23rd of June yet price has not made a corresponding new high (short blue lines). This divergence now is bearish. It indicates that price is weak.
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 @ 09:44 p.m. EST.