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Downwards movement was expected for the main Elliott wave count, but it was noted that volume strongly suggested some more upwards movement for Thursday’s session.

Summary: Downwards movement should continue from here with lower lows and lower highs. 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

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. If price continues higher, then look for upwards movement to end again if it comes up to the lilac trend line.

Only two daily wave counts will be published today. All three from yesterday remain valid, but the first alternate no longer has the right look. The main wave count and second alternate will be published today.

MAIN DAILY CHART

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

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.

Minute wave ii may not move beyond the start of minute wave i above 2,113.32.

Minute wave ii today has a clear three wave look to it on the daily chart.

A base channel is added in blue to minor waves 1 and 2. Minute wave ii is finding resistance at the upper edge of this base channel.

HOURLY CHART

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

At 1,912 minute wave iii would reach 1.618 the length of minute wave i.

Minute wave ii fits as a zigzag on the five minute chart. There is no Fibonacci ratio between minuette waves (a) and (c).

A green channel is drawn about the zigzag of minute wave ii. At the end of Thursday’s session, price has broken below the lower edge of this channel providing earliest indication that minute wave ii may be over. Upwards movement is finding resistance at the lower edge of this channel for so far what looks like a typical throwback.

Price is finding support at the cyan trend line again. If this line is breached tomorrow, then expect to again provide resistance.

A new low below 2,074.02 could not be a second wave correction within minuette wave (c), so at that stage minuette wave (c) would have to be over. This would provide earliest price confidence that upwards movement is over and was a three wave structure.

After the lower edge of the dark blue base channel is breached, then expect it to provide resistance. First it may provide some support.

SECOND ALTERNATE DAILY CHART

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

Primary wave 2 may have ended on 23rd of June. Primary wave 3 may have begun there.

Within primary wave 3, intermediate wave (1) may be complete. Intermediate wave (2) is now a clearer three wave structure. There is almost no room left for it to move in, so it is highly likely today to be over.

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) may not move beyond the start of intermediate wave (1) above 2,113.32.

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.

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.

Intermediate wave (B) may now be complete; it is a clearer three wave structure.

Primary wave 2 may not move beyond the start of primary wave 1 at 1,810.10.

TECHNICAL ANALYSIS

DAILY CHART

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

Thursday’s candlestick is a spinning top, representing a balance between bulls and bears. This indicates the trend may have changed from up to neutral.

Overall, the bears were slightly more in charge during Thursday than bulls as the colour of the candlestick is red. Volume did not support the slight fall in price though as it is lighter than the prior upwards day. This gives some cause for concern for the Elliott wave count, but in conjunction with a spinning top candlestick for the session the concern is only slight.

ADX is still declining indicating the market is consolidating. Price is range bound between about 2,120 above and 2,040 below. During this range bound movement, which began back in the end of March, it is three downwards days of 29th of April, 24th of June, and 27th of June which have strongest volume. This suggests a downwards breakout is more likely than an upwards breakout.

ATR is overall flat, mostly in agreement at this time with ADX. The market is consolidating.

On Balance Volume came up to find resistance at the first purple trend line again, and has today turned down from that line. This gives a weak bearish signal today from OBV.

RSI is neutral. There is plenty of room for price to rise or fall. Price and RSI showed bearish divergence at the last major high at 2,120 on 8th of June. Price has made lower lows and lower highs since that high. That bearish divergence was followed by reasonable downwards movement.

Stochastics shows some divergence today with price still. Between the two highs from 23rd June to 1st July, price has made a lower high while Stochastics has made a higher high. This is hidden bearish divergence and indicates weakness in price.

MACD also exhibits divergence with price at the two highs on 20th of April and 8th of June. MACD failed to make corresponding highs as price made new highs, indicating weakness to upwards movement. MACD may be held down by this trend line extended outwards.

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 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.

VIX from StockCharts 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. So far, following this strong divergence between price and VIX, price has barely fallen. More downwards movement should still be expected to follow this divergence.

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, 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. Upwards movement over 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.

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 @ 09:05 p.m. EST.