The main Elliott wave count in last analysis expected upwards movement. This is exactly what is happening.
Summary: While price remains above 2,700.68, assume a third wave may be unfolding. The short term target is at 2,824 or 2,915. The mid to longer term target is at 2,922. The final target for this bull market to end remains at 3,616.
Small bearish divergence today from On Balance Volume suggests the pullback may not be over and may continue lower to again test the lilac trend line, or to end about 2,651. A new low now below 2,700.68 would indicate this is likely.
Pullbacks are an opportunity to join the trend. An upwards trend is expected to develop, which has very strong support from new all time highs from the AD line and On Balance Volume.
Always practice good risk management. Always trade with stops and invest only 1-5% of equity on any one trade.
New updates to this analysis are in bold.
The biggest picture, Grand Super Cycle analysis, is here.
ELLIOTT WAVE COUNT
Cycle wave V must complete as a five structure, which should look clear at the weekly chart level and also now at the monthly chart level. It may only be an impulse or ending diagonal. At this stage, it is clear it is an impulse.
Within cycle wave V, the third waves at all degrees may only subdivide as impulses.
Intermediate wave (4) has breached an Elliott channel drawn using Elliott’s first technique. The channel is redrawn using Elliott’s second technique: the first trend line from the ends of intermediate waves (2) to (4), then a parallel copy on the end of intermediate wave (3). Intermediate wave (5) may end either midway within the channel, or about the upper edge.
Intermediate wave (4) may now be a complete regular contracting triangle lasting fourteen weeks, one longer than a Fibonacci thirteen. There is perfect alternation and excellent proportion between intermediate waves (2) and (4).
If intermediate wave (4) were to continue further as either a flat or combination, both possibilities would require another deep pullback to end at or below 2,532.69. With both On Balance Volume and the AD line making new all time highs, that possibility looks extremely unlikely.
If intermediate wave (4) were to continue further, it would now be grossly disproportionate to intermediate wave (2). Both classic technical analysis and Elliott wave analysis now suggest these alternate ideas should be discarded based upon a very low probability.
Within intermediate wave (5), no second wave correction may move beyond the start of its first wave below 2,594.62.
It is possible that intermediate wave (4) is a complete regular contracting triangle, the most common type of triangle. Minor wave E may have found support just below the 200 day moving average and ending reasonably short of the A-C trend line. This is the most common look for E waves of triangles.
Intermediate wave (3) exhibits no Fibonacci ratio to intermediate wave (1). It is more likely then that intermediate wave (5) may exhibit a Fibonacci ratio to either of intermediate waves (1) or (3). The most common Fibonacci ratio would be equality in length with intermediate wave (1), but in this instance that would expect a truncation. The next common Fibonacci ratio is used to calculate a target for intermediate wave (5) to end.
Price has clearly broken out above the upper triangle B-D trend line. This indicates that it should now be over if the triangle is correctly labelled.
A trend line in lilac is added to this chart. It is the same line as the upper edge of the symmetrical triangle on the daily technical analysis chart. Price has found support about this line at the last two small swing lows. The suppport at this line has reasonable technical significance now that it has been tested twice, and this line should be assumed to continue to provide support until proven otherwise.
Sometimes the point at which the triangle trend lines cross over sees a trend change. A trend change at that point may be a minor one or a major one. That point is now about the 10th of June.
Minor wave 3 may only subdivide as an impulse, and within it the subdivisions of minute waves ii and iv may show up as one or more red daily candlesticks or doji. So far the last red daily candlestick may be minute wave ii.
Minor wave 2 may be a complete zigzag. There is no adequate Fibonacci ratio between minute waves a and c.
The daily chart is on a semi-log scale. This hourly chart is on an arithmetic scale, and this is why the lilac trend line sits slightly differently on each chart. On this hourly chart, price perfectly found support at the lilac trend line. Minor wave 2 ends with a strong bullish engulfing candlestick pattern.
A base channel is added to minor waves 1 and 2: draw the first trend line from the start of minor wave 1 on the low of the 3rd of May, to the end of minor wave 2, then place a parallel copy on the end of minor wave 1. Corrections should find support about the lower edge of this base channel as minor wave 3 unfolds along the way up.
Minor wave 2 was relatively shallow, less than 0.5 of minor wave 1. Look out for corrections now within minor wave 3 to possibly be more shallow than otherwise expected. For this reason the preferred target for minuette wave (ii) may be the 0.382 Fibonacci ratio of minuette wave (i).
There may be almost complete three first and second waves. If this wave count is correct, then next week may see an increase in upwards momentum.
Two targets are given for minor wave 3 to end, and both fit with the higher target for primary wave 3 to end on the daily chart. If price keeps on rising after the first target has been reached, or the structure is incomplete, then the second target will be used.
FIRST ALTERNATE HOURLY CHART
Minor wave 2 may be continuing lower as a double zigzag or sideways as a double combination. The double may be joined by a complete three in the opposite direction, a zigzag labelled minute wave x, which moved higher on Friday. If minor wave 2 is a double zigzag, then minute wave y within it should deepen the correction to achieve its purpose, ending below minute wave w at 2,676.81; note that it may find support about the lilac trend line. If minor wave 2 is a double combination, then minute wave y may be a flat or triangle, moving price sideways and ending close to the same level as minute wave w at 2,676.81.
If the target at the 0.618 Fibonacci ratio is wrong, it may still be too low. The lilac trend line has so far offered strong support, and it may continue to do so. If price moves lower to again touch this trend line, and if minute wave y that may be complete, then it may end there.
Minor wave 2 may not move beyond the start of minor wave 1 below 2,594.62.
SECOND ALTERNATE HOURLY CHART
Minor wave 2 may be continuing further as a flat correction, and within it minute wave a may be a complete three, a double zigzag. Minute wave b may now also be a complete three, a zigzag, meeting the minimum requirement of a 0.9 length of minute wave a. If minute wave b is over at Friday’s high, then it would be a 0.92 length of minute wave a, which indicates a regular flat correction. Regular flats most commonly exhibit C waves that are about even in length with their A waves, so a target for minute wave c is calculated to expect this most common tendency.
This wave count would see minor wave 2 continue further for several days.
It is possible still that minute wave b could continue higher. If it does, a flat correction would remain valid. If upwards movement continues and exhibits reasonable weakness, then this wave count may then be favoured.
Click chart to enlarge. Chart courtesy of StockCharts.com.
From Dhalquist and Kirkpatrick on trading triangles:
“The ideal situation for trading triangles is a definite breakout, a high trading range within the triangle, an upward-sloping volume trend during the formation of the triangle, and especially a gap on the breakout.”
For this example, the breakout may have now happened. There was a high trading range within the triangle, but volume declined. This week may be the end of the pullback, with a long lower wick slightly overshooting the triangle trend line.
The bullish signal from On Balance Volume this week is reasonable, but really does need to be clearer for confidence. If next week continues upwards, it would be clear and then should be given reasonable weight.
Click chart to enlarge. Chart courtesy of StockCharts.com.
The symmetrical triangle may now be complete, and price has completed an upwards breakout. There may be some small cause for concern that the upwards breakout does not have support from volume. However, in current market conditions only some small concern is had here. Rising price on light and declining volume has been a feature of this market for years, yet price continues to rise.
After an upwards breakout, pullbacks occur 59% of the time. The pullback looks typical, but it is concerning that at the end of this week there are two bearish signals at the daily chart level from On Balance Volume. On the 31st of May On Balance Volume made a slight new low, but price did not. Now on the 1st of June price has made a slight new high above the high two sessions prior, but On Balance Volume has not made a corresponding new high. This suggests the pullback may not be quite over. The triangle trend line may be tested again.
On the 14th of May On Balance Volume made a new all time high at the daily chart level. This signal remains overall very bullish.
Symmetrical triangles suffer from many false breakouts. If price returns back into the triangle, then the breakout will be considered false and the triangle trend line will be redrawn.
The base distance is 340.18. Added to the breakout point of 2,704.54 this gives a target at 3,044.72. This is above the Elliott wave target at 2,922, so the Elliott wave target may be inadequate.
VOLATILITY – INVERTED VIX CHART
Click chart to enlarge. Chart courtesy of StockCharts.com. So that colour blind members are included, bearish signals
will be noted with blue and bullish signals with yellow.
Normally, volatility should decline as price moves higher and increase as price moves lower. This means that normally inverted VIX should move in the same direction as price.
Both price and inverted VIX moved higher on Friday. There is no new divergence.
BREADTH – AD LINE
Click chart to enlarge. Chart courtesy of StockCharts.com.
There is normally 4-6 months divergence between price and market breadth prior to a full fledged bear market. This has been so for all major bear markets within the last 90 odd years. With no longer term divergence yet at this point, any decline in price should be expected to be a pullback within an ongoing bull market and not necessarily the start of a bear market. New all time highs from the AD line means that any bear market may now be an absolute minimum of 4 months away. It may of course be a lot longer than that. My next expectation for the end of this bull market may now be October 2019.
Small caps have made another new all time high, but mid and large caps have yet to do so. This divergence may be interpreted as bullish. Small caps may now be leading the market.
Breadth should be read as a leading indicator.
The AD line continues to move strongly higher to new all time highs. This is extremely bullish. While there may be some small uncertainty on short term movements, reasonable confidence may be had in the larger upwards trend. It is extremely likely that price may follow the AD line to its own new all time highs.
The following lows need to be exceeded for Dow Theory to confirm the end of the bull market and a change to a bear market:
At this stage, only DJIA has made a new major swing low. DJT also needs to make a new major swing low for Dow Theory to indicate a switch from a bull market to a bear market. For an extended Dow Theory, which includes the S&P500 and Nasdaq, these two markets also need to make new major swing lows.
Charts showing each prior major swing low used for Dow Theory may be seen at the end of this analysis here.
Published @ 03:33 a.m. EST on 2nd June, 2018.