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Downwards movement was expected for the short term. Although price did not make a new low, the candlestick for Friday closed red and the upper wick was long. Overall, this fits expectations.

Summary: For the short term, next week may see more downwards movement to a new low. The target is at 2,698, which is just below support about 2,700; if that gives way, then about 2,677.

After this next wave down, a multi week bounce may develop.

A primary degree correction should last several weeks and should show up on the weekly and monthly charts. Primary wave 4 may total a Fibonacci 8, 13 or 21 weeks. Look for very strong support about the lower edge of the teal trend channel on the monthly chart.

Primary wave 4 should be expected to exhibit reasonable strength. This is the last multi week to multi month consolidation in this ageing bull market, and it may now begin to take on some characteristics of the bear market waiting in the wings.

The final target for this bull market to end remains at 3,616, which may be met in October 2019.

New updates to this analysis are in bold.

The biggest picture, Grand Super Cycle analysis, is here.

Last published monthly chart is here, video is here.

ELLIOTT WAVE COUNT

WEEKLY CHART

S&P 500 Weekly 2018
Click chart to enlarge.

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. It is clear it is an impulse.

Within cycle wave V, the third waves at all degrees may only subdivide as impulses.

Within primary wave 3, there is perfect alternation and excellent proportion between intermediate waves (2) and (4).

The channel is now drawn about primary degree waves. The first trend line is drawn from the ends of primary waves 1 to 3, then a parallel copy is placed upon the low of primary wave 2. Primary wave 4 may find support about the lower edge of this maroon channel. At the end of the first downwards wave within primary wave 4, that is exactly where price bounced up. The overshoot of the upper edge of this channel by the end of intermediate wave (3) looks typical. For the S&P, its third waves are usually the strongest portion of an impulse; they often exhibit enough strength to overshoot channels.

Fourth waves do not always end within channels drawn using this technique. If primary wave 4 breaks out of the narrow maroon channel, then it may find very strong support about the lower edge of the teal channel. This channel is copied over from the monthly chart and contains the entire bull market since its beginning in March 2009. While Super Cycle wave (V) is incomplete, this channel should not be breached.

Primary wave 4 may not move into primary wave 1 price territory below 2,111.05.

When primary wave 4 may be complete, then the final target may be also calculated at primary degree. At that stage, the final target may widen to a small zone, or it may change.

At this stage, the expectation is for the final target to be met in October 2019. If price gets up to this target and either the structure is incomplete or price keeps rising through it, then a new higher target would be calculated.

DAILY CHART

S&P 500 Daily 2018
Click chart to enlarge.

Primary wave 4 would most likely end somewhere within the price territory of the fourth wave of one lesser degree. Intermediate wave (4) has its price territory from 2,872.87 to 2,532.69. Within this range sit the 0.236 Fibonacci ratio at 2,717 and the 0.382 Fibonacci ratio at 2,578.

The 0.382 Fibonacci ratio would expect an overshoot of the teal channel. This may be too low; price may find support at the lower edge of the channel. However, as primary wave 4 should be expected to exhibit reasonable strength, it may be able to overshoot the channel and that would look reasonable.

Primary wave 2 unfolded as a shallow regular flat correction lasting 10 weeks.

Primary wave 4 may have begun with a zigzag downwards. This is labelled as the first zigzag in a possible double zigzag downwards for intermediate wave (A).

If intermediate wave (A) unfolds as a double zigzag, then primary wave 4 may be unfolding as either a flat or a triangle. A double zigzag may not be labelled as intermediate wave (W) because the maximum number of corrective structures is three, and to label multiples within multiples increases the maximum beyond three and violates an Elliott wave rule.

If primary wave 4 is unfolding as a flat correction, then intermediate wave (A) may be a double zigzag. Primary wave B may then bounce higher to retrace a minimum 0.9 length of primary wave A, and may make a new high above the start of primary wave A as in an expanded flat correction.

If primary wave 4 is unfolding as a triangle, then intermediate wave (A) may be a double zigzag. Primary wave B would have no minimum required length, and would most commonly be about 0.8 to 0.85 the length of primary wave A.

Primary wave 4 may not move into primary wave 1 price territory below 2,111.05.

HOURLY CHART

S&P 500 Hourly 2018
Click chart to enlarge.

Intermediate wave (A) may be an incomplete double zigzag. The fist zigzag in the double may be complete, labelled minor wave W. The double may now be joined by a completed three in the opposite direction, a zigzag labelled minor wave X.

Double zigzags should have a strong slope against the prior trend, downwards in this case, and to achieve a strong slope their X waves are normally brief and shallow. The second zigzag in a double has the purpose of deepening the correction when the first zigzag does not move price deep enough. A target is now calculated for minor wave Y to end using a common Fibonacci ratio between minute waves a and c. This target is very close to support about 2,700.

Within minor wave Y, minute wave b may not move beyond the start of minute wave a at 2,816.94.

ALTERNATE DAILY CHART

S&P 500 Daily 2018
Click chart to enlarge.

It is also possible to see intermediate wave (A) as an incomplete five wave structure.

There is now reasonably good proportion between minor waves 2 and 4 within this wave count. Additionally, there is alternation between the deep 0.96 combination of minor wave 2 and the shallow 0.46 zigzag of minor wave 4.

There is no adequate Fibonacci ratio between minor waves 3 and 1. This makes it more likely that minor wave 5 may exhibit a Fibonacci ratio to either of minor waves 3 or 1. Because minor wave 1 was very short, a Fibonacci ratio to minor wave 3 here looks slightly more likely.

If intermediate wave (A) ends with closing below the lower edge of the maroon channel, which is copied over from the weekly chart, then intermediate wave (B) may bounce up to test resistance there.

Intermediate wave (B) may not move beyond the start of intermediate wave (A) above 2,940.91.

ALTERNATE HOURLY CHART

S&P 500 Hourly 2018
Click chart to enlarge.

The channel is redrawn about this possible impulse downwards using Elliott’s second technique. Draw the first trend line from the ends of minor waves 2 to 4, then place a parallel copy on the end of minor wave 3.

Minor wave 5 may end either midway within the channel or about the lower edge if the target is inadequate.

Within minor wave 5, minute wave ii may not move beyond the start of minute wave i above 2,816.94.

SECOND ALTERNATE DAILY CHART

S&P 500 Daily 2018
Click chart to enlarge.

It is also possible to still see intermediate wave (A) as a complete zigzag. The bounce may continue next week for intermediate wave (B).

If intermediate wave (A) is a zigzag, then primary wave 4 may be unfolding as a flat or triangle.

The zigzag may also be labelled intermediate wave (W), because primary wave 4 may be unfolding as a double combination with the first structure a zigzag and the second structure most likely a flat.

While waves W, Y and Z within combinations must only subdivide as single corrective structures, X waves may subdivide as any corrective structure including multiples (although this is uncommon). X waves are not counted in the maximum number of allowable corrective structures which is three.

SECOND ALTERNATE HOURLY CHART

S&P 500 Hourly 2018
Click chart to enlarge.

If intermediate wave (A) or (W) is a complete zigzag, then intermediate wave (B) or (X) would be expected to be a very high bounce.

The minimum requirement for intermediate wave (B) within a flat correction is for it to retrace 0.9 of intermediate wave (A).

There is no minimum requirement for the length of intermediate wave (B) within a triangle.

There is no minimum requirement nor maximum limit of intermediate wave (X) within a double combination.

This alternate wave count expects that intermediate wave (A) or (W) found support at the lower edge of the maroon channel. If primary wave 4 continues as a triangle, then support at that line may hold.

A new high above 2,816.94 by any amount at any time frame would add some confidence to this alternate wave count. At that stage, a continuation of a deep bounce would be most likely.

TECHNICAL ANALYSIS

WEEKLY CHART

S&P 500 weekly 2018
Click chart to enlarge. Chart courtesy of StockCharts.com.

The bearish long upper wick on this weekly candlestick is contradicted by a bullish signal from On Balance Volume. Downwards movement here may be limited as On Balance Volume may find support with one more downwards week.

DAILY CHART

S&P 500 daily 2018
Click chart to enlarge. Chart courtesy of StockCharts.com.

A bearish long upper wick, support from volume for downwards movement, and a new low for On Balance Volume at the daily chart level all indicate more downwards movement next week to a new low below 2,710.51 as most likely.

Look out for support below, at about 2,700.

VOLATILITY – INVERTED VIX CHART

WEEKLY CHART

VIX daily 2018
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.

Primary wave 4 has now arrived and is showing reasonable strength. There is continuing mid term bearish divergence with inverted VIX making a new low below the prior swing low of the week beginning 25th June, but price has not yet made a corresponding new low.

As primary wave 4 continues this weekly chart may offer a bullish signal at its end.

This week completed an inside week with the balance of volume upwards and a green weekly candlestick. A small upwards movement from inverted VIX offers no new short term divergence.

DAILY CHART

VIX daily 2018
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.

For Friday the candlestick closed red and the balance of volume was down, but the day was an inside day.

Downwards movement during Friday’s session does not have a normal increase in VIX. This divergence for the short term is bullish.

BREADTH – AD LINE

WEEKLY CHART

AD Line daily 2018
Click chart to enlarge. Chart courtesy of StockCharts.com.

When primary wave 3 comes to an end, it may be valuable to watch the AD line at the weekly time frame as well as the daily.

The AD line has made a slight new low below the prior swing low of the week beginning 25th June, but price has not. This mid term divergence is bearish, but it is weak.

Upwards movement within this last week has support from a slight increase in the AD line. There is no new short term divergence.

DAILY CHART

AD Line daily 2018
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 on the 29th of August means that the beginning of any bear market may be at the end of December 2018, but 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.

Breadth should be read as a leading indicator.

The AD line has made a new low below the prior low of the 15th of October, but price has not. This divergence is short term and bearish; it is reasonable, but it is not very strong. This supports the first two Elliott wave counts.

Downwards movement during Friday’s session has support from a decline in market breadth. This is bearish.

Both of mid and small caps moved lower on Friday. Downwards movement has some support from market breadth. This looks bearish for the short term, and a new low below the last small swing low looks most likely here.

DOW THEORY

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:

DJIA: 23,344.52.
DJT: 9,806.79.
S&P500: 2,532.69.
Nasdaq: 6,630.67.

ANALYSIS OF INTERMEDIATE WAVE (4)

TECHNICAL ANALYSIS

S&P 500 daily 2018
Click chart to enlarge. Chart courtesy of StockCharts.com.

Intermediate wave (4) was a large symmetrical triangle. The deepest wave was the first wave. At its low there was a clear candlestick reversal pattern and bullish divergence between price and Stochastics.

RSI barely managed to reach into oversold.

The current correction for primary wave 4 may behave differently, but there should be some similarities.

It is expected that primary wave 4 may be stronger than intermediate wave (4).

VIX

S&P 500 daily 2018
Click chart to enlarge. Chart courtesy of StockCharts.com.

This is a daily chart.

At the two major lows within intermediate wave (4), inverted VIX exhibited single short term bullish divergence.

At highs within intermediate wave (4), inverted VIX exhibited one single day bullish divergence with price.

AD LINE

S&P 500 daily 2018
Click chart to enlarge. Chart courtesy of StockCharts.com.

This is a daily chart.

At the two major lows within intermediate wave (4), there was bullish divergence between price and the AD line. At the two major highs within intermediate wave (4), there was each one instance of single day bearish divergence.

Published @ 05:29 p.m. EST on 20th October, 2018.


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