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A strong bounce today is analysed to see if there is evidence of a sustainable low here.

Summary: There is no evidence to suggest the larger bull market is over. Downwards movement over the last four weeks is expected to most likely be a deep pullback, which has precedent in this secular bull market that began in 2009. It may be over at today’s low.

Today registered an 80% up day and completes a bullish long lower wick.

A new low below 2,728.81 would indicate a deeper correction that may end at the lower edge of the teal multi-year trend channel.

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

Last monthly charts analysis is here with video here.

ELLIOTT WAVE COUNTS

FIRST WAVE COUNT

WEEKLY CHART

S&P 500 Weekly 2020
Click chart to enlarge.

Cycle wave V may subdivide either as an impulse or an ending diagonal. This wave count considers a diagonal. The alternate considers an impulse.

A channel is drawn about the impulse of Super Cycle wave (V) using Elliott’s first technique. Draw this channel first from the high of 2,079.46 on the 5th of December 2014 to the high of 2,940.91 on the 21st of September 2018, then place a parallel copy on the low at 1,810.10 on the 11th of February 2016. Cycle wave IV found support about the lower edge. The lower edge of this channel is currently very important and should be watched closely tomorrow.

The middle of the third wave overshoots the upper edge of the Elliott channel drawn about this impulse (off to the left of the chart). All remaining movement is contained within the channel. This has a typical look.

Within Super Cycle wave (V), cycle wave III may not be the shortest actionary wave. Because cycle wave III is shorter than cycle wave I, this limits cycle wave V to no longer than equality in length with cycle wave III at 3,477.39. A new high by any amount at any time frame above this point would invalidate this main wave count in favour of one of the two alternate monthly charts which may be seen in last published monthly analysis.

At this stage, cycle wave V may end within this year or possibly into next year.

The daily chart below will focus on movement from the end of intermediate wave (B) within primary wave 3.

Ending diagonals require all sub-waves to subdivide as zigzags. Primary wave 4 of a diagonal must overlap primary wave 2. This rule is now met. Primary wave 4 may not move below the end of primary wave 2 below 2,728.81.

This ending diagonal would be expanding. Primary wave 3 is longer than primary wave 1, and primary wave 4 so far is longer than primary wave 2. Primary wave 5 would need to be longer than primary wave 3 for all rules regarding wave lengths of expanding diagonals to be met.

Downwards movement for this main wave count must end here for the wave count to remain valid. If primary wave 5 begins here, then it must be longer than primary wave 3 at 3,398.71.

DAILY CHART

S&P 500 Daily 2020
Click chart to enlarge.

All sub-waves of an ending diagonal must subdivide as zigzags. This is the only Elliott wave structure where a third wave sub-divides as anything other than an impulse.

Primary wave 4 must subdivide as a zigzag. Intermediate wave (B) within the zigzag may have been more brief than expected, and it may have been over last week. Intermediate wave (C) for this wave count may now also be over here.

Diagonals normally adhere very well to their trend lines, which may be tested within the sub-waves. The upper 1-3 trend line is tested at the end of minor wave 3 within intermediate wave (C) within primary wave 3.

Primary wave 4 may not move beyond the end of primary wave 2 below 2,728.81.

HOURLY CHART

S&P 500 Hourly 2020
Click chart to enlarge.

It is possible to see primary wave 4 as a complete zigzag. A best fit channel is drawn to contain almost all of this movement.

A new high above 2,977.24 would invalidate the alternate below for the short term and provide some confidence in this main wave count.

A breach of the best fit channel would provide further confidence that a sustainable low may be in.

Strong confidence that a sustainable low is in place would come now with a 90% up day or another 80% up day tomorrow.

ALTERNATE WAVE COUNT

WEEKLY CHART

S&P 500 Weekly 2020
Click chart to enlarge.

It is also possible that cycle wave V may still be unfolding as an impulse. Within the impulse, only primary wave 1 may be over at the last high.

Primary wave 1 is seen as an impulse. Within primary wave 1, there is poor proportion between the corrections of intermediate waves (2) and (4) and minor waves 2 and 4. This gives the wave count a forced look, but it is valid. The S&P does not always exhibit good proportion, so a little flexibility in the right look is sometimes required.

Primary wave 2 may be unfolding as a zigzag. It may find strong support about the lower edge of the multi-year teal trend channel.

Primary wave 2 may not move beyond the start of primary wave 1 below 2,346.58.

If the main wave count is invalidated with a new low below 2,728.81, then this alternate would then be used.

The limit is removed from this alternate. If only primary wave 1 is over at the last all time high, then more room would be required for the structure of cycle wave V to complete than the limit would allow. This alternate may fit with one of the alternate monthly charts.

DAILY CHART

S&P 500 Daily 2020
Click chart to enlarge.

This wave count allows for more downwards movement here. Primary wave 2 may not end until price comes down again to test the lower edge of the teal channel.

Primary wave 2 may be subdividing as a zigzag; this is the most common Elliott wave structure for a second wave. Primary wave 2 may not move beyond the start of primary wave 1 below 2,346.58.

It is possible that primary wave 2 could be over at today’s low. Both the main Elliott wave count and this alternate Elliott wave count may remain valid over the next several months.

HOURLY CHART

S&P 500 Hourly 2020
Click chart to enlarge.

Primary wave 2 may be incomplete. A target is calculated that may be a little too low. It would require a small overshoot of the lower edge of the teal channel. The lower edge of the channel may be a better guide to where primary wave 2 may end.

Intermediate wave (C) must subdivide as a five wave structure; it may be an almost complete impulse. Within the impulse, minor wave 4 may not move into minor wave 1 price territory above 2,977.24.

TECHNICAL ANALYSIS

WEEKLY CHART

Weekly 2020
Click chart to enlarge. Chart courtesy of StockCharts.com.

A 19.4% drop in price (high to low) so far has precedent within the larger bull market. It does not necessarily mean the secular bull market must be over.

At the weekly chart level, conditions are not yet oversold; this pullback may be expected to continue further.

A long legged doji last week represents a pause, a balance of bulls and bears. This is not a reversal pattern; doji appear within trends or consolidations.

DAILY CHART

Daily 2020
Click chart to enlarge. Chart courtesy of StockCharts.com.

There are now four 90% downwards days in this strong downwards movement.

The following indicators now suggest a low may be in place here or very soon indeed:

– RSI reached deeply oversold and now exhibits short-term bullish divergence with price.

– Stochastics reached oversold and now exhibits short-term bullish divergence with price.

– On Balance Volume continues to exhibit bullish divergence with price.

The following indications will be looked for to provide confidence that a low is in place:

– A 90% upwards day.

– Two back to back 80% upwards days. This requires tomorrow to also complete an 80% up day.

– A bullish candlestick reversal pattern.

While the long lower wick today is bullish, it is not long enough to complete a hammer candlestick pattern as it is less than twice the length of the real body.

BREADTH – AD LINE

WEEKLY CHART

AD Line weekly 2020
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.

Bear markets from the Great Depression and onwards have been preceded by an average minimum of 4 months divergence between price and the AD line with only two exceptions in 1946 and 1976. With the AD line making new all time highs with last all time highs from price, the end of this bull market and the start of a new bear market is very likely a minimum of 4 months away, which is mid June 2020.

In all bear markets in the last 90 years there is some positive correlation (0.6022) between the length of bearish divergence and the depth of the following bear market. No to little divergence is correlated with more shallow bear markets. Longer divergence is correlated with deeper bear markets.

If a bear market does develop here, it comes after no bearish divergence. It would therefore more likely be shallow.

Last week price has moved sideways and the AD line has slightly declined. This is very slight bearish divergence.

Large caps all time high: 3,393.52 on 19th February 2020.

Mid caps all time high: 2,109.43 on 20th February 2020.

Small caps all time high: 1,100.58 on 27th August 2018.

DAILY CHART

AD Line daily 2020
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.

Breadth should be read as a leading indicator.

Both price and the AD line have moved higher today. Neither have made new swing highs. There is no new divergence.

VOLATILITY – INVERTED VIX CHART

WEEKLY CHART

VIX weekly 2020
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.

The all time high for inverted VIX was on 30th October 2017. There is now over two years of bearish divergence between price and inverted VIX.

The rise in price is not coming with a normal corresponding decline in VIX; VIX remains elevated. This long-term divergence is bearish and may yet develop further as the bull market matures.

This divergence may be an early warning, a part of the process of a top developing that may take years. It is clearly not useful in timing a trend change from bull to a fully fledged bear market.

Last week price has moved sideways and inverted VIX has moved slightly lower. This divergence is bearish for the short term.

DAILY CHART

VIX daily 2020
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.

Both price and inverted VIX have moved higher today. Neither have made new swing highs. There is no new divergence.

DOW THEORY

Dow Theory would confirm a bull market if the following highs are made:

DJIA: 26,951.81 – a close above this point has been made on the 3rd of July 2019.

DJT: 11,623.58 – to date DJT has failed to confirm an ongoing bull market.

S&P500: 2,940.91 – a close above this point was made on the 29th of April 2019.

Nasdaq: 8,133.30 – a close above this point was made on the 26th of April 2019.

Dow Theory would confirm a bear market if the following lows are made on a closing basis:

DJIA: 21,712.53

DJT: 8,636.79 – a close below this point has been made on March 9, 2020.

S&P500: 2,346.58

Nasdaq: 7,292.22

Published @ 05:57 p.m. EST.


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New updates to this analysis are in bold.