Yesterday’s analysis expected downwards movement.

Price has moved sideways, to complete a small doji candlestick, and remains below the invalidation point on the Elliott wave count.

Summary: A correction down to about 2,120 and the lilac trend line is still expected this week. Use this as an opportunity to join the trend for a third wave up. Volume strongly supports the Elliott wave count. Manage risk because it is the single most important aspect of trading. Do not invest more than 3-5% of equity on any one trade and always use a stop.

Last monthly chart for the main wave count is here.

Last weekly chart is here.

New updates to this analysis are in bold.

MAIN WAVE COUNT

DAILY CHART

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Primary wave 2 now looks to be complete as a double zigzag. Within primary wave 2: intermediate wave (W) was a very shallow zigzag lasting a Fibonacci 13 sessions; intermediate wave (X) fits perfectly as a triangle lasting 20 sessions, just one short of a Fibonacci 21; and intermediate wave (Y) also lasting 20 sessions deepens the correction achieving the purpose of a second zigzag in a double.

Primary wave 2 looks like it has ended at support about the lower edge of the maroon channel about primary wave 1, and at the 200 day moving average.

With upwards movement slicing cleanly through the lilac trend line, this behaviour looks to be more typical of an upwards trend. At this stage, corrections within primary wave 3 may be expected to turn down to test support at this trend line. While after hours movement did not find support there, the New York session did.

At 2,500 cycle wave V would reach equality in length with cycle wave I.

At 2,467 primary wave 3 would reach equality in length with primary wave 1. This is the ratio used in this instance because it fits with the higher target at 2,500.

Within primary wave 3, intermediate wave (1) may have ended at the last high. Intermediate wave (2) may turn price downwards to test support at the lilac trend line. It is typical of the S&P to show the subdivisions of its third waves clearly at higher time frames.

Primary wave 3 may show some strength compared to primary wave 1, but it does not have to. This wave count sees price in a final fifth wave at cycle degree, within a larger fifth wave at Super Cycle degree. The upcoming trend change may be at Grand Super Cycle degree, a once in generations trend change. This final fifth wave should be expected to exhibit great internal weakness; this market may appear broken. That would be typical behaviour for a final fifth wave of this magnitude.

HOURLY CHART

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Intermediate wave (1) may have ended at the last high.

Intermediate wave (2) would most likely end about the 0.618 Fibonacci ratio of intermediate wave (1) at 2,121. This is close to the lilac trend line.

Within intermediate wave (2), minor wave B may be incomplete. It may move either higher or sideways. If minor wave A is correctly analysed as a five wave impulse (this is what it looks like on the five minute chart), then minor wave B may not move beyond its start above 2,182.32.

Minor wave B has moved higher. It did not unfold as a triangle and now looks like a zigzag. Minute wave c fits as an ending contracting diagonal, a close relative of triangles. The only thing which looks a little odd about it is the large overshoot of the (i)-(iii) trend line. Normally, the fifth wave only slightly overshoots this trend line.

Intermediate wave (2) may not move beyond the start of intermediate wave (1) below 2,083.79.

Intermediate wave (1) lasted four days. Intermediate wave (2) has so far lasted four days and may continue to total a Fibonacci five or eight days. All of these options would still give the wave count a good look in terms of proportion.

Minor wave C must subdivide as a five wave structure. So far minute waves i and ii may be complete. Minute wave iii may unfold strongly lower tomorrow, then it may end with a weaker low before minor wave C is done.

If price makes a new high above 2,182.32 tomorrow, before a downwards wave, then my analysis of minor wave A as a five is wrong. There would be two options at that stage: either intermediate wave (2) was over at the low as a quick shallow zigzag labelled minor wave A, or intermediate wave (2) is continuing further as a flat correction. The second option is more likely.

TECHNICAL ANALYSIS

WEEKLY CHART

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

A break back up above the lilac trend line is very bullish. This line is now weakened because of the break, but it should still be expected to provide some support if price turns down a little.

Price has found support at the 40 week / 200 day moving average.

Upwards movement last week has strong support from volume. This supports the Elliott wave count.

On Balance Volume found support at the two yellow trend lines. This also supports the Elliott wave count.

RSI is not extreme, so there is room for price to rise further.

DAILY CHART

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

A small inside day completes a small red doji. A doji represents a balance of bulls and bears. With lighter volume this day looks corrective, which fits the wave count.

The balance of volume today was downwards with On Balance Volume moving lower. There is little support for downwards movement. This may give some small cause for concern in the Elliott wave count expecting a sharp wave down to support at 2,120. However, it is also possible that the market may fall of its own weight to support.

The next support is about 2,155 and thereafter about 2,120.

ADX is declining, indicating the market is not trending. ATR agrees. Bollinger Bands disagree as they are widening. With two of these three indicators suggesting the market is not trending, it is reasonable to conclude the last few days are a consolidation.

On Balance Volume has again today turned down from the purple trend line. This line has now been tested three times. A break above it would be a reasonable bullish signal, but not a strong one because the line has a steep slope.

Stochastics is overbought and now exhibits divergence with price: price has made a lower high since the high of the 10th of November, but Stocahstics today made a new high. This divergence is bearish and indicates weakness in price.

VOLATILITY – INVERTED VIX CHART

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There are a few instances of multi day divergence between price and inverted VIX noted here. Bearish divergence is blue. Bullish divergence is yellow. It appears so far that divergence between inverted VIX and price is again working to indicate short term movements spanning one or two days. While this seems to be working more often than not, it is not always working. As with everything in technical analysis, there is nothing that is certain. This is an exercise in probability.

There is still some hidden bearish divergence between price and inverted VIX: inverted VIX has made a reasonable new high this week, but price has not. This indicates weakness to upwards movement from price. This divergence may be followed by one or two days of downwards movement. It will only be considered to have failed if price makes a new high above the prior high of the 10th of November.

This divergence is considered today to still be in effect. It has been followed now by one small red daily candlestick completing an inside day, and it may be followed by one more day of downwards movement before it is resolved.

BREADTH – AD LINE

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

Short term bullish and bearish divergence is again working between price and the AD line to show the direction for the following one or two days.

There is still hidden bearish divergence between price and the AD line: the AD line has this week made a new high, but price has not made a new high above the prior high of the 10th of November. This indicates weakness in upwards movement from price. It may be followed by one or two days of downwards movement. This divergence will only be considered to have failed if price makes a new high tomorrow.

At this stage, this divergence is still in effect because price has not made a new high. A small red doji may be interpreted as one day of downwards movement. A second day of downwards movement may also follow now.

Price moved sideways today, with volume more in support of downwards than upwards movement. But the AD line increased to a new high today. This single day divergence suggests further weakness to price, and it is also interpreted as bearish.

BREADTH – MCCLELLAN OSCILLATOR

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The McClellan Oscillator is now extreme (below 60). On its own this is not an indicator of a low, but it is a warning that this market is oversold. The McClellan Oscillator today is at -73.44.

On the 21st August, 2015, the McClellan Oscillator reached a similar point of -71.56. Price found a low the next session, 104 points below the closing price of the 21st August. This very extreme reading for the 24th August would have been a strong indicator of a low in place.

On the 11th December, 2015, the McClellan Oscillator reached -80.82. It moved lower the next session to -92.65 and price moved 19 points lower. The extreme reading of 11th December might possibly have led to an expectation of a bigger bounce than the one that occurred, and might have misled analysis into missing the strong fall from 29th December to 20th of January.

The next most recent occasion where this oscillator was extreme was the 8th January, 2016. It reached -66.25 on that date. The low was not found for seven sessions though, on the 20th January 2016, almost 110 points below the closing price of the 8th January. At the low of the 11th February, there was strong bullish divergence with price making new lows and the oscillator making substantially higher lows. This may have been a strong warning of a major low in place.

The most recent occasion of an extreme reading was -75.05 on the 2nd of November. The last low came two days later.

As an indicator of a low this is not it. It is a warning of extreme levels. The next thing to look for would be some divergence with price and this oscillator at lows. Divergence is not always seen at lows, but when it is seen it should be taken seriously. Any reading over 100 should also be taken very seriously.

This indicator will be approached with caution. It is one more piece of evidence to take into account.

There is still short term hidden bearish divergence between price and the McClellan Oscillator this week. While the McClellan Oscillator has made a substantial new high price has not. This indicates weakness in upwards movement from price and may be followed by one or two days of downwards movement. It will only be considered to have failed if price makes a new high tomorrow.

With no new high today this divergence is still in effect. It has now been followed by one red doji candlestick, and it may be followed by one more red daily candlestick before it is resolved.

The McClellan Oscillator is not extreme. There is plenty of room for price to rise.

DOW THEORY

Major lows within the old 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 bear market from November 2014:

DJIA: 17,977.85 (4th November, 2015) – closed above on 18th April, 2016.

DJT: 8,358.20 (20th November, 2015) – closed above this point on the 9th of November, 2016.

S&P500: 2,116.48 (3rd November, 2015) – closed above this point on 8th June, 2016.

Nasdaq: 5,176.77 (2nd December, 2015) – closed above this point on 1st August, 2016.

Dow Theory Conclusion: The transportations indicate an end to the prior bear market. The transportation index confirms a bull market.

This analysis is published @ 06:56 p.m. EST.