A higher high and a higher low fits the definition of upwards movement today, although the candlestick has closed red. Overall, price continues to behave as expected.
Summary: There is no evidence to suggest the larger bull market is over. The current pullback is very deep and not likely to be finished yet. At its conclusion, it may present a good buying opportunity.
For the short term, a bounce or sideways consolidation may continue for wave B. Targets for it to end are either 3,188 or 3,257. Thereafter, wave C may end below 2,812.68.
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
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 middle of the third wave overshoots the upper edge of the Elliott channel drawn about this impulse. 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.
Fourth and second waves of diagonals most commonly end somewhere between 0.66 to 0.81 of the prior wave. This gives a target zone for primary wave 4 from 2,954.81 to 2,855.10. However, this diagonal is expanding and primary wave 5 needs to be longer in length than primary wave 3, which was 664.71 points for this rule to be met. This rule needs to be met prior to the upper limit for cycle wave V at 3,477.39, so primary wave 5 would need to begin below 2,812.68.
DAILY CHART
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. Within the zigzag, a sharp bounce or a time consuming sideways consolidation for intermediate wave (B) may be underway.
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
Click chart to enlarge.
Primary wave 4 within a diagonal must subdivide as a zigzag. Within the zigzag, intermediate wave (B) would very likely show on the daily and weekly chart for primary wave 4 to have the right look. Intermediate wave (B) now shows up on the daily chart.
Intermediate wave (B) may not move beyond the start of intermediate wave (A) above 3,393.52.
This first hourly chart looks at the possibility that intermediate wave (B) may be unfolding as a zigzag. This is the most common Elliott wave corrective structure, so this wave count has a higher probability than the alternate hourly chart below.
ALTERNATE HOURLY CHART
Click chart to enlarge.
It is also possible to move the degree of labelling within intermediate wave (B) down one degree. Intermediate wave (B) may be unfolding sideways as a flat, combination or triangle. All of these structures begin with a three wave structure, or minor wave A or W, that may be an incomplete zigzag.
When minor wave A or W may be complete, then minor wave B or X may be a deep pullback.
SECOND WAVE COUNT
WEEKLY CHART
Click chart to enlarge.
This second wave count sees all subdivisions from the end of the March 2009 low in almost the same way, with the sole difference being the degree of labelling.
If the degree of labelling for the entirety of this bull market is all moved down one degree, then only a first wave at cycle degree may be nearing an end.
When cycle wave I is complete, then cycle wave II should meet the technical definition of a bear market as it should retrace more than 20% of cycle wave I, but it may end about either the 0.382 or 0.618 Fibonacci Ratios of cycle wave I. Cycle wave II may end close to the low of primary wave II within cycle wave I, which is at 1,810.10. It is also possible that cycle wave II could be fairly shallow and only barely meet the definition of a bear market.
An ending expanding diagonal is still viewed as nearing an end. This wave count labels it primary wave 5. Primary wave 5 may still need another year to two or so to complete, depending upon how time consuming the corrections within it may be.
Primary wave 5 may be subdividing as a diagonal, in the same way that cycle wave V is seen for the first weekly chart.
ALTERNATE WAVE COUNT
WEEKLY CHART
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.
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.
TECHNICAL ANALYSIS
WEEKLY CHART
Click chart to enlarge. Chart courtesy of StockCharts.com.
Risk of a pullback identified has been followed by a 15.8% drop in price (high to low) so far. This dramatic drop in price 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.
For the short term, the volume spike last week may be a selling climax. In conjunction with a bullish long lower wick on this weekly candlestick, a bounce may be expected about here.
DAILY CHART
Click chart to enlarge. Chart courtesy of StockCharts.com.
There are now three 90% downwards days in this strong downwards movement.
Following a 90% downwards day, either a 90% upwards day or two back to back 80% upwards days within 3 sessions would be required to indicate a 180°reversal in sentiment and indicate a sustainable low may be in place.
Friday’s gap is closed. It is renamed an exhaustion gap.
Price is falling faster than On Balance Volume. This divergence is bullish and suggests this pullback may be an interruption to the secular bull market.
Monday does not meet the definition of an 80% or a 90% up day.
BREADTH – AD LINE
WEEKLY 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.
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 and the AD line have both moved lower. Price has made new lows below the prior swing low of the week beginning 2nd December 2019, but the AD line has not. Price is falling faster than market breadth; breadth does not support this fall in price. This divergence is bullish and fairly strong, and it supports the new Elliott wave count.
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
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.
Today price moved higher with a higher high and a higher low, but the AD line has declined. This is a day of single bearish divergence.
VOLATILITY – INVERTED VIX CHART
WEEKLY 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.
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 both price and inverted VIX have moved lower. Inverted VIX has made new lows below prior lows of weeks beginning 17th / 24th December, but price has not. Inverted VIX is falling faster than price. This divergence is bearish. Because this disagrees with the AD line, it shall not be given weight in this analysis.
DAILY 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.
Today price moved higher, but inverted VIX moved lower. This is a single day of bearish 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
S&P500: 2,346.58
Nasdaq: 7,292.22
Published @ 06:42 p.m. EST.
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Careful risk management protects your trading account(s).
Follow my two Golden Rules:
1. Always trade with stops.
2. Risk only 1-5% of equity on any one trade.
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New updates to this analysis are in bold.
Index not quite at a new high so unfinished business for tomorrow.
Take care and have a good evening all!
Buying back short leg of bull put spreads. Possibly more upside but objective was to hold long puts at just about zero cost basis and mission accomplished….
Keep an eye on VIX for divergent higher low with index higher high.
We do face risk of a gap down tomorrow so not a bad idea to take some off the table…
Selling SPY 315 calls bought at 0.60 for 1.60.
Holding buy-stop fill contracts (the safer trade!)for more upside per Lara’s count. I may sell by the close if we hit 2.00. Congrats to the other gun-slingers! 🙂
Took my profits a tad early but as they say, any landing…
Verne – happen to see your message before heading out and bought at 0.50. Was a little late getting back and ended up selling at 2.70. Little scary since I’m a long term investor by trade, but nice to not screw it up.
And I really appreciate all the comments you and rest of the frequent posters leave. It’s like frosting on the EW cake. Learning a lot from all of you!
Updated hourly chart:
The structure of minor C looks incomplete and so I’d be expecting some more upwards movement here.
We should clear 3100, possily with VIX divergence. If it proves final resistance fall away should be impulsive…
it would be nice to sell the rest of these SPY calls tomorrow near Lara’s target…
Indeed! Hot butter coming right up…!!
VIX looks like it’s breaking from falling wedge….but no higher high so possible truncation…no confirmation yet though…
O.K. people, sharp eyes on this last impulse up. Also watch VIX…
Looks like four of C, barring wave extensions. We need to be alert for a reversal once we surpass “A” high…
Expect some resistance at 3100.00…
In markets like this pay no attention to option spreads. They will fill you for less than the bid and pay you more than the ask….use limit orders…
took some profits here at 3090, looking to reload if this is a 5 up out of the triangle
These are electronic markets. You cannot be filled outside of the bid/offer.
If you think you are, it means your feed is late.
I can only agree with the recommendation though. Opening position should only use limit orders.
Not true. I have done it literally dozens of times.
I have also made numerous “stink bids” that were filled at below the official bid and the flll price never even showed up. I did not such a thing was even possible until I learned it from master options trader Jeff Clark.
You would be surprised at what you don’t know…! 🙂
Might be over here at 3090 (multi-year trend line resistance). If it continues, then we will be going to 50% fib retest, according to logic:)
Note SPX is up 3.1% on the day; is it likely to go to 3.5, 4.0 today? I’m doubtful. Maybe due for a little consolidation. The 50% overhead is a potential double top area. And I would not be surprised by some large fund selling late in the day (starting perhaps 2:30, or maybe kicking in a 3:30).
Touched 50% exactly and retraced.
Looking to munch on some UVXY March 13 25 strike calls. Opening “stink bid” of 1.25. We could get a bite on C up, now trading for 2.20…
Here we go…!
Nice retest of the BD trend line too…
On very rare occasions, these triangles go rogue and break to the downside.
Even more amazing, they will sometimes turn right back around and take off for the upside target….triangles can be tricksy….said you-know- who… 🙂
Heck of a triangle visible at the 15 minute (and below) tf!! E wave is in. Should resolve up and away…
I was counting top of D with E down ahead before break-out…could be wrong…
your nice short term SPX options play idea prompted me to also take a similar small position in IWM (friday expiry 153.5 calls for .33). So come on Mistress Market, fulfill this WC!!
🙂
BTW, I use a very generous 50% stop loss on spec trades which is fine as we are not betting the house…
Large price swings in the market means it is worth considering a slight change in strategy if you are an options trader. Normally you get a bigger bang for the buck with OTM contracts but the risk is much higher as some 80% of contracts expire worthless. You have to have very high probability set-ups which also requires excellent technical or EW analysis. EW does a great job of telling where you are likely going but generally not too good at telling you when.
In the WAR ROOM we have been buying deep in the money contracts that are giving great returns owing to the current over-sized swings in the market.
Here’s another little secret, during counter-trend rallies SELLING puts is usually much more profitable than buying calls. A brief look at how puts and calls change during these moves will show you what I mean.
Of course as VIX rises so does premium, so selling it makes a lot of sense.
Looking at option prices relative to a possible C wave up targeting around 3260.
Friday’s SPY 315 strike calls are trading for 0.60. Even a move to tag 3200 means those contracts would trade for just about five.
I like to occasionally use EW and patterns and price targets to find “mis-priced’ options…. 🙂
Here is how I am going to play that speculation:
1.00 buy stop on 315 strike calls…
I was close! Bought 314 for 0.85
Yikes! Another gun-slinger!! 🙂
I’ll put toe into that water, thanks!
Today so far looking like an inside small range day (ignoring the giant opening gap). But well inside the B wave up channel and no gap or lower pivot violations. Yet.
Larger triangle unfolding for B wave it would appear. If correct, we have a C up yet to come. A quick look at the chart and the overhead gap makes a gap fill at about 3260.00 a possibility.
Today’s gap should serve as another great sign-post for an end to the correction. Still looking for sub 3K close to confirm.
Hi Verne, which gap do you refer to? I don’t see any on a daily. It’s an inside day so far.
The opening gap relative to yesterday’s day session close.
So essentially, he means a move back below yesterday’s close. I would tend to agree; that would not be very consistent with an ongoing B up thesis.
Thanks Kev.
Just saw the query…
Thanks Kev.
Just saw the query…
The latest CV count #’s. I don’t expect these to be highly accurate for all kinds of reasons. I do expect the general trend to come through regardless. So far, so good. Note: “today” is partial data. Watching carefully for exponential growth in the daily data chart. That would be very, very concerning. It’s also interesting to note that the much higher counts from earlier are of course China rates. If we are to believe this, they managed to get it under control, but consider what they had to do to succeed. Is the rest of the world going to put in place similar draconian measures? I’m doubtful. And to the degree the world does…what does that do to business results? Interesting times.
looks like futures like the outcome from first super Tuesday so far…
I think it’s entirely possible we see 3200 today
Verne if it’s possible could you explain correlation of vix to sp500 movement. Have I got this right low vix the market rallies ? And what is a low vix as a numerical number in your view. Thsnkyou in advance. Sorry to ask a dumb question
Some folk refer to VIX as a “fear guage”. In the simplest terms fear and VIX increases when the market is falling. Technically, VIX, or “implied volatility” is a measure of the put/call ratio for the S&P 500. A higher VIX suggests more puts than calls being bought and therefore expectation broadly that the market will decline.
Volatility considerations can become infinitely more complex than that brief summary when you include matters like risk/parity trading (traders being permitted greater leverage on lower volatility), long position hedging, and rolling vol futures calculations, most way beyond my pay-grade.
Historical average for VIX prior to the financial crisis was around 20, but in an era of CB relentless intervention in equities markets, volatility has been unnaturally suppressed the past several years. I think these days around 15.00 seems to distinguish risk-on vs risk-off market posture. Chris Cole ( a very good quant guy) a few years ago wrote a paper suggesting when VIX stays above 15 traders start getting calls from risk desks about trimming leverage.
Thankyou verne
🙂
From investopedia:
What Is the CBOE Volatility Index (VIX)?
“Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.”
Note: it is based on the PRICE of SPX options, not a ratio of the open interest of puts and calls.
Because price of options “discounts” the expect move size of the options, it is a proxy for “expect volatility”, even though it itself is a measure of the average PRICE of particular options.
Thankyou Kevin
Sooooo….if VIX Is based on the price of options and not the put/call ratio, what determines option price…? Exactly!
The guys over at Investopedia must mof be traders.. 🙂
It’s COMPUTED as (generally; the CBOE has a long white paper on the exact math) as an average of SPX option prices.
How option prices get set…well as we all know that’s an open market process!! And hence, options prices, and hence the VIX, can get wonky, just as asset prices can get wonky. Hence, the very legitimate naming of it as a “fear index”. SPX option prices are fundamentally discounting (or expressing) expected move size (expected volatility), but those prices are established by an open trading process, and fear is often the prime driver of that pricing. Hence sometimes surreal upward movement in VIX and the price of SPX options.
That’s my take. But for the formal calculation of VIX, there’s a pure mathematical formula for that with no room for any discretion. All variability is strictly in the open market price of those options.
A lot of people here are discussing coronavirus and may be interested in this webinar:
https://bloomberg.cwebcast.com/ses/KI2tU-zp8mZYkpGUVJ9bAg~~
ES upward break from bullish falling wedge
Let’s get that last wave up!
Hmmm….you looking at 3,188 or higher target on this move up.
Yep looking at a target between 3188 (June ES) being 0.618 of (A), and 3024.50 where C of (B) will equal A of (B).
3189.60 and 3213 on SPX.
We’ve already had 5 up, 3 down on a 5 mins chart on ES.
Sorry….3204.50 on ES.
Yep. Look for the CTAs to push things just past the expected fib retracements. VIX will tell you when to pull the trigger….
Looking to fire up some hot cakes …
make mine a double stack of buckwheats
Blueberry with maple syrup for me!
Oh Yeah!
Don’t forget great big slabs of budda!!