Have we seen the top in the S&P-500? Possibly, but not quite yet in my opinion.
As you all know, I utilize a combination of several technical analysis tools to predict price movements in the markets. Those tools include Elliott Wave and its associated Fibonacci price targets, Hurst cycle analysis, MACD divergence, RSI overbought/oversold, support and resistance, trend lines & channels, multi-timeframe analysis, volume, volatility, sentiment, breadth and more. Most of these tools are currently suggesting that a major top is in the very late stages of forming in the S&P-500, Dow Jones Industrial Average (DJIA), Nasdaq, and Russell 2000.
As the long-term chart using quarterly candles shows (below), there is a very large RSI divergence already showing between the Y2K high and the top under formation right now. Also worth noting is the pattern “fractal” currently unfolding. If U.S. stocks are in the process of forming an expanding wave 4 triangle at supercycle degree, (my main count), this is the same Elliott Wave pattern (fractal) that appeared during the wave 4 at one lesser degree: the cycle (teal) degree wave 4 from 1966 through 1974. And don’t let the appearance of the semi-log quarterly chart fool you. That 1973-74 bear market was quite devastating, as the SPX lost 50% of its value in less than two years.
We can zoom in to the topping process that’s been underway in the stock market since the year 2000 by examining the monthly chart below. Notice how stocks have continued higher since the October 2011 low, but have traveled in the bottom half of the (burgundy) base channel. This is uncharacteristic of wave 3’s, which should break through the top of base channels. Rather, the S&P has, in recent months, found itself having a very difficult time staying above the lower trend line of the channel. That base channel is a big deal, and when it breaks to the downside, there is very little in the way of support until you get all the way back down to the 2000 and 2007 highs, (around 1553-1576).
Additionally, the RSI on the monthly chart is very troubling. Compare the three most recent periods exhibiting an overbought RSI condition. First, during the latter mania stages within supercycle wave 3 (1995-98), the RSI was super strong, reaching and maintaining the highest readings going back many decades, and staying overbought for years. That was followed by the overbought readings leading into the 2007 top, which stayed in overbought territory for much shorter duration, and the peak readings weren’t as high. And finally, from March 2013 through December 2014, the RSI moved in and out of low overbought territory, with the highest peaks falling short of reaching the highest 2007 readings.
As we move to the weekly chart, we can see that nothing has changed much since my most recent stock market post. Depending on which wave count is correct, either an ABC or 12345 is underway to the upside since March 2009. I’ve written in these pages before about the 4.5-year Hurst cycles, and how an organic Sentient Trader analysis of the SPX or Dow Jones Industrial Average should start at the Y2K top because it was the last large degree Elliott Wave top. When one does so, a 4.5-year cycle trough is rightly placed at the 2002 low. I say “rightly” because 2002 marked the end of the first multi-year bear market going back 20-years. Even if you don’t agree with my assessment that Y2K was a supercycle degree top, there’s no denying that the 2002 low must have been a cycle trough of at least 4.5-year magnitude. So moving forward from the 2002 cycle 4.5-year low, the most recent 4.5-year cycle trough was in October 2011, which importantly was the low in US stocks since Y2K when priced in Gold. Then, counting forward from October 2011, the next 4.5-year cycle trough is due in March 2016.
Also, on the weekly chart we can see that the last 18-month Hurst cycle trough (a 10% correction ending October 15 2014) occurred only 18 trading days after an all-time stock market high. Wow! This exemplifies how this market has been behaving. Its grinds higher for as long as it possibly can before mini-crashing into the larger Hurst cycle troughs. That September/October downward burst was the 18-month trough. The next larger cycle trough coming up in about 9 months is the 4.5-year. It’s doubtful that stocks will stay up until just a few weeks before that one, and as we’ll see on the daily and intraday charts later, the larger stock indices are unlikely to stay up much longer at all from an Elliott Wave perspective.
On to the daily chart (below), we can see that after the mid-October low, price shot up like a rocket into late November. But since then, price has chopped incessantly, with a very slight upward bias. This is textbook behavior of an Elliott Wave ending contracting diagonal. Wave 1 is the longest, wave 3 is shorter than 1, 4 is shorter than 2, and 5 must be shorter than 3 was. Importantly, if a contracting ending diagonal is underway since the October 15 low, and waves 1, 2, 3 and 4 (blue) are finished, wave 5 blue cannot end above 2178.39. I must say, the price action since late November strongly suggests DIAGONAL.
As we can see in the 240-minute chart (below), in keeping with the way this market has been behaving for a long time, the final wave up (blue 5) is delaying, buying time, and delaying some more. I’ve been saying this for a long time, but this next bear market must be the most feared bear market of all time! By the way, in my last post about the SPX (April 30), I mentioned that my main count was that a pink wave B triangle was still underway. That appears to have been correct.
So did the market top on May 20? It’s certainly possible, but Hurst cycle analysis is expecting price to generally rise into a 40-day cycle crest centered on June 2. If that were to occur, and new highs were achieved, the pink C thrust from the pink B triangle would be subdividing internally as an ending expanding diagonal. Diabolical. Whether the top is “in” or not, a big 40-week cycle trough is due in June/July, which should draw the S&P markedly lower over the next few weeks. I expect that downward movement to be intermediate (black) wave 1 (or A) of a much larger move to the downside. Any price action in the S&P below 2096.04 (2091.50 in the ES futures) in the next day or two would strongly suggest that the May 20 high will hold.
As always, there are other important wave counts that may suggest alternative outcomes, especially when considering developments in items like the XLF, Dow Jones Transports, Utilities, Real Estate, Regional Banking, Biotech, the Mining Sector, Energy and more. My weekly “Counts” webinar really presents the entire picture, and that picture morphs a little from week to week. Want to stay on top of these markets? It takes persistent commitment.
Don’t have time for a 2.5 hour webinar? Try my EWP ScreenShots service, which includes multi-timeframe (weekly, daily, 240-minute, & 60-minute) analysis of SPX, DAX, TLT (bonds), Gold, Oil, the US Dollar Index, and the EUR/USD currency pair twice per week, (on Sundays and Wednesdays). You can subscribe one week at a time, if you like.
So . . if the stock market is moving into a bear market phase, is it time to pack up the toys and go home? Certainly not! There’s money to made in these markets, both long and short, as many of my paid subscribers can attest.
Sid Norris – ElliottWavePredictions.com