Dow Jones Industrial Average Index

[PCMNewsdesk]

[Bottom Line]: The Dow and S&P are declining in five waves from their respective December-January peaks. Once five complete waves are in place, the market will undergo its largest upward retracement since the top days. But the "five down" indicates that the next larger degree of trend has turned lower. Ultimately, the current decline should be the first building block to a far larger and longer stock market selloff.

"There's no sense of panic on the floor of the NYSE," according to a floor trader interviewed on financial television this afternoon. Panic occurs at or near a low, so if this trader's sense of "the floor" is accurate, the market should have greater downside potential. We do note that today's NYSE Trading Index closed at 3.16 (CQG), which is the highest close since June 21, 2012 (3.38). Panics however, can take on a life of their own so we are monitoring the market's internal measures closely.

Here's one internal measure that we are watching. The decline from the December 31 peak at 16,588.20 is five waves, shown clearly on one of the daily charts above even though wave (i) is not quite textbook. I've marked the strongest downside NYSE advance/decline ratio, which usually occurs within a third wave. On January 24, the NYSE a/d's were 6.48-to-1 negative, which fits well with the designation as wave (iii), as shown on the second chart above. Today's NYSE a/d was 5.73-to-1 negative. That's still very strong but it is slightly less than January 24, so it is possible to label the current decline wave (v) of i (circle) down. If the a/d ratio becomes stronger than 6.48-to-1 negative, then the odds would probably change to the potential that the market was declining in a third wave, which would mean significantly lower prices over the near term.

[PCMNewsdesk]

[Bottom Line]: On a long term basis, the stock market is at the forefront of a long and deep decline. Short term, a five wave decline from the recent peaks is nearing an end. The desire to sell shares has subsided over the past several sessions but the desire to buy the market has yet to materialize. Any rally should prove to be countertrend and be completely retraced as the market works lower.

The market is in a precarious short term position. We've been discussing the five-wave decline in the Dow and S&P 500 from their respective highs at 16,588.20 (DJIA on 12/31) and 1850.84 (S&P on 1/15). The implications of this structure are twofold. First, the "five down" means that at the least, the one-larger-degree market trend has turned lower. Second, once five waves down are complete, the market will undergo its largest upward retracement since the late-December, mid-January peak. Selling pressure has abated but we are struck by wide-spread complacency toward at least the possibility of major wash out. Instead, most news stories about the market's decline have a similar theme: "it's a normal 10% correction;" "it a significant buying opportunity;" "buy on the crisis in the emerging world." It's possible that these views will prevail; after all, there are a lot of smart and talented people on Wall Street. But we know a thing or two about social mood and when the crowd thinks mainly one way, and that view is widely shared, it pays to be attuned to a different conclusion. Our view is that stocks are at the forefront of a major bearish wave to the downside. We're putting together a great issue of The Elliott Wave Financial Forecast on Friday to discuss the long term outlook. As always, the wave structure will provide key guidelines in our analysis.

Monday's Dow chart showed how the decline that day (Feb. 3) was not as strong as the decline on January 24 in terms of the number of NYSE stocks that ended the session down versus up (the advance/decline ratio). In other words, there was a lessening in intensity in selling pressure. Third waves are stronger than fifth waves, so the less intense downward pressure in Monday's decline indicated that it was a fifth wave, the final wave of the "five down" that we forecast. Prices slipped to a new low this morning (15,340.60 in the Dow and 1737.92 in the S&P) and then rallied thereafter. The downside a/d's in this morning's decline were milder still. However, a market that reverses upward after making a new intraday low but is unable to close the day positive is not a bullish sign. A good deal of buying power was used up but with no positive results.

Here are the two short-term potentials for tomorrow and Friday. The Hourly S&P chart labels today's decline as the end of wave i (circle) down. This means that wave ii (circle) up started today and should carry the market higher for at least another 4-5 days. Under this view, prices should continue to rally tomorrow, following through on this afternoon's tepid rally. Tomorrow should be a stronger upside day. Another potential is shown on the Dow's 15-minute chart. It's possible that this afternoon's rally is the final push in wave iv, which traced out an upward flat (see text, p.45). This pattern means that stocks fall from the get go tomorrow and make a new low before wave i (circle) is complete. It could be a strong decline. One of our internal momentum measures shows a positive set up for stocks at today's low, but that would be erased if the Dow and S&P decline below 15,340.60 and 1737.92, respectively. A Dow rally above 15,500 early tomorrow would tilt the odds toward wave ii (circle) up.

The first bounce after the market peaks in 1929, 1973, 1987, 2000 and 2007 retraced at least 50% of the prior decline and more often retraced 60%-70%. If this same form holds now, wave ii (circle) up should carry the Dow to at least 15,950 and the S&P to at least 1794. A 60%-70% retracement would mean above 16,100 in the Dow and the areas surrounding 1808 in the S&P.

[PCMNewsdesk]

[Bottom Line]: The rally of the past three days is a countertrend move that is correcting a portion of the prior five-wave decline. The completion of a three-wave pattern will mark the start of the next major wave lower.

The largest stock market decline during wave Y (circle) up from the October 4, 2011 low (see chart, p.2 in the new Feb. EWFF) has been 10% from April to June 2012 in the S&P. So investors who jumped in on every 5%-10% decline have had their behavior validated by a market that rallies to new highs. Markets however, are full of irony and paradox: once a condition persists for a period of time whereby the majority believes it will continue, something new and different develops. The wave structure is the best tool we know to show when that change occurs and the "five down" in the DJIA and S&P from the recent highs suggests it is now.

The stock market's countertrend rally, which started Wednesday (Feb. 5) and will be labeled wave ii (circle) when complete, should be a three-step process; an initial rally, a partial pullback and then a final push to complete the move. These will be the sub-waves that comprise wave ii (circle) and we label them (a)-(b)-(c) to denote a move against the one-larger degree trend. Stocks appear near the end of the initial rally phase, which is wave (a). So far, the advance this week has not been as strong as the prior decline from the December-January highs. On January 24 there were 6½ stocks down for every 1 up on the NYSE. On Monday (Feb. 3), there were over 5 stocks down for every 1 up. Today was the strongest rally day of the three and there were slightly less than 3½ stocks up for every 1 down. So investors' selling pressure has been stronger than buying pressure. Moreover, volume has contracted each day of the advance (Bloomberg data and CQG data). The buying could get a bit stronger in wave (c), which sports similar characteristics to third waves, but it doesn't have to. Once wave iii (circle) down starts, selling intensity will likely exceed that of wave i (circle), which means a day or more of greater than 7-to-1 negative breadth.

The Dow rallied above 15,500 in the third minute of trading yesterday morning (Thur.), indicating at the outset that the wave ii (circle) push was on. The index has quickly retraced 37% of wave i (circle), while the S&P 500 has retraced 53% of its corresponding first wave decline. In Wednesday's STU we said that the first bounce after the market peaks in 1929, 1973, 1987, 2000 and 2007 retraced at least 50% of the prior decline and more often retraced 60%-70%. The current bounce in the blue chips is conforming to the historical percentages.

These two short term charts show the wave labels of the market's recent moves. The rally from Wednesday's lows is wave (a) of an (a)-(b)-(c). Wave (b), which will unfold for a short period next week, will amount to a partial pullback of this three-day rally. Then wave (c) will carry the indexes to their final highs. As noted above, the Dow is just shy of a 38.2% retracement of wave i (circle), which is 15,817.20. So it's possible that wave (a) may be ending now. Often, a complete countertrend rally will stop at or near a previous fourth wave of lesser degree. The Dow has two prior fourth waves at 15,907.50 and 15,945.80. We can't be certain wave (c) will end at one of these levels until we see wave (b) develop. Still, they do represent good targets to keep an eye on. The S&P has two prior fourth waves of lesser degree at 1798.77 and 1807.66. The index rallied to within ticks of the first one, which suggests that wave (a) may be ending now, too. We do know for certain that wave ii (circle) should generate widespread agreement that the worst is over for U.S. stocks, that the market had a mild 6-7% correction and that all the indexes were rallying to new all-time highs. It will mark the psychological backdrop for the next wave down.

Sometimes mood changes will be expressed clearly in other stock indexes too. This hourly chart of the S&P 600 Small Cap Index is a good example. The index peaked on December 26 and traced out a clear five waves down to Wednesday's (Feb. 5) low at 614.47, completing the pattern at the Elliott channel line. The overall structure is the same as the Dow and S&P, with the rally from Wednesday tracing out an (a)-(b)-(c). The small cap's lagged this afternoon's Dow and S&P 500 rally, instead making the day's high at the open. The small cap's may still push higher in wave ii (circle) but a decline below the wave i (circle) low would indicate that wave iii (circle) down had started.

The two extremes recorded over the past two months are important to the wave structure. One extreme is this week's low, 15,340.60 in the Dow and 1737.92 in the S&P. A decline below these levels by both indexes would indicate that wave three down had started. It will be a huge decline. At the opposite end is the highs set on December 31 at 16,588.20 in the Dow and on January 15 at 1850.84 in the S&P. A rally to new highs by both indexes would instead indicate that the bear market rally was not yet complete.

[PCMNewsdesk]

[Bottom Line]: The rally from last week's lows remains countertrend in the Dow and S&P 500. Today was the third consecutive "up" close but the internal strength of the advance was tepid. The conclusion of wave ii (circle) up will lead to a strong third wave decline.

The countertrend rally that started at last Wednesday's lows (Feb. 5) of 15,340.60 in the DJIA and 1737.92 in the S&P 500 extended higher today. Probably a better way to describe today's advance is "stretched," as the Dow closed higher by less than 8 points, while the S&P closed up 2.82 points. Whereas Friday's rally occurred with slightly less than 3½ stocks up for every 1 down on the NYSE, today's rally was far more tepid, with 1.4 stocks up for every 1 down. Today also marked the fifth consecutive day of contracting NYSE volume (CQG and Bloomberg data). It's very rare to see more than 5 straight days of contracting volume so odds favor a volume pick up tomorrow. Usually, an up close on narrow breadth and contracting volume indicate a rally that is internally weak. Open interest in VIX puts jumped to a record 3.21 million on Friday. This means investors are betting at record levels that the VIX will decline further from Friday's 15.29 close. Usually the VIX falls during a stock market rally. This is a contrary indicator and suggests that option traders are jumping on the rally like never before. Tomorrow, new Fed chair Janet Yellen makes here mainstream media debut before the House Financial Services Committee, with her semi-annual report on monetary policy and the U.S. economy. That will undoubtedly dominate tomorrow's headlines.

Wave ii (circle) would "look" better with a more pronounced wave (b) pullback followed by a wave (c) push to a final countertrend rally high. It appears that Friday did mark the end of the initial rally phase, wave (a), and since then wave (b) has been tracing out a flat (see text, p.45). The Dow Industrial's poked to a slight new recovery high today, while the Dow Transports were down on the day. Under this scenario, wave c of (b) will draw the Dow to 15,623-15,690, the most probable range. The still-developing structure will determine the final low for this wave. Thereafter, wave (c) of ii (circle) should carry the indexes to modestly higher levels than today, which will complete the upward correction.

An alternate potential is shown on by the Alt. line on the Dow's short term chart. In this scenario, wave (b) was a quick and sharp pullback that occurred Friday morning, with the DJIA declining to 15,625.50 and the S&P to 1777.28. Wave (c) then carried to today's highs or will end with slightly higher highs over the next day or so. This means that stocks are closer to ending wave ii (circle) and starting wave iii (circle) down, which will be a long and powerful selloff. A decline through 15,568 in the Dow and 1766 in the S&P, with strong downside breadth and volume, would signal the onset of this next wave lower.

Market analysis involves assessing probable outcomes, as guarantees do not exist. If stocks continue to stretch higher from near current levels, the S&P has a strong target surrounding 1808, which is wave "four of three" as well as a 61.8% retracement of wave i (circle) down. A possible Dow target is 15,907-15,964.

[PCMNewsdesk]

[Bottom Line]: The second wave advance in the Dow and S&P 500 has carried high enough to consider the wave nearly complete. A strong third-wave decline will draw all stock indexes to significant new lows.

Today's Dow high at 16,036.56 high amounts to a 56% retracement of wave i (circle) down. The S&P has retraced 78.6% (v of 61.8%) of wave i (circle). The NASDAQ 100 rallied to a new high. The NYSE Composite Index has retraced 71% of the prior decline, while the Dow Transports have retraced 47% of the same. So the rally has been somewhat uneven. The rally in the Dow and S&P have met second wave expectations in terms of percentage retracements, so they need not carry higher. If the Dow were to meet its 14-year trendline that extends off the major tops of January 2000 and October 2007 (see chart), it would rise to the area surrounding 16,205, which would amount to a 69% retracement of wave i (circle). A decline through 15,578 in the Dow and 1771 in the S&P, with strong downside breadth and volume, would signal the onset of this next wave lower.

While the S&P 500's retracement has been at the upper end of historical norms, the S&P 600 Small Cap Index has retraced 50% of its wave i (decline) and carried back to the bottom channel line, as shown on the above chart. The index still remains a bit shy of an open gap and the previous fourth wave, which occurs in the 644-648 range. A close under 626 would indicate that wave iii (circle) down to significant new lows had started.

Yesterday's rally occurred with 3.42 stock up for every 1 down and volume did indeed increase.

[PCMNewsdesk]

[Bottom Line]: The second wave advance in the Dow and S&P 500 is overbought and has internally weakened, which suggests that the rally is in its very late stages. The next major wave should be a broad stock decline.

After being stuck at home for two days due to Icepocolypse II, it feels good to be out and about and back in the office. My heart goes out to those who are still without power. To our Northern subscribers: hang in there, Spring is coming.

Here's an interesting fact that will not be reported in the financial headlines. The stock market has closed up 7 out of the past 9 days since February 3 while NYSE volume has contracted 8 out of the past 9 days. That's stunning. This daily Dow chart shows NYSE daily volume graphed at the bottom (MVOLNYE). Bloomberg describes the data as "NYSE trading volume on all US exchanges for all security types." Daily volume expanded during wave i (circle) and contracted during wave ii (circle), which is consistent with the designation of the rally as "countertrend." Sometimes the final sub-wave will end in conjunction with a short-term volume spike, but it's not required.

Today's rally occurred in conjunction with a significant NYSE Tick divergence on the Dow 15-minute chart, reflecting waning upside strength. The "momentum fade" is occurring with the S&P 500 stretched like a taught rubber band. This chart shows the percentage of S&P 500 stocks above their 10-day moving average. The red arrows denote the times when of maximum overbought readings, when the percentage exceeded today's 92.4%. Each time coincided or shortly preceded a near-term decline.

The Dow has retraced 67% (2/3) of wave i (circle) and today's high matches the November 29, 2013 high at 16,174.50. The E-mini S&P rallied to 1838.75, filling the only remaining open gap it had at 1838.50. The S&P cash has an open gap at 1844.86 (Jan. 22) but its retracement has already been an outsized 92%. The S&P 600 Small Cap Index pushed to 649.14, the top of the cited target range. The NASDAQ Composite made a new recovery high today, rallying to 4250.90. At the Supercycle wave (V) top in January-March 2000, the DJIA topped on January 14, 2000 and the NASDAQ peaked 38 trading days later, on March 10, 2000. It's now been 31 trading days since the Dow topped on December 31, 2013. I don't believe that the Dow can hold up for another seven days, but it's possible. The Dow's 14-year trendline the extends from the peaks in January 2000 and October 2007 crosses 16,209 next Tuesday (Feb. 18).

[PCMNewsdesk]

The stock rally continued today in the NASDAQ and S&P. Today market the 8th consecutive higher close for the NASDAQ, creating an overbought condition. However, the Dow Industrials and Dow Transports were down on the day. This diverging behavior is reflected in the market`s internal measures, which were tepid. In terms of advancing issues relative to declining issues and advancing volume relative to declining volume, today`s rally was the third weakest since the February 5 low. Incredibly, the 15-min. NYSE Tick divergence has remained in place since the morning of February 11. None of these measures are bullish but the pattern today in both Dow and S&P today appears to be a small-degree fourth wave. The implication is that there will be another upward push, either tomorrow or Thursday, after which stocks will be at another juncture whereby a more substantive decline could begin. A coordinated decline below the February 13 lows at 15,863.20 in the Dow and 1809.22 in the S&P would negate the idea that stocks had traced out a small-degree fourth wave. A five-wave decline from the recent highs in conjunction with expanding downside breadth and volume would indicate a change of trend for the market.

[PCMNewsdesk]

[Bottom Line]: The stock market recovered a portion of yesterday's downward reversal. A coordinated decline in the blue-chip indexes below this morning's lows would keep the Dow and S&P aligned and indicate another wave down was unfolding.

In Tuesday's (Feb. 18) Update we noted several weakening internal measures of the rally (a/d ratio, up/down volume and NYSE Ticks), which were consistent with the late stages of an advance. But the short term wave pattern suggested another upward push either Wednesday or today. That push occurred yesterday morning (Wednesday), when the DJIA carried to 16,225.70 and the S&P rallied to 1847.50. As the daily chart shows, the Dow met its long-term trendline that connects the major stock peaks in January 2000 and October 2007. The S&P 500 filled the open gap at 1844.86 (Jan. 22), which we cited in last Friday's STU.

The broad market rallied again today but, so far, the Dow and S&P remain beneath yesterday's highs. These indexes have fulfilled the expectations for a second-wave rally, leaving them positioned to start wave iii (circle) to the downside. NYSE volume contracted from yesterday's volume and the NYSE advance/decline ratio ended with 1.92 stocks up for every 1 down. A coordinated decline below this morning's lows at 16,006.50 in the Dow and 1824.58 in the S&P would strengthen the case that wave ii (circle) is complete. If the Dow were to retrace 78.6% of wave i (circle) it would push to 16321.20, but this is not required.

The top chart above of the S&P 500 shows the trend channel formed by the rally from October 2011 as well as the percentage of S&P 500 stocks that are currently trading above their 200-day moving average. The series of lower highs since May 2013 shows how each successive S&P high has been accompanied by waning upside strength. It is similar to the number of net new 52-week highs that is shown at the bottom of the second chart above. Peak upward momentum occurred last May and is clearly lagging in a number of varying measures. The slackening is not a guarantee of a market high but it is compatible with one. The opposite extreme should occur as the market declines.

[PCMNewsdesk]

[Bottom Line]: If a third-wave decline started at this week's highs in the Dow and S&P it should be evident in next week's market action. The other interesting pattern is silver, which should thrust higher.

Both the DJIA and the S&P closed the day and the week slightly lower. The third Friday of the month is options expiry, which sometimes occurs with an increase in volatility and volume. But today's session was muted, with the daily range relatively narrow and NYSE volume about the same as yesterday's volume.

The DJIA remains just beneath its 14-year trendline. The near-term structure of the past two-to-three sessions is open to interpretation so we cannot rule out either another test of the line early next week or a push to the 78.6% retracement of wave i (circle) at 16,321.20. As we said, another upward push is not required to consider wave ii (circle) complete but it will take a clear "five down" from recent highs or a coordinated break of yesterday's lows at 16,006.50 and 1824.58 respectively, in order to diminish the "additional rally" odds. If wave iii (circle) down has started, next week should be a solid down week for the stock market.

Last night we looked at the percentage of S&P 500 members that were trading above their 200-day moving average. The series of lower highs since last May indicated a lessening of upside momentum. Tonight's chart shows the percentage of S&P 500 members with new 52-week highs. The message is similar. The peak upside momentum occurred in conjunction with the wave 3 price peak in the S&P and each successive new high has been against a narrowing list in the percentage of members with new 52-week highs. The push from February 5 is the weakest, so far. At this point we're waiting to see if the market corroborates the weight of the technical evidence, which continues to indicate that stocks are vulnerable to a much larger decline.

[PCMNewsdesk]

[Bottom Line]: The stock market started the day much stronger than it ended, even though the headline closing figures show an across-the-board rally. Today would be an ideal date for the Dow to end its upward correction and a coordinated Dow and S&P decline below Friday's levels would strengthen the bearish case.

Today's 16,300.00 high in The Dow Jones Industrial Average is at round-number resistance and just beneath a 78.6% retracement (v of 61.8%) of wave i (circle). The new recovery high makes wave ii (circle) a double zigzag (see text, p.42), labeled (a)-(b)-(c)-(x)-(a)-(b)-(c), and the index closed essentially on the long-term trendline from the prior peaks in 2000 and 2007. In terms of time, wave i (circle) in the Dow unfolded over 22 trading days (closes) and today marks the 14th day for wave ii (circle). If the rally ended today, wave ii (circle) and i (circle) would be related by a Fibonacci ratio (5/8).

Just before the session's high (late morning), the NYSE advance/decline ratio strengthened to 3.42 stocks up for every 1 down. But breadth contracted sharply into the close and ended the day with just 1.66 stocks up for every 1 down. The S&P 500 made a new recovery high intraday at 1858.71 and then closed the day below the January 15 close (1848.38), which still stands as the closing high for the move. Today's set up appears similar to what happened at that January 15 high, when the S&P pushed above its December 31 high, which was not confirmed by the DJIA. Its peak remains December 31. Likewise, today's S&P rally was not confirmed by the Dow and the closing a/d of 1.66:1 was even more muted than the January 15 a/d of 1.84:1. The rally has been led chiefly by the high-tech component of the S&P as the OEX, the 100 largest-cap stocks within the S&P 500, remains below its December 31 high at 824.21. The top line of the S&P's wave Y (circle) weekly channel from October 2011 crosses 1875-1880 this week. Prices met the line several times from during the last four days of December and then fell just shy of the line at the January 15 high. The index doesn't have to meet this line again. If it does, it should be formidable resistance.

The first sign that the final (c) wave up within the double zigzag is over will occur with a coordinated Dow and S&P decline below their respective wave (a) highs, which occurred on Friday. In the Dow, this level is 16,191.90 and in the S&P it's 1846.13. The bearish case would be strengthened with a decline below Friday's lows at 16,093.80 and 1835.60, respectively.

As the week progresses, the financial media's attention will turn to Fed chair Janet Yellen's Thursday testimony to the Senate Banking Committee, which was originally scheduled for mid-February but was postponed by one of this year's many snow storms.