Dow Jones Industrial Average Index

[PCMNewsdesk]

[Bottom Line]: Since Monday's high, the Dow and S&P have traced out two successive "inside days," with each day's intraday high and low within the previous day's. Prices should break from this pattern tomorrow or Friday at the latest. The technical backdrop continues to indicate that the rally is at or very near an end.

Stocks may be biding their time—waiting to get the short-term emotion of Fed chair Janet Yellen's Senate testimony out of the way tomorrow—prior to embarking on their next wave. But today was interesting in that it was another session whereby the day started relatively strong and then weakened as it progressed. Over the past week, February 19, 21 and 25 all ended the day in the lower portion of their daily range after initially showing strength earlier in the session. Today's close was at the midpoint of the daily range, but breadth was muted (1.39:1), as shown below. Meanwhile, the precious metals are adhering well to our forecast: today both gold and silver were down, with silver experiencing its largest intraday decline (4.27%) since the December 31 low.

As for the DJIA, the daily chart at top shows the index continuing to flirt with its long-term trendline that connects the three major peaks of this topping process—January 2000, October 2007 and December 2013. Upward momentum lags, optimism remains elevated and relevant valuation metrics remain sky high. The second chart graphs the daily NYSE advance/decline ratio on the bottom. As is normal, the strongest breadth surge occurred at the start of wave ii (circle) and each successive upward push occurred with fewer stocks advancing relative to declining. The February 24 high sported the mildest in the series of declining a/d ratios. As long as the strongest a/d ratio of 3.48:1 (Feb. 7) is not exceeded, the profile fits that of a terminating second wave rally.

Wave ii (circle) either ended Monday morning at 16,300.00 (Feb. 24) or the index should complete the upward correction with another push tomorrow (possibly Friday). Both the Dow and S&P declined in coordination beneath their respective (a) wave highs (see Monday's STU) but the structure since yesterday's low creates two short term options. One option is that the rise from yesterday's 16,147.20 low is a small degree second wave, which will soon lead to a third wave decline. That pattern is shown on the first of the two charts directly above. The Dow should rapidly decline to 16,000 and then below. The second chart above shows another option. Here, the entire rally from February 5 (15,340.60) remains a double zigzag (see text, p.42) but wave (x) is tracing out a running triangle (see text, p.50, Figures 1-43). The implication of this pattern is that prices will rally above 16,300.00 tomorrow, tracing out the final subdivisions of the second zigzag. Once those are all in place, wave ii (circle) will be complete. Based on Elliott's guidelines of wave formation, a decline below the wave a low at 16,006.50 would eliminate this possibility and increase the odds greatly that wave iii (circle) down had started.

The S&P 500 closing high remains on January 15 at 1848.38. The intraday high is Monday at 1858.71 (Feb. 24). As noted Monday there is a wide disparity between the Dow and S&P. Given the context of the technical indicators that we've been discussing, the non-confirmation is bearish. In terms of wave structure, a daily close-only chart wave label the January 15 high as the top, while a chart constructed of intraday extremes would label the rally from February 5 as wave v (circle) of 5. We look at both and tonight's chart shows the latter interpretation. The top line of the S&P's channel crosses 1875-1880 for the remainder of this week. As we said Monday, "the index doesn't have to meet this line again. If it does, it should be formidable resistance."

[PCMNewsdesk]

[Bottom Line]: The NASDAQ 100 closed higher for the fourth straight week as investors continue their push into the hot "tech" names. The DJIA closed the week higher too, but remains down 1.54% so far this year. Pundits continue to express a high degree of enthusiasm toward stocks and the economy and our stance remains that the next major wave will be down.

In Wednesday's STU, we described two short-term options for the Dow based on the developing wave structure. The option that unfolded is shown on the above chart. Wave ii (circle) from the February 5 low at 15,340.60 remains a double zigzag (see text, p.42), labeled (a)-(b)-(c)-(x)-(a)-(b)-(c). Wave (x) took the shape of a running triangle (see text, p.50, Figures 1-43), which ended at 16,155.80 late Wednesday afternoon. The rally since then is tracing out the final sub-waves within wave ii (circle).

In fact, the odds suggest that today's high may have completed wave ii (circle). The index appears to have traced out a small five-wave decline to this afternoon's low at 16,248.80, which was followed by an a-b-c bounce to a 60% retracement that filled a small gap (16,311.10). If so, Monday may or may not open strong but regardless, the market should decline.

If today's 16,321.70 close did not mark the closing high for the rally, it should be made over the next one-to-three days after which stocks will decline. March 6 will be the Fibonacci fifth-year anniversary of the Dow's Cycle wave a low, which marks the start of Cycle wave b. An over-bought and over-believed advance has a high potential to reverse during the current time period.

Yesterday's up close occurred with a NYSE advance/decline ratio of 2.13:1, which was slightly stronger than the a/d ratio on February 20 (1.92:1) and February 24 (1.66:1). Again today, the a/d ratio started the session stronger than it ended. This morning's a/ds rose to 2.60:1, but by the close they had contracted to 1.48:1. And as the chart shows, the net number of new 52-week highs continues to lag the market's push. The broad weight of the evidence as pertains to the strength of the market's rally continues to lean to one side. Over the past week or so in these pages, we've showed the percentage of S&P 500 members above their 200-day moving average; the percentage of S&P members above their 10-day moving average; the percentage of NASDAQ members at new yearly highs; the percentage of S&P members at new yearly highs; and the percentage of NASDAQ members with an RSI above 70. All of these measures have so far failed to confirm the push to new highs. Similar to a car that must decelerate before it can stop and reverse, the stock market must slow and narrow its ascent before it can stop and reverse. It's occurring now.

The S&P 500 made a new closing and intraday high today. Today's push to 1867.92 came within approximately 10 points of the top line of the index's channel. If prices were to meet this line, as they did at the end of wave iii (circle), we still view it as formidable resistance.

[PCMNewsdesk]

[Bottom Line]: Today's market decline was broad, with over 83% of the S&P 500 stocks closing lower. A third-wave decline should be broad and strong, so we are watching closely as evidence emerges to confirm a significant trend change in stocks.

Today's across-the-board stock market decline is consistent with the start of wave iii (circle) down. Friday night we noted that the Dow traced out "five down" from the 16,398.90 high and then rallied in an "a-b-c" to a 60% retracement, perfectly filling a small gap at 16,311.10. It was this evidence that led to the statement, "the odds suggest that today's high may have complete wave ii (circle)." It's only been one day since Friday's high so obviously nothing is confirmed, but the near-term pattern keeps the trend pointed to the downside.

There were 2 stocks down for every 1 up on the NYSE today. This breadth measure should gain downside strength if wave iii (circle) has started. The strongest negative breadth during wave i (circle) occurred on January 24, with 6½ stocks down for every 1 up. Wave iii (circle) should be accompanied by a greater negative extreme. Big Board volume should also increase on the downside and all stock indexes should decline. Diverging behavior would be a potential problem to the near-term bearish case.

These charts show the wave labels for the latter portion of wave Y (circle) as well as the sub-waves of wave ii (circle) up and the start of wave iii (circle) down. Today's decline brought the DJIA below the long-term trendline that connects the peaks of Supercycle wave (V) in January 2000, Primary wave B (circle) in October 2007 and Cycle wave b on December 31. A reflex rally could carry the index back to "test" the line again this week. Resistance is 16,223-16,331. A push to a new high would mean that wave ii (circle) was not complete.

The S&P 500 declined in conjunction with the other major stock indexes and the odds are rising that wave iii (circle) started. Prices fell shy of the upper channel line on Friday and the sub-waves of the S&P's decline since then are not as clear as in the Dow. So further confirming evidence in the S&P would be helpful to the bearish outlook. There is a large gap at 1859.45, Friday's close, which could be filled before the next wave down begins. That would be nearly a 78.6% retracement of the recent decline and should be about the maximum upside potential for any remaining bounce. A coordinated decline below today's low at 1834.44 (16,071.20 in the Dow), would suggest that the next wave down was underway. It should be strong.

[PCMNewsdesk]

[Bottom Line]: Today's negative NYSE advance/decline ratio in conjunction with a NYSE Trading Index that closed below 1.00 suggests that it took a good deal of buying power to hold the market up today. If stocks are able to trace out a five-wave decline, the pattern would signal a trend reversal.


In today's new issue of EWFF we discussed the "flight to risk" that has carried the NASDAQ/DJI ratio sharply higher (see pp.3-4 in EWFF). Today was the second straight day whereby the NASDAQ underperformed the Dow. Believe it or not, the last time this occurred was during the January-February decline, when the NASDAQ and Dow declined 7%. The downside potential now is greater.

Something else happened this week that was really interesting. Tuesday was the strong rally day, as we discussed in the prior STU. At the end of that day, the CBOE equity put/call ratio closed at .48, meaning that there was twice as much call volume as put volume. In other words, traders were betting heavily that the rally would continue via call options. On Wednesday, the ratio closed at .46, an even greater optimistic extreme. On both days the p/c ratio closed more than two standard deviations below a Fibonacci-based moving average (see purple arrow on above chart). The last time this happened was almost 6 years ago, on April 18 and 21, 2008 (Friday-Monday). This was near the end of Intermediate wave (2) of Primary wave C (circle), the big down wave that bottomed in March 2009. The extreme optimism was occurring during an upward correction. The Dow made its wave (2) closing high on May 2, while the S&P held up until May 19 before both indexes starting another major wave down. Despite soaring optimism that resulted in a huge surge in call volume relative to put volume, the S&P closed today just 4 points from Tuesday's close.

Moreover, the S&P met, again, the top line of its parallel channel formed by the rally from October 2011. This next chart shows the index, the line and the wave count. At the wave iii (circle) high, prices danced around the line during the last week of December, tested it again on January 15 and then declined thereafter.

Meanwhile, the Dow's high remains December 31, which keeps the wave labels intact. The rally from the February 5 low at 15,340.60 is Minute wave ii (circle). The index closed up today but the NYSE advance/decline ratio was negative, with 1.4 stocks down for every 1 that was up. That's usually a bearish sign. But because Tuesday's advance was a breadth thrust (i.e., a rally with a strong positive NYSE a/d ratio), it's possible the Dow may exceed the December 31 peak (16,588.20). A close under 16,071.20 would diminish the bullish potential and a decline through 15,750.00, in concert with a concurrent S&P decline, would raise the odds to high that the next wave down to new lows was underway.

[PCMNewsdesk]

[Bottom Line]: Today's session was slow and uneventful. If stocks are able to trace out a five-wave decline, the pattern would signal a trend reversal.

We read a lot of stories over the weekend about the 5-year anniversary of the market's advance, which started on March 9, 2009, the bottom of Cycle wave a. Another anniversary occurred today. On March 10, 2000, the NASDAQ Composite registered its all-time high at 5132.50, which capped a mania for everything technology. It's been 14 years and a rollercoaster ride but the NASDAQ still sits 15% below its high. One news story quoted someone who made the argument that price-to-earnings valuations had not yet attained the levels reached in 2000 therefore the market had more upside potential. That line of reasoning seems faulty for two reasons. First, 2000 valuation levels were an outlier, far from historical norms. So comparison to that "New Era" is specious. Second, the stock market started to crash from there, an outcome I'm quite certain this person does not want. Our view is that during Cycle wave c, if earnings collapse faster than share prices, we may well see valuation levels that exceed those at the 2000 peak.

Near term, the past five trading days have all ended within a very narrow range in the S&P 500 between 1873.81-1878.04 (closes). In other words, since March 4, the index has been essentially flat. Likewise, the closing level of the CBOE Volatility Index (VIX) has occurred in a relatively narrow range over the past five sessions. The above chart is from Bloomberg and shows the daily VIX. The bottom graph is an approximate 40-day cycle that should be bottoming soon. The cycle's length has variability but it does suggest that the VIX is approaching a low. Low volatility precedes higher volatility and if the cycle remains active, the VIX should rise when the stock market declines.

The DJIA and S&P ended today with slight declines, as did the NASDAQ Composite. In fact, nearly all the major stock indexes ended lower. The NYSE advance/decline ratio ended negative too, but despite the lower closes, there was not a strong impetus to sell. It was a muted session on low volume. The S&P remains just beneath the top line of its channel from October 2011. This line runs through 1888 through the end of this week and remains resistance. The Dow's structure has not changed. As we said in the newsletter, "it's possible the index may exceed the December 31 peak (16,588.20)," but a close under 16,071.20 would diminish the bullish potential. A decline through 15,750.00, in concert with a concurrent S&P decline, would raise the odds to high that the next wave down to new lows was underway.

[PCMNewsdesk]

[Bottom Line]: Today's session was a "draw," as the Dow and NYSE Composite ended slightly lower, and the S&P and NASDAQ ended slightly higher. Technical indicators were equally muted. The strongest directional bias based on the wave structure is seen in 10-year T-note yields, which are declining.

The NYSE Composite Index closed lower for the fourth consecutive day. However, more stocks closed up than down on the day, based on the closing NYSE advance/decline ratio (1.11:1). The S&P 500, S&P Small Cap Index and NASDAQ Composite all ended slightly higher and there was slightly more NYSE up volume than down volume. No technical indicator that measured today's behavior had a strong directional bias, either up or down. As we noted in Monday's STU, the market has become "numb" short term.

There remains a non-confirmation between the S&P, which made a high on March 7 at 1883.57, and the Dow, which made a lower high the same day, as shown on the chart. The Dow's peak remains at 16,588.20 on December 31. A five-wave decline from the March 7 high at 16,505.70 would strengthen the bearish case that the market's senior index made its wave ii (circle) high on this date. The index has yet to trace out this pattern, so there remain short term options. One option is a continuation of the series of lower lows and lower highs from March 7, culminating in acceleration to the downside. Another option is a push up into next week. The long-term indicators are soundly bearish, as discussed in the most recent issue of EWFF. Near term, the odds are more balanced.

[PCMNewsdesk]

[Bottom Line]: The Dow closed down for five straight sessions for the first time in almost two years. The NASDAQ Composite was down 2.09% for the week, slightly more than the S&P 500 (down 1.97%) and slightly less than the Dow (down 2.35%). The wave structure of the decline does not count as complete.

In October, EWFF made the following observation: "Despite all the Fed-related hoopla, the real news is that the central bank is failing in its mission, as inflation remains entirely subdued. U.S. stocks are the only financial asset to hit new highs, as bonds, metals and commodities are all down over the past 12 months. Meanwhile, the Fed is painting itself into a corner. Its ballooning balance sheet and zero interest rate policy will ultimately serve no purpose but to exacerbate the fallout." Commodities, in particular, sport a compelling case for another major wave down.

[PCMNewsdesk]

[Bottom Line]: Today's surge should be just about complete if the push is a countertrend move. If there is any follow-through to today's rally it should be weak internally. Anything other than that would indicate that market's upward push had further bullish potential.


The stock market jumped higher at the open, carrying the Dow to 16,270.30 and the S&P 500 to 1862.30. The day's high was made shortly after 10:00am and the rest of the session was a back-and-forth tug. The short term scenario we laid out Friday night was as follows: "in order to create an impulse wave down from the March 7 highs at 16,505.70 in the Dow and 1883.57 in the S&P, a fourth-wave rally will develop that, when complete, leads to another wave down to fresh new lows. This fourth wave either started at today's lows or will do so from lower levels next week."

Both the Dow and S&P pushed slightly above our cited resistance this morning but the surge felt like it was fueled to some extent by short-covering due to over-leveraged bears. That's speculation on our part but, if true, this fourth wave rise should exhaust over the coming trading hours. NYSE daily volume (MVOLNYE index on Bloomberg) was the second lowest of the year, suggesting a lack of strong internal support to today's advance. Short term market gyrations are possible with the Fed meeting tomorrow and Wednesday. After Wednesday's rate announcement, new Fed chair Yellen will hold her first post-meeting press conference, which the financial media will be covering intently. Any short-term emotions that materialize should dissipate shortly thereafter. The structure of the decline is not as clear a developing "five" as we would prefer, but we'll give the market some leeway to see if it can continue to subdivide lower and turn the pattern into a nicely-proportioned impulse wave. A coordinated close above 16,335 in the Dow and 1867 in the S&P would require another look at the indicators to see if they still favored a turn down sooner rather than later.

Saturday's edition of The Wall Street Journal (Mar. 15) published an article that cited a study by a University of Michigan finance professor who keeps an adjusted insider sell/buy ratio. The professor tweaks the sell/buy data to filter out those who own more than 5% of a company's shares based on the view that this cohort is mainly comprised of hedge funds or mutual funds. Thus, they are not true company insiders. Currently the sell/buy ratio is 6-to-1, which the article quotes the professor saying is "as pessimistic as I've ever seen over the last 25 years." He believes it's a major bearish omen for stocks. Whether or not that's true, we're reminded of an observation by legendary market analyst Bob Farrell: there may be many reasons why an insider sells their shares but one of them is not because they think the price is going higher.

[PCMNewsdesk]

[Bottom Line]: Today's sharp afternoon selloff should be the first sub-waves of a larger decline. A solid break of the neckline in the Dow and S&P would confirm the decline. In contrast, if the Dow and S&P turn above this week's highs, the market will attain greater bullish potential over the near term.


The Dow's countertrend rally high occurred at 16,369.90 yesterday morning (Mar. 18). The index held up until this afternoon before dropping sharply and retracing much of the rally from the March 14 low at 16,046.90. The S&P 500 made a slightly higher rally high this morning at 1874.14 and it too fell sharply this afternoon, making an intraday low at 1850.35. Both indexes carried higher than we originally anticipated; the Dow by a single point and the S&P by just over 5 points. But daily NYSE volume remained weak into the high and then expanded with today's decline. In addition, today's NYSE advance/decline ratio was firmly negative with 3.3 stocks down for every 1 up. This was the weakest a/d since early February. Probably the most important measure of today's market action was the NYSE intraday Tick low at minus 1385. That's the strongest downside Tick (i.e., most negative momentum) in over 2 years, since December 19, 2011. There is no in-between interpretation with this reading. It either marks the kickoff to a much larger wave lower or it signals a low that leads to another wave up to new highs.

It's possible to label this week's high as the right shoulder of a head-and-shoulders topping formation that started with the left shoulder on February 28. This chart shows the formation in the S&P and DJIA. The S&P has been relatively stronger than the Dow, making a high on March 7 as opposed to the Dow's December 31 high, and this strength is seen in the h&s pattern. Note the up-sloping neckline of the S&P as opposed to the down-sloping neckline in the Dow. And the S&P's right shoulder is slightly higher than its left shoulder, whereas the Dow's right shoulder is modestly weaker than its left shoulder. Equally important, daily NYSE volume (MVOLNYE on Bloomberg) is stronger during the left shoulder and then weakens as the right shoulder is formed. As noted above, volume expanded with today's selloff. This volume profile is one signature of the pattern. The pattern will be confirmed once each index closes solidly below its respective neckline. The S&P's neckline crosses 1842 through the end of the week while the Dow's crosses 16,035 over the same period. A measured move would then project the S&P to 1795 and the Dow to 15,590 over the short term. The Elliott wave potential suggests a much larger decline, eventually.

In terms of waves, the challenge over the near term is that the waves does not label well as five down or five up. As more of the pattern develops the structure will clear. At that point, we should be able to publish a short term chart with labels. Friday is options expiry so the potential for elevated volatility remains. A rally above the recent highs at 16,369.90 (Dow) and 1874.14 (S&P) would void the head-and-shoulders and indicate a continued advance above the March 7 highs.

[PCMNewsdesk]

[Bottom Line]: After rallying most of the morning, stocks declined most of the afternoon. The Dow closed the week slightly below where it closed the final week in February. There has been ample opportunity to carry the Dow to a new high but so far all rallies have failed. If the bears control the trend, prices have to show downside strength at some point next week or they will lose their near term opportunity.

The Reuters Jefferies CRB Index is breaking down, in line with STU's analysis from March 14. Gold ended its rally within the target area cited in these pages. The U.S. Dollar Index surge sharply higher this week, consistent with the type of move we discussed based on the termination of an ending diagonal. And the British pound is declining persistently relative to the U.S. dollar, which EWFF forecast on March 7, the day of a secondary high. Overall, our various scenarios are playing out and we await the major U.S. stock indexes to fall in line and confirm the other markets.

Near term, the head-and-shoulders topping formation is void as stocks rallied above the right shoulder. But the Dow and S&P closed up yesterday accompanied by negative breadth and a super low NYSE Trading Index of .49 indicating that a lot of buying power was concentrated in mainly the up stocks. Moreover, the Dow's rally to today's high is a "three" not a "five," as shown on the short term chart above. The intraday rally met the top line of a parallel channel formed by the push from 16,046.90 on March 14 and wave "c" is almost exactly equal to wave "a" at today's 16,456.40 intraday extreme. That's classic "a-b-c" behavior. In fact, after rising to the top channel line, the Dow fell for the rest of the afternoon and ended the day lower. The uncertainty is that while the advance to today's high is a clear "three," the decline that preceded it does not label well as an impulse (i.e., five waves). Also, while today's session was down across-the-board (save for Utilities, which are a "defensive" sector), the NYSE advance/decline ratio ended slightly positive at 1.38:1. This is not fatal to a continued decline but it's not an ideal reading.

A decline below the "b" wave low at 16,126.22 (Mar. 19) would confirm the "a-b-c" labels shown on the chart. It would also suggest strongly that the Dow was falling to lower levels still, as wave iii (circle) down begins. If the Dow recovers to a new high (above 16,456.40) and the S&P confirms with a rally above 1883.97, the "a-b-c" wave labels would change, possibly indicating that a five-wave advance was in progress to a new all-time high. As always, we have to assess the sub-waves and attendant indicators at the time of these moves to draw a firm conclusion.

The S&P 500 is mixed. The cash index pushed to a new high by less than ½ point but the E-mini June futures (including the overnight Globex) did not. Nor did the full S&P June futures contract constructed using pit-session prices only. With the entire market reversing today, after the indexes made new highs for the week, we are showing the daily E-mini as if today's high was the top of an "a-b-c," similar to the Dow. If the E-mini rallies above 1880.50, thereby confirming the S&P cash, the push will no longer be an "a-b-c."