Dow Jones Industrial Average Index

[PCMNewsdesk]

The market is closed on Monday, July 4, in celebration of the Independence Day holiday. The next STU will be published on Wednesday, July 6.

[Bottom Line]: Pre-holiday trading slowed, which is natural, but stocks still managed to tack on to the strong run that started on Monday. The Dow, S&P and NASDAQ all ended the week up by more than 3%. These indexes have covered a lot of ground in a short period of time, so an impending near term decline is normal. But as long as Monday's lows remain intact, the next Minor-degree wave of advance is underway and progressing higher.

The S&P has carried back to chart resistance, which includes the highs of November 3, 2015, April 20, 2016, June 8 and June 23. Measures of market breadth and volume have lessened from their strong readings earlier this week and the NYSE Tick divergence (15-min. bars) that we noted in the prior Update remains intact. So it would be natural for the stock rally to pause. A near term decline may even be sharp initially, but if the next Minor-degree rally started at Monday's low, the decline should ultimately terminate above this low, which is 1991.68 in the S&P 500 and 17,063.00 in the DJIA. A decline below these lows would invalidate their wave labels and portend much greater bearish potential for stocks than is currently indicated.

So, Monday's lows (June 27) represent the start of Minor wave 3 (per the S&P chars) or Minor wave 5 (per the Dow's potential structure). In both cases, the blue-chip stock indexes should reach new highs.

[PCMNewsdesk]

[Bottom Line]: We forecasted a near term market decline in the previous STU in order for stocks to digest the strong rally that started on June 27. This pullback developed yesterday. There may be more to come over the next day or so, although we are not certain of the odds to place on this near term potential. The strongest technical signals are in bonds and the precious metals. The current trends in these assets are over-bought and over-believed, which is a combination that usually leads to a reversal.

The blue-chip stock indexes gapped lower at yesterday’s open and closed the day lower too. Today, an initial gap lower at the open led to an intraday reversal whereby both the Dow and S&P ended the day higher. While yesterday’s low may have been the entirety of the pullback from the July 1 high—2108.71 in the S&P and 18,002.30 in the Dow—the decline retraced less than .382 of Minute wave i (circle), leaving the possibility that there will be another wave lower in the coming day or so in wave (c) of ii (circle). If so, the next downside target surrounds the 2064.00 level in the S&P, followed by the range of 2042-2050. Wave ii (circle) does not have to end at these levels and ranges but if prices decline there, we will be alert to the structure and indicators to assess whether the pullback is complete. The equivalent areas in the DJIA are 17,626-17,644 and 17,500-17,532.

The other legitimate short term view is that wave ii (circle) ended this morning. A solid close above 2120 in the S&P and above 18,016 in the DJIA would raise the odds toward this conclusion (both indexes should confirm each other’s move). Wave iii (circle) will carry prices to new all-time highs.

Last Monday's low (Jun 27) remain important to the market’s trend. These lows are 1991.68 in the S&P 500 and 17,063.00 in the DJIA. A decline below these levels by both indexes would negate the wave labels shown on our charts and portend much greater bearish potential for stocks than is currently indicated.

[PCMNewsdesk]

[Bottom Line]: A solid week for the stock market resulted in higher weekly closes for all the major U.S. stock indexes. Today’s breadth and advancing volume measures were particularly strong, suggesting that another wave up is underway, which should carry to new highs for both the Dow and S&P (the latter index is just a day or so away). The U.S. long bond and the precious metals remain particularly vulnerable to a trend reversal.

Minute wave ii (circle) ended in a shallow pullback at 2074.02 in the S&P and 17,713.40 in the DJIA on Wednesday (Jul. 6). The rally of the past two days has carried the S&P above chart resistance surrounding the 2120.55 high (Jun. 8), while the Dow has carried above chart resistance surrounding 18,011.00. While the Dow is still a bit shy of its 18,167.60 high of April 20, today’s rally was attended by a NYSE advance/decline ratio of 7.14:1 and a NYSE up/down volume ratio of 17.49:1. The NYSE Trading Index closed at .40, which is the lowest close since February 22 (.37), six trading days after the Intermediate wave (4) low on February 11. These measures are very strong, consistent with the kick-off to a third wave rally, which in this case is Minute wave iii (circle) of Minor wave 3 of Intermediate wave (5), as shown on the S&P 500 chart. Even if the wave labels on the Dow’s chart ultimately prove to be the case, the rally is still Minute wave iii (circle) of Minor wave 5 of Intermediate wave (5). The implication for both interpretations of the wave structure is that prices will soon carry to new all-time intraday highs. This means the S&P will exceed the 2134.71 intraday high on May 20, 2015 and the DJIA will exceed the 18,351.30 intraday high on May 19, 2015. Today’s S&P high at 2131.71 is just 3 points shy of the May 2015 high, while today’s 2129.89 S&P close is less than 1 point from the all-time closing high at 2130.82 on May 21, 2015.

Short term, there was a large NYSE Tick divergence (15-min. data) during today’s entire rally. The small pullback from the intraday highs that started late this afternoon may continue early next week, though the strong breadth and volume figures and the multi-year low in TRIN indicate that the market’s rally has a solid tailwind. So whether or not there is more of a near term pullback ahead, stocks have not made their final highs. If evidence emerges to the contrary, we’ll discuss it here.

[PCMNewsdesk]

[Bottom Line]: The stock market started the week by following through on Friday’s strong advance. Futures were pulling back at the close and the advance is extended near term. But the wave structure of the rally does not count complete.

Both the DJIA and S&P 500 gapped higher at today’s open, with the S&P 500 carrying to a new all-time high. Today’s push to 2143.16 in the S&P was not confirmed by the Dow or any other major U.S. stock index. Historically, this non-confirmation would be a bearish indicant for the stock market in general. But with the NYSE advance/decline ratio so strong on Friday, as well as the NYSE up/down volume ratio, the odds are that the DJIA will join the S&P at new highs. Short term however, the S&P has closed higher for 7 out of the past 9 days and 5 of those days started with a higher gap open, creating an extended trend. A pullback is not unreasonable behavior for stocks in an extended rally, part of the normal ebb and flow of market action. It would take a decline through 2100 (S&P) on strong downside breadth and volume in order to indicate trouble with the uptrend (below 17,816 in the DJIA).

With the S&P at new all-time highs and the Dow not far behind, we’re struck by how many other markets are turning down or appear on the verge of doing so. In the July issue of The Elliott Wave Financial Forecast we discussed the major sentiment extreme in a host of differing assets (see p.7), illustrating the phenomena with a chart of commodities. The CRB index made its high on June 8 as did Crude oil (closing high). We also discussed the major sentiment extremes in bonds and precious metals, of which we update our charts below. (Dr.) Copper made a tepid countertrend bounce from January to mid-March and remains weak. And we always keep an eye on Apple’s share price because it’s a major position in so many mutual funds; its stock price remains down 28% from its April 2015 high. It seems to us that when the U.S. stock market finally turns lower, the ensuing bear market will be as broad-based as the 2007-2009 decline. But in percentage terms, the selloff should be far larger. The blue-chip Dow and S&P don’t appear to be there yet, but the fact that these indexes are tracing out five waves up from January (Dow) or February (Dow/S&P) should make identifying the final high straightforward. We’ll of course keep you apprised of all developments as they occur.

[PCMNewsdesk]

[Bottom Line]: The stock market has closed higher for 9 out of the past eleven sessions (Dow), creating an extended trend. Today’s rally was weak internally, suggesting that the advance is losing momentum short term, often a precursor to a decline. But the wave structure of the rally from at least June does not count as finished.

One of the interpretations that we’ve shown in these pages pertains to the DJIA, and is shown on the above chart. It’s possible to label the start of Intermediate wave (5) at 15,450.50 on January 20. Intermediate wave (5) will be comprised of five Minor-degree waves. Minor wave 5 started at the 17,063.00 low on June 27. As the wave labels show, Minute wave iii (circle) of Minor wave 5 started at 17,713.40 on July 6. Third waves are most often the longest and strongest wave in an impulse sequence. In order for wave iii (circle) to exceed the length of wave i (circle), the Dow must rally above 18,652.70, the point where the two waves would be equal in size. When wave iii (circle) is finished, waves (iv) and (v) would then develop to complete Minor wave 5 and Intermediate wave (5), which will mark the top. So based on this structure, the advance in the blue-chip stock indexes will carry higher in the coming month or more.

Short term, the rally is extended and weakening and one measure of sentiment is nearing an extreme. The Dow closed 24.5 points higher today, but there were more stocks down than up on the NYSE (.79:1 a/d ratio) and there was more down volume than up volume on the Big Board as well (.85:1 up/dn vol. ratio). This waning upward momentum suggests strongly that the advance is either going to get very choppy in the coming days or there will be a sharp but relatively brief pullback. Tuesday night, the Daily Sentiment Index (trade-futures.com) rose to 83% stock bulls, which is just two ticks from the level that accompanied the April 20 high (85%). Based on the aforementioned wave labels, the Dow has no business being below 18,000, which we label as the top of Minute wave i (circle) of Minor wave 5. Declining through that level would change the wave labels (though not necessarily negate the bullish potential).

The S&P 100 index (OEX), the largest cap shares within the S&P 500, may be labeled the same way as the DJIA. The S&P 500, however, made a low in February, not January like the Dow and OEX, so it cannot be labeled in a similar manner. It would be awkward and inconsistent with Elliott’s guidelines to label Minor wave 5 starting at 1991.68 (June 27) in the S&P 500, similar to the labels in the Dow. This is why we’ve shown this low to be the start of Minor wave 3, not Minor wave 5. The implication is for a larger and longer advance prior to a top. At some point, we will have to decide that one of these wave interpretations is far more probable relative to the other, but for now we don’t have to make this choice. The reason is that both views imply the same market action over the near term. It’s when the Dow is near the end of its “fifth of fifth” that we’ll have to judge whether the market is at a top or has more to rally, per the S&P wave count.

[PCMNewsdesk]

[Bottom Line]: Today was the sixth straight higher close for the DJIA. The last time the Dow closed higher for six or more consecutive days was March 11-21 (seven up days), which was the middle of a third wave. The S&P did not confirm today’s Dow close, ending the session lower. But it was a strong week for nearly all the U.S. stock indexes. Stocks could pullback near term, but the wave structure indicates that prices will eventually carry higher. The 30-year T-bond has started a decline that will draw prices lower still.


In Wednesday’s STU, we pointed out the market’s slackening upside momentum and said that this behavior was “often a precursor to a decline.” The Russell 2000 index of small-cap stocks made a near-term high on Tuesday (Jul 12), the S&P 400 MidCap index made a high yesterday (Jul. 14), as did the NASDAQ Composite, while the Dow and S&P 500 help up until this morning. All of these indexes closed the day lower. But the developing Elliott wave structure indicates that a stock market decline should be short term, a pullback within a still-progressing five-wave rally that started at the June 27 lows.

This hourly Dow chart shows the waves that have developed so far from June 27. Recall that in Wednesday’s Update we said the following: “Third waves are most often the longest and strongest wave in an impulse sequence. In order for wave iii (circle) to exceed the length of wave i (circle), the Dow must rally above 18,652.70, the point where the two waves would be equal in size.” Today’s intraday high at 18,557.40 fell shy of the aforementioned level. Therefore, the odds are low that it constitutes all of Minute wave iii (circle). Instead, today’s high is Minuette wave (i) of Minute wave iii (circle), with Minuette waves (ii), (iii), (iv) and (v) still ahead prior to the end of Minute iii (circle). The other possibility is that the current rally simply extends higher early next week and carries the Dow past 18,652.70, which would allow us the option of labeling the entire push from 17,713.40 as wave iii (circle), depending upon the technical condition of the advance. Regardless of these near-term gyrations, the key point is this: The wave structure of the stock market’s rally from at least late June does not count as complete. Therefore, stocks retain a bullish potential that should eventually carry the Dow and S&P higher than this week’s highs.

The above chart shows the wave labels as they pertain to the S&P 500. We have labeled today’s 2169.05 high as Minuette wave (i) of Minute wave (iii), similar to the labels on the Dow’s hourly chart and for the same reason. Minuette wave (ii) down will be followed by wave (iii), (iv) and (v) before Minute wave iii (circle) is complete. So, here too, the index retains its bullish potential. As of now, wave (ii) has a broad target area at 2129-2147 in the S&P, which equates to 18,145-18,359 in the Dow. As each index enters these respective ranges, we will be alert for a resumption of the rally. If the Dow were to decline below 18,000 and the S&P were to simultaneously decline below 2108, we would have to change the wave labels on the chart and reexamine whether the bullish case was still valid.

This next chart of the S&P 500 and the Daily Sentiment Index (trade-futures.com) of short term traders shows a current level of optimism that is consistent with an impending market decline. We don’t yet have today’s reading as we go to press, but as of yesterday’s close the DSI had shot up to 87% bulls. We’ve marked in red the prior extremes since the summer of 2014, with each one attending the start of a near term market selloff. It’s possible that the DSI could rise to an even greater bullish extreme, especially if the Dow and S&P continue to subdivide higher immediately. Generating a DSI reading above 90%bulls is not uncommon near the end of strong market rallies. But as it stands, we grade this sentiment measure as extreme enough now to coincide with the start of a decline.

[PCMNewsdesk]

[Bottom Line]: The market’s rally is extended short term but the overall trend for stocks is higher still.


The DJIA and S&P 500 are progressing higher in five waves from the June 27 lows at 17,063.00 and 1991.68, respectively. This five wave advance is Minor wave 3 of Intermediate wave (5), with the possibility that it may be Minor wave 5 of (5) in the Dow. In either interpretation, the structure of the advance is not yet finished, which means that the market will carry higher until five Minor degree waves are complete.

Short term, the rally is over-bought and over-believed. The Dow has closed higher for 12 out of 14 days, the last seven in a row, making the push over-bought. The Daily Sentiment Index (trade-futures.com) jumped to 87% bulls last Thursday, making the rally over-believed. This combination typically occurs at or near the end of an advance, even near term. The Russell 2000 index of smaller-cap shares made an intraday high last Tuesday (Jul. 12) and NYSE Composite Index last Thursday (Jul. 14). The Dow and S&P made their respective intraday highs on Friday. But the Dow, S&P and Russell 2000 all made new closing highs today, so the market has been resistant to decline so far. Still, the conditions for a pullback just described remain intact and so too does the risk for a selloff, even if only short term.

As we discussed Friday, if the market’s pullback starts from near current levels, the most probable wave label is Minuette wave (ii) of Minor wave iii (circle). If the market first extends higher so that the Dow exceeds 18,652.70 and the S&P exceeds 2191.05, it will be possible to label an impending high as Minor wave iii (circle). But the latter wave label will be determined by the structure and technical condition of the indexes at that time. There is no change in the preliminary target ranges for wave (ii). In the S&P it is 2129-2147; in the DJIA it is 18,145-18,359.

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