Dow Jones Industrial Average Index

[PCMNewsdesk]

[Bottom Line]: Today was an end of the year, small range, light volume day, with the Dow up slightly and the S&P and NASDAQ down slightly. While investors' thoughts have turned to tomorrow night's celebration, optimism toward U.S. stocks remains sky high. Paradoxically, the degree of bullishness is consistent with a market advance in its very late stages

Trading was thin all day and should be tomorrow, too. The DJIA had a very narrow range of just 27.5 points from intraday low to high. In other words, nothing new occurred today that would alter or add to the previous STU. The rally from the most recent low at 15,703.70 in the DJIA (Dec. 12) and 1767.99 in the S&P (Dec. 18) is Minute wave v (circle). As we noted Friday, our near-term analysis indicates that another push lies ahead prior to the final sub-wave of wave v (circle). Seasonal trends remain positive into at least Thursday and possibly into early next week. So far, the wave (iv) pullback (see E-mini chart) has been minimal but the pattern does not preclude a larger setback, though it's not required. Support remains 5,809-16,254in the Dow (1805-1820 in the S&P and 1809-1820 in the E-mini). A close under 16,000 in the Dow, 1797 in the S&P and 1786 in the E-mini would start to shift the odds to a more immediate bearish potential.

Sentiment is the most important indicator to help assess waves and as we've discussed in these pages and EWFF, it remains at or near historic extremes. I suspect that the final push will crystalize optimism to a level that we've rarely experienced. It is exactly as one would expect near the end of a long rally and the forefront of a major top.

[PCMNewsdesk]

This chart shows how the pattern unfolds in the DJIA. If wave (ii) is tracing out an upward flat, the index should rise to just above 16,532.90, the wave a of (ii) high. A break of today's low at 16,405.50 would indicate that wave (iii) down was starting. If today's low is wave (iv), per the Alt. line, the Dow will carry above 16,588.20 (Dec. 31) to complete wave (v) of v (circle). The Daily chart shows that the market's senior index is back at the outer channel line formed by the rally from October 2011.

While there remain short term options for pattern, a close under the prior wave iv (circle) low would greatly increase the odds that a large decline was underway. Wave iv (circle) is 15,703.70 in the DJIA, 1767.99 in the S&P 500 and 1754.00 in the E-mini.

[PCMNewsdesk]

[Bottom Line]: The NASDAQ is the potential outlier now. While the bearish, near-term counts shown for the S&P and the Dow Industrials remain valid, the more speculative technology index has the potential to slip to a new high. Such a move will put the onus on the blue chip Dow to follow suit. If it fails to do so, the beginning of a major bear market phase will be confirmed.

The wave c of (ii) label shown for the Dow Industrials is right where Steve placed it in anticipation of wave c’s completion on Monday: “If wave (ii) is tracing out an upward flat, the index should rise to just above 16,532.90, the wave a of (ii) high.” The actual high was 16,562. But we still need a little more decline, a break of (Monday's) “low at 16,405.50,” which Steve also mentioned, to indicate that wave (iii) down is underway. So, the bullish alternate remains possible as shown on the chart. Such a circumstance would carry the Dow through the December 31 high at 16,588.20, to complete wave (v) of v (circle). The daily chart shows that the senior index is back at the upper channel line formed by the rally from October 2011 and well through the trendline drawn off the top of the January 2000 and October 2007 highs. A move back through this longer-term trendline, which sits at 16,175, on expanding negative breadth, will be a first definitive signal that the long-term bear market is back in place. A close under the prior wave iv (circle) low, 15,703.7, will be even more definitive.

In recent issues, EWT and EWFF have shown many of the historically extreme sentiment measures that call for a major peak. One that we showed in the January EWFF was the 5-day CBOE put/call ratio, which was at its lowest level in almost 10 years. The 10-day figure was at .71 yesterday, which is also lower than at any point since 2004. Today’s figure closed at .70 after opening at .55 and rising to .72, a remarkably low range. Clearly, the decline from the highs has done nothing to curtail options traders’ appetite for calls. This is a very bearish signal. Another wide range of bearish signals are currently available in the momentum aisle. The next three charts of key momentum measures captures a clear internal deterioration through the Dow’s December 31 peak.

The last one shows a major non-confirmation in the 10-day NYSE advance/decline total. If the Dow can push decisively through the second key trendline (green dotted line), this failure, will be confirmation that the broader stock market has been rolling over for more than two months. The long-term wave count agrees with the message of this ratio; indiscriminate selling should follow soon.

[PCMNewsdesk]

[Bottom Line]: The fifth wave of the stock market advance from October 9 has not yet completed all of its subdivisions. There likely needs to be a "down-up" sequence in the stock market before the next opportunity for a top.

The Dow and S&P made new highs today and the NASDAQ is just a point from confirming the push. As this chart shows, the DJIA has returned to the upper trendline that extends back to the May 22 high at 15,542.40. Today's Dow close at 15,821.60 is just above the line. The sub-waves of the rally do not count complete. While there may be a near-term pullback, there is more than likely another upward push coming before the wave structure of the advance may be considered finished.

[PCMNewsdesk]

[Bottom Line]: Today's across-the-board decline reveals that the Dow has been the leader of the market's direction; to the downside. Optimism remains elevated toward stocks overall, which leaves plenty of room for a continued decline. U.S. T-note yields are declining too and gold and silver prices should continue to rally. The DJIA was down again today, this time in conjunction with every other major U.S. stock index. For the Dow, it marks the 6th down close out of the 8 trading days in 2014. Apparently, a declining stock market is unusual to the leading financial daily, as this morning's headline attests. The headline may also provide a clue as to why selling pressure had not been that intense: investor's didn't want to "miss out" on the gains. Actually, most investors do want to "miss out" on a decline, particularly if it is large, which is why selling pressure picked up today. Fear is a stronger emotion than hope, which is why bear markets are always swifter than bull markets. Today's NYSE advance/decline ratio was .322:1, with over three stocks down for every one up. It was the strongest downside breadth since December 11. More important though, the S&P 100 Index, the S&P 500 Index and the S&P 600 Small Cap Index all confirmed the Dow's decline by falling below their respective January 6 lows. Today alone, the S&P 500 took back last week's entire rally, and the broader market indexes had a larger percentage decline than the Dow. The Dow Transportation Average completed the wave structure of its rally and should join the broader indexes in the decline. Both the DJIA and S&P have turned down after meeting the outermost upper channel lines of their respective rallies from October 2011, when these channels started. So the market action itself is indicating that these upper lines are important. This near-term Dow chart suggests that a series of first and second waves have unfolded since the December 31 high at 16,588.20. Each second wave has been a shallower retracement than the prior second wave, indicating a market that has coiled. The release of this energy is now occurring, as prices work lower. If the current selloff is a "third of third" wave, as indicated by the wave labels, rallies should be minimal until the index is probably closer to 16,000 or lower (probably around 1800 in the S&P). As we've noted in prior STUs, a close under the prior wave iv (circle) low would greatly increase the odds that a major long-term decline was underway. Wave iv (circle) is 15,703.70 in the DJIA, 1767.99 in the S&P 500 and 1754.00 in the E-mini. The alternate possibility is that this early year selloff is a fourth wave, labeled "a-b-c" or some variation thereof. The S&P 500 has a confluence of support surrounding the 1816-1818 level, which is essentially today's low. Similar support surrounds 1811 (±) in the E-mini contract, as shown above. If the decline is a fourth-wave pullback, prices should stop going down now. A strong decline through today's lows will draw the indexes below support and enhance the odds for the bearish scenario described in the Dow's paragraph. We've made the long-term case in EWT and EWFF as to why the stock market is at the pinnacle of the rally and poised to start Cycle wave c down, which will amount to a far larger percentage decline than Cycle wave a. The conditions have been ripe for its start and remain so. We'll continue to forecast the developing waves and report confirming or refuting evidence as it unfolds.

[PCMNewsdesk]

[Bottom Line]: The S&P is at a new high but the DJIA is not. The market's technical condition remains suitable for a significant reversal.

Stock market behavior is fractured, which that often attends the end of a rally that has been underway for a while. This one certainly has. The Dow Transportation Average rallied to a new high along with the S&P 500 cash index, the NASDAQ indexes and the Russell 2000. The Dow Industrials have not made a new high so far, nor has the S&P 600 Small Cap Index and the NYSE Composite Index. The E-mini S&P rallied to 1845.75, which just missed filling an open gap at 1846.25. This contract is also not at a new high. In Monday's decline (Jan. 13), there were more than 3 stocks down for every 1 up. In yesterday's rally (Jan. 14), there were 2.4 stocks up for every 1 down. So internally, the market's decline was stronger than its rally, one piece of evidence that suggests the current advance is a fifth wave (i.e., an ending wave). The Dow and S&P were up again today, but the NYSE a/d ratio had 1.8 stocks up for every 1 down, which was weaker than yesterday.

Another piece of evidence is seen on this chart depicting the net new 52-week stock highs, as tallied each day by Bloomberg. The net new high number peaked in mid-May of last year, as the Dow was making its Minor wave 3 high. With the Dow rallying to a higher high, the net new highs made a lower peak at 470 in mid-October. A higher Dow high in late-December was accompanied by an even lower net new high total of 365. The number has continued to wane, as shown on the chart. Often there is a lead time between the peak level of upside momentum and the peak level in the stock market. It's now been 8 months since the net number of new 52-week highs made a top, which is another piece of evidence that indicates the rally is a fifth wave. When combined with the current level of optimism, the market relative to its trendlines and, most important, the wave structure, the evidence leads to our conclusions discussed in these pages and in the newsletters.

[PCMNewsdesk]

[Bottom Line]: The blue-chip indexes have been moving sideways while the higher-beta NASDAQ continues to rally. There are a few cross-current short-term signals, but the intermediate and long-term signs are crystal clear and remain strongly bearish. T-note yields appear to have completed "five down" from their January 2 high.

The New Year has started with a big yawn in the sense that Dow and S&P have not made any upside or downside progress the past 2½ weeks. The S&P closed 2013 at 1848.36, which is essentially where it is today, while the Dow closed the year at 16,576.60. The senior index is down 200 points. The strongest indexes are the high-tech NASDAQ and the DJ Transportation Average, led by the airlines, such as Delta, Southwest, Alaska and JetBlue.

In terms of the wave structure, there is nothing compelling to report tonight. The Dow and S&P continue to bump up along the top line of their respective channels, as shown on the charts above. The S&P is close enough to its recent 1850.84 high (Jan. 15) so that it could easily slip past this level and make a new recovery high. The Dow's a bit farther away from its 16,588.20 high on December 31, but the selloff has yet to trace out a clear "five down." The NYSE advance/decline ratio has been mild, with no strong buying or selling impetus, but the NYSE Trading Index (advance/decline ratio divided by the up/down volume ratio) is oversold, short term. The 10-day TRIN is 1.2. If there is another upward push ahead, the Alt. line on the Dow's chart shows that it would be wave v (circle) of 5. Intermediate-to-long term, the rally has lost upside momentum (see weekly chart above) and optimism remains elevated. As we've noted, a break of the mid-December lows would greatly strengthen the near-term bearish case. These lows are 15,703.70 in the Dow (Dec. 12), 1767.99 in the S&P (Dec. 18) and 1754.00 in the E-mini contract (Dec. 16).

These two charts update the CBOE put call ratios. The top chart shows the 10-day equity only p/c ratio, which appears to be turning into an uptrend from its recent low at .51 on January 7. This was the lowest 10-day p/c in 3 years. The second chart shows the 10-day average of the CBOE total put/call ratio, which includes equity and index measures. It too appears to be turning upward from a 9-year low at .71 on January 7. Since these ratios turned upward, the combined S&P 500 and Dow has been essentially sideways. The strongest signals for a market reversal occur when the put/call ratios decline to an extreme and then reverse into a rising trend. While the 10-day TRIN is oversold, a continuation of the current rising trends in the p/c ratios would be a piece of bearish evidence that supports the case for a stock market decline. Recent extremes in the ISE Sentiment Index, another way of measuring puts relative to calls by looking at only opening long positions, support this latter conclusion.

[PCMNewsdesk]

Bottom Line]: The stock market's initial wave down continued today. The market was positive for a period during the session as the indexes attempted a larger rally. But sellers again held the day and the major stock indexes closed lower. Whether or not a larger short term bounce develops, the main trend for stocks remains down.


Today's intraday rally in the stock market is likely a fourth wave or possibly the first leg of a fourth wave. The above 45-minute S&P 500 chart shows the subdivisions from the top at 1850.84 on January 15. Today's low is labeled as the end of wave (iii) because there is not a fourth-wave bounce that is comparable to wave (ii), since the top. The S&P's initial resistance is 1801-1810, which includes the prior fourth wave. The secondary possibility, as denoted by the Alt. line on the short-term chart, is that the decline from the January 15 peak is a complete five waves. In this latter scenario, the current bounce would carry a bit higher to complete wave ii (circle), leading to the next major wave of selling pressure, wave iii (circle) down.


The Dow's pattern is similar, though the initial waves off of the December 31 peak at 16,588.20 are not clearly conveyed. Here, a wave four bounce has initial resistance at 16,032-16,079. If a stronger bounce develops, the index might test the underside of its 14-year resistance line from the January 2000-October 2007 tops. This line crosses just below 16,200 through the end of this week. The key point in both the S&P and Dow is that the initial waves down from the recent top are the start of a longer and deeper decline.


After the 1929 stock market top and during the following market crash, the DJIA did not close down for more than four consecutive days. After the 1987 top and during the subsequent crash, the DJIA did not close lower for more than five straight days. Obviously there were three-, four- and five-day declines that were huge and the near-term rallies to relieve the selling pressure were as short as one day. The reason I mention this is to show that even during the most severe market declines, there will be brief bounces, at the least, before more selling pressure develops and prices move lower again. Today marks the fifth straight day that the Dow has closed down, which indicates a compressed decline. Stocks do not have to rally tomorrow, but one shouldn't be surprised by a respite from the selling pressure.


The bottom half of the above graph plots the Smart Money Flow Index. EWFF last discussed this indicator in September. The index compares the Dow’s price after the first 30 minutes of trading and its price at the close. The underlying theory of the index is that the public buys and sells early in the day, while the “smart money” waits to see the day’s trading flow and then executes their orders at the close. Note how the Dow's December 31 top was accompanied by a lower high in the SMFI. The decline reveals that the "smart money" is ahead of the market, selling into the close. Today was another example of an intraday rally that could not sustain, as the Dow closed lower for the fifth straight day, as noted above. Even if there is a larger bounce near term, the behavior of this index suggests broader and deeper bearish forces.


Another strong sign that the decline is not complete is the high number of weekly Buying climaxes. InvestorsIntelligence.com reports that last week there were 512 buying climaxes, the highest total since the last week in May 2013 (864). The DJIA and NYSE Composite were unable to make much upside progress until October last year, when the next persistent wave of advance started that led to the current highs. A buying climax occurs when a stock makes a new 52-week high and then closes the week down. This behavior is thought to reflect distribution from strong hands to weak ones, and a high level of climaxes usually congregate near market highs.


Erratum: In Friday's STU I said that this week's Fed meeting will be the first one led by new Fed chair Janet Yellen. Actually, this week's meeting will be the final one presided over by outgoing chairman Ben Bernanke. There is no meeting in February, so the next meeting on March 19 will be the first where Ms. Yellen will be the chair.

[PCMNewsdesk]

The Dow's pattern is less ideal, but five waves from its December 31 high are now clearly discernable on this daily chart. After a weak fourth wave, the Dow is probably declining in a fifth wave that has carried to the 15,700 area, the site of iv (circle) within 5 up, the Dow’s last resting place on its way to its final, December 31 high. This area may provide some support, but, here too, it should not last. Yesterday’s high just under 15,935 should hold and be followed by significant further declines in a fifth wave. Once that move completes, a test of the 14-year resistance line across the January 2000-October 2007 tops (red line on the second chart) remains possible. As noted on Monday, this line moves through approximately 16,200 at the end of this week. To reiterate the most important point from Monday’s STU, the highs of December 31 through January 23 will stand for a long time and be followed by a decline that will surpass that of 2007-2009 in depth and breadth.

Last Friday, [The Elliott Wave Theorist] issued an Interim Report showing the completion of a diagonal (see text, p. 36) in the Dow Jones Transportation Average and stating that it should mark the index’s all-time high for some time to come. The chart shows the clean downside impulse wave that the Transports have since traversed. As noted above, the Dow Industrials got very close to their prior wave iv (circle) low of 15703.9 (15,709) today. If they can break this level, and the Transports can do likewise, an intial Dow Theory sell signal will be in place. The DJT is 1.8% from its comparable wave iv (circle) low.

[PCMNewsdesk]

Here’s another look at that key trendline in the Dow. It’s not an outside down month, as the Dow peaked on December 31, but it’s about as close as a month can get. You might not be able to see it on the chart, but January 2000 was another near miss that worked out pretty well for the bears. On Monday, we graded the Dow’s pattern as “less ideal,” but the last few wiggles have done a lot for its form. As the chart shows, the daily chart of the Dow now offers a readily visible five-wave decline from December 31. As it also shows, wave (v) has pierced key support at 15,703.70. A re-test is certainly possible, but the long-term bearish implications should be readily apparent by these charts. There is a nest of support above and below the Dow’s current level, but once it is out of the way, the Dow should slide fast to below 15,000.