Come along for a ride, as we examine the current context of the stock market.
Part 1 Weekly
A look at the weekly shows a rising wedge formation. This formation has been identified by many market participants on this site and elsewhere, so this is nothing new. Elliott Wave Theory knows this formation as an ending diagonal, a move that brings about the conclusion of the one higher degree pattern. These diagonal patterns tend to take time to complete, but result in a sharp and abrupt reversal.
I'm not going to speculate here about the higher degree pattern, rather save it for an academic discussion for another time. A larger degree pattern from the weekly view is going to take months to play out and at least weeks before you know whether or not the preferred count is correct. In any case, where we are headed is less important than how we get there. The moves in the coming weeks should help paint a picture of the larger formation.
For the purpose here, we are at the very least looking at a decent correction coming (at least the distance of the wedge origin, but likely more). It is good to keep in mind that this is a 6 year bull market which has had very little retracement, apart from a dip in 2011.
I have pointed some some of the major intermediate term support areas in red. Depending on how you draw the lower wedge boundary, it's possible to say we have already broken out to the downside here. Because diagonals can be difficult to time perfectly, and can provide false breakout signals, I usually like to wait for support level 2 pivots back to be broken. In this case, it points to the 2039 level (first red horizonal support). When 2039 is broken, I'll be inclined to call the wedge complete.
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Part 3
Intraday (4H)
Here we are looking even shorter term at the last swing on the daily. We are attempting to riddle whether an impulsive (5 wave) move is forming in this context. As you'll recall on the above daily chart I labeled this leg down as an ABC, but here I'm entertaining the idea that an impulse could be forming, making the ABC a 123. I should note that even if an impulse forms here, the larger pattern could (and likely will continue to be) a 3 wave ABC. Meaning, the 5 waves will constitute a large A on the larger time frame. My reasoning for this is because we already had 3 waves off the 5/19 high, so we will most likely continue to have corrective behavior. The counts here tend to speak for themselves. Another leg down from here will likely confirm an impulse count, and conversely, a move above 2100 would serve to invalidate impulse, since a rule is that wave 4 cannot overlap wave 1. So a trade above 2100 will serve to confirm with high confidence the count on the daily chart.
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Part 2
Daily
In part 2 of this discussion, we will attempt to analyze the more recent price action on the daily time frame to get a sense of recent price action coming off the All Time High (ATH).
Coming off the May 19 high of 2137, the first thing that is apparent from an Elliott Wave count perspective, is that the price action is occurring in 3-wave patterns. In this case, 2 sets of ABC moves, creating a complex WXY correction (which is still a 3 wave pattern). With prices barely off the 6/29 2055 low, it's a bit early to call this pattern, as labeled, complete. Purely looking at this chart, you can't really get confirmation, until a trade above 2130, or the start of the ABC pattern in progress. There's a way to get an earlier gauge on an intraday time frame, which we'll discuss in the next chart.
Now that we've established 3-wave corrective, here's what that tells us. Nuances aside (and there are a few), price patterns are either impulsive or corrective. Impulsive (five-wave patterns) tell you a higher degree pattern is in progress, while corrective tells you the move is counter-trend. The important thing to note here is that, at least so far, there is no way to count 5 waves off the high. An impulse move would definitively tell us that a trend change has occurred, because the new higher degree trend would now be down. Does that mean prices can't continue to fall? Nope...prices can certainly hit new lows in the coming week, but it does signal the likelihood that a major downtrend has not yet begun.
Let's put aside Elliott for a second, and look at my other favorite tool for analyzing trend, the linear regression channel. After all, channels and Elliott are complementary. As a short primer, a linear regression line is just a best fit line describing all price points (usually closing price) for the given sample set. The bands are typically formed defining standard deviation of price over that period. You can do similar analysis with something like a moving average, or bollinger band, but I just prefer this. Again, it's somewhat subjective what part of a trend you decide to capture. For my purpose here, I look at the last major higher degree swing going back to late 2014 to define the major trend in place. There are 2 main ways to play linear regression. You can play a break out, when price breaks out of the channel, indicating a change in trend; or you can play a reversion to the linear regression line. As an analysis tool, it simply provides a reference point. ie. where is price in the context of the trend? In the case of the above chart, price has broken below the channel, and then retraced back to 'test' the channel. If price reverses back lower in the coming week, I will be inclined to call the channel broken, as that would constitute a more decisive break out, and moving decisively beyond a standard deviation from the LR.
The smaller channel shows the more recent price action off the 5/19 ATH. Here price appears to be retracing to the LR of the smaller channel. If price bounces off that and heads back to the low, the indication will be the new channel is more representative of a new trend, rather than simply a subwave in the context of the rising channel.
Part 3
Intraday (4H)
Here we are looking even shorter term at the last swing on the daily. We are attempting to riddle whether an impulsive (5 wave) move is forming in this context. As you'll recall on the above daily chart I labeled this leg down as an ABC, but here I'm entertaining the idea that an impulse could be forming, making the ABC a 123. I should note that even if an impulse forms here, the larger pattern could (and likely will continue to be) a 3 wave ABC. Meaning, the 5 waves will constitute a large A on the larger time frame. My reasoning for this is because we already had 3 waves off the 5/19 high, so we will most likely continue to have corrective behavior. The counts here tend to speak for themselves. Another leg down from here will likely confirm an impulse count, and conversely, a move above 2100 would serve to invalidate impulse, since a rule is that wave 4 cannot overlap wave 1. So a trade above 2100 will serve to confirm with high confidence the count on the daily chart.