SP500 Analysis

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 continued to decline throughout the day, reaching a low so far of 4334.75. The decline was sufficient to suggest that wave B of Submicro degree won’t reach a 90% retracement of the preceding wave A. That being the case, for reasons discussed below, the form of the correction, wave 4 of Micro degree, is a Zigzag, or potentially a Triangle of some sort, rather than a Flat. I’ve changed the labelling on the chart to match a Zigzag scenario.

Under the Zigzag analysis, wave B of Submicro degree ended yesterday at 4472 on the futures, and the subsequent decline, wave C of Submicro degree, has so far fallen to 4334.75, and as a Zigzag is likely to drop below the end of wave A, 4293.75.

The end of wave C in a simple correction will mark the end of wave 4 of Micro degree, which will be followed by the rise of wave 5 of Micro degree to new heights. If the correction takes a compound form, then the of wave C will be followed by a separator wave, which I label as wave X, to the upside, and then a second corrective pattern, perhaps another Zigzag, or perhaps a Flat. Long story short: The S&P 500 is at a crossroad with many possible paths to choose from.

1 p.m. New York time

Options calendar. Today marks the opening of my trading window for using options expiring November 19. The window remains open through October 12, with October 5 being the optimal trading date. See my trading rules for details.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures fell 84 points from yesterday’s high, 4472, to the overnight low, 4388.

What does it mean? The high is 52 points below a 90% retracement — 4523.93 — of the decline from September 3 to September 20, If the price reverses and reaches the 90% retracement level, then the correction that began September 3 is a sideways, Flat pattern.

What’s the alternative? If the price continues to decline, the correction is taking some other pattern, most likely a direction Zigzag pattern.

[S&P 500 E-mini futures at 3:30 p.m., hourly bars, with volume]

What does Elliott wave theory say? The rise that began September 20 is wave B of Submicro degree, the middle wave within its parent, wave 4 of Micro degree, which began on September 3.

It is wave B that will determine the nature of the correction. In a Flat pattern, the B wave always retraces at least 90% of the preceding A wave. That would mean a rise to 4523.93 in this case. In a Zigzag pattern, the B wave usually will retrace 50% to 79% of wave B, which it has done. So far B has retraced 70% of wave A.

There are other patterns with other B-wave retracements, but Flat and Zigzag are the most common.

Another tendency is for wave 4 to take a different pattern than wave 2. Micro wave 2 in this case was a Zigzag, and so the present wave 4 is likely to be a Flat. “Likely” isn’t a firm rule, so perhaps this will turn out to be an exception.

Learning and other resources. Elliott wave analysis provides context, not prophecy. As the 20th century semanticist Alfred Korzybski put it in his book Science and Sanity (1933), “The map is not the territory … The only usefulness of a map depends on similarity of structure between the empirical world and the map.” And I would add, we can judge that similarity of structure only after the fact.

See the menu page Analytical Methods for a rundown on where to go for information on Elliott wave analysis.

By Tim Bovee, Portland, Oregon, September 28, 2021


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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