SP500 Analysis

9:37 a.m. the next day, New York time

Chart update problem resolved. I’ve updated the lower chart, showing a close-up view, showing the S&P 500 E-mini futures half an hour before the closing bell.

3:30 p.m. New York time

Half an hour before the closing bell. As the closing bell approached, the S&P 500 continued to rise during the day, reaching 4727.75 on the futures, 4737.12 on the index. No change in the analysis. The WordPress system for some reason won’t allow me to update the close-up chart, down above Elliott wave analysis section. Imagine a line that goes up about two-thirds of the way from the 78.6% retracement line and the 100% retracement line, and you’ll have the 3:30 p.m. in your mind.

11:45 a.m. New York time

Long-term chart. Today is the last trading day of the week; the markets will observe Christmas on Friday, the day before the holiday itself. So as is my end-of-the-week practice, here’s a look at the long term. The chart shows the S&P 500 index stretching back to the summer of 2018, with the large structure that, by my analysis, has dominated the markets since that year, an expanding Diagonal Triangle, which began on December 26, 2018, from 2346.58.

[S&P 500 index at 11:41 a.m., 2-day bars]

Expanding triangles have a characteristic: The trend-line boundaries keep moving further away from each other. And so the end of the 2nd wave of the triangle was lower than the start of the 1st wave, something not normally allowed in a five-wave main trend.

In Elliott wave terms: The triangle is wave 5 of Intermediate degree — subscript {0}. Within it, the index is presently tracing wave 3 of Minor degree {-1}. Minor wave 3 began on February 23, 2020 — the end of the early pandemic crash — from 2191.86.

Within Minor 3, the index is positioned in a series of 5th waves down to Micro degree {-5}, which began on October 4 from 4278.94.

By that analysis there is still significant upside ahead. Minor wave 3 still hasn’t traced its 3rd wave internally, at Submicro degree {-6}, and it is 3rd waves that cover the most ground in the direction a trend.

The end of Minor wave 3 will signal the beginning of wave 4 of Minor degree, a downward movement that will in theory reach the lower boundary of the Diagonal Triangle, which is presently in the mid-1900s and moving lower each day. It will feel like an end-of-the-world major crash.

The good news: That 4th wave will be followed by Minor wave 5, which will carry the price back up to the upper boundary, which is moving higher day, creating the bull market for the record books. The end of Minor wave 5 will also end increasingly larger 5th waves, of the Primary {+1}, Cycle {+2} and Supercyle {+3} degrees. The 5th wave of Supercycle degree began in 1932, from the low point following the Great Crash of 1929.

And following that Supercycle rise? Well, the bull is always followed by the bear. In Elliott wave terms, the end of a 5th wave is followed by either a correction, within a larger degree, consisting of three waves, with variations, or a new downtrend, consisting of five waves.

One of the wisdom writings of Jewish scripture, composed somewhere between 450 and 200 BCE by an unknown author who says he is reporting the words of the king’s son, Kohelet, provides a perfect description of how the markets work, whether the viewpoint be big picture or close up: “The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.” Or as the humanistic Cylons of the reimagined Battlestar Galactica put it, repeatedly, in the 2004-2009 series: “All of this has happened before, and will happen again.”

That insight lies at the core of Elliott wave analysis.

11 a.m. New York time

Earnings plays rules. I’ve posted my rules for earnings plays in the “Trading Rules” section of the menu bar. After tinkering with it, where came down was this: There are rules for entry that are unique to earnings plays, but once the position has been entered, my rules are the same as they are short options spread, with the exception that I’m aiming for 25% of maximum potential profit, rather than 50%. The goal is to improve the turnover of funds for earnings plays.

10:50 a.m. New York time

Earning plays exited. Two of my earnings plays reached 25% of maximum potential profit, and as is my rule, I exited. I’ve updated the analyses of the two short iron condor positions — DRI and GIS — with results.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures rose in overnight trading, reaching 4706.75 minutes after the opening bell, a bit above a Fibonacci 78.6% upward retracement of the decline from December 16 to December 20.

What does it mean? The uptrend that began on December 20 and will eventually break above the December 16 high, 4743.25, perhaps significantly above that level.

What’s the alternative? If the price reverses and falls back into the 4500s without moving above the December 16 high, then the present rise was the second leg of of a downward correction.

[S&P 500 E-mini futures at 3:30 p.m., 45-minute bars, with volume]

What does Elliott wave theory say? Under my principal analysis, the rise from 4520.25 on December 20 is wave 3 of Bitsy degree — subscript {-9} — within rising wave 5 of Subminuscule degree {-8}.

Learning and other resources. Elliott wave analysis provides context, not prophecy. As the 20th century semanticist Alfred Korzybski put it this way 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, in the ever-changing markets, 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, December 23, 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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