Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 reached a low of 4606 during the session and has reversed to the upside, reaching a bit more than 40 points higher. Downward wave C{-10} within the wave 4{-9} downward correction continues. No change in the analysis. I’ve updated the near-term (upper) chart.

2:15 p.m. New York time

My trades. I’ve entered a short iron condor position on TFC, timed for the company’s earnings announcement on Monday before the opening bell. Analyst opinion switches before earnings suggest a higher likelihood of a negative earnings surprise. I’ve posted a full analysis of the trade.

I’ve entered a long shares position on PNC, which also publishes earnings Monday morning. PNC has an implied volatility rank of 36.3, with an expected move either direction, based on options pricing, of 1.83, for a range of $220.15 to $223.81 at an entry price of $221.98. The Zacks Earnings Surprise Predictor score for PNC is $2.29, meaning a higher likelihood of a positive earnings surprise.

I’ve also entered a long shares position on SI — Monday morning earnings announcement. Implied volatility rank: 33.3%. Expected move either direction: $9.34, for a range of $125.72 to $144.40 based on the entry price, $135.06. The Zacks Earnings Surprise Predictor for SI is an1.81% score, indicating a likelihood of a positive earnings surprise.

I rejected two earnings plays using options. GS at $380 a share was a bit pricey for my taste, and SCHW had overly low implied volatility, which reduces potential profit.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continued falling in overnight trading, for a second time reaching below the 61.8% Fibonacci retracement level and stretching further to halfway to the 78.6% retracement mark.

What does it mean? The decline from the January 12 reversal to the downside is the third, and potentially final, leg of the correction that began January 4 from 4808.25.

What’s the alternative? The chart pattern since January 4 is also consistent with a new downtrend beginning January 4. If the price moves below the January 10 low, 4572.75, then this interpretation will be confirmed.

Two charts. The upper chart shows the S&P 500 futures beginning around last Thanksgiving. The lower chart shows the S&P 500 index price line since the beginning of the pandemic.

[S&P 500 E-mini futures at 3:30 p.m., 2-hour bars, with volume]
[S&P 500 index at 9:32 a.m., daily bars]

What does Elliott wave theory say? Under my principal analysis, wave 4{-9} began on January 4, has completed two waves, A{-10} and B{-10} and is now in wave C{-10}, the last of the three-wave pattern, unless wave 4 extends in a compound correction that has several corrective patterns.

Under my alternative analysis, the peak on January 4 marked the end of wave 5{-9} and its parent, wave 3{-8}, which began on December 3 from 4492. A wave 4{-8} downward correction has begun and will dominate the rest of January and probably much of February.

The longer term chart, with prices back to the early pandemic crash in February 2020, shows the scale of the decline since January 4: It’s that tiny scribble at the right end of the price line. It seems big in the headlnes and it may eventually turn big, but not yet.

The red lines are the boundaries of the expanding Diagonal Triangle that began in December 2018. One the decline takes hold, I expect the price to work its way down to the lower boundary and then back up to a still higher upper boundary (that’s the expanding part).

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, January 14, 2022


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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