Trader’s Notebook

10:45 a.m. New York time

What’s happening now? The S&P 500 E-mini futures traded sideways in overnight trading, remaining within a range of less than 35 points. The U.S. stock and options markets will be closed today for a day honoring the civil rights activist Martin Luther King. The futures and bond markets will hold shortened sessions.

What does it mean? The last leg of the correction is itself on its last leg, needing only one more decline to be complete.

What are the alternative? Alternative #1: The upward move from January 10 was a correction within a new downtrend that began on January 14. The subsequent decline is a movement in the direction of the downtrend that will carry the price below the December 20 low of 4520.25

Alternative #2: The downward correction ended on January 14, and the subsequent rise is the first tentative step of a resumption of the uptrend.

Alternative #3: The correction that began on January 14 has completed one corrective pattern, and after a connecting rise, will add a second corrective pattern in a compound structure.

[S&P 500 E-mini futures at 10:45 a.m., 2-hour bars, with volume]

What does Elliott wave theory say? There is a stark contrast between my principal scenario and the first alternative. The one sees the beginning of an uptrend that will carry the price a considerable distance higher. The other sees the beginning of a major downtrend that over time will carry the price down to levels not seen since 2016.

Under the principal scenario, the decline from January 12 is wave C{-10} within wave 4{-9}. The C wave has three waves, and whether the decline is a Flat or a Zigzag, the C wave will have five waves internally. Arguably, four waves are complete; one more to go. The end of wave C will also be the end of wave 4{-9}, and the subsequent wave 5{-9} will carry the price to new heights, beyond the January 4 end of wave 3{-9}, leading to a series of ever-larger corrections and rises still higher.

The first alternative is the polar opposite. The January 4 peak ended wave 5{-9} and its parent, wave 5{-8}, and the subsequent decline is wave 1{-9} within wave 1{-8}, the first stage of a new downtrend that will reach below 2000.

The third alternate is less grandiose, focusing on the on the meaning of the decline since January 12. The principal analysis sees it as three waves within wave C, with a 4th wave now underway. The alternative sees the low of January 14 as being the end of wave C, and the subsequent rise as an X wave connecting two corrective patterns within a compound structure. As noted above, wave C must have five waves internally. And If I squint real hard, I can see a tiny 4th wave before the final fall to the January 14 low. Honestly, it seems too small for a 4th wave of degree {-11}, but it’s not impossible.

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 17, 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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