Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. No change from the re-analysis that I posted an hour and 10 minutes ago. Wave 2{-7}, an upward correction, continues and now internally is in wave C{-8}, it’s final wave, unless it extends in a complex correction. Wave C{-8} will have five waves total within it and by my count is now on it’s middle leg, upward wave 3{-9}. I’ve updated the chart.

2:20 p.m. New York time

The new principal analysis. The old principal analysis from this morning having been invalidated when it bumped into a firm rule of Elliott wave theory, I’ve been looking at the chart to find a re-analysis that would be true to the rules.

One approach that I try to take with any reanalysis is that of Minimum Necessary Change, a term borrowed from Isaac Asimov’s 1955 time-travel novel The End of Eternity. In it, the guardians of the future make small changes in the past — moving a box from one shelf to another — in order safeguard the timeline that leads to them. They make the Minimum Necessary Change.

In the case of the S&P 500, the Minimum Necessary Change would keep the 4th wave rule from being broken (see the discussion below) while preserving the January 4 peak as a significant reversal in the trend.

The way to do that is to make the rise that began on January 24 into something other than a 4th wave. Which I’ve done, by taking some waves that had been at degree {-7} in the earlier count and demoting them to degree {-8}, which makes the low of January 24 the end of wave 1{-7} and the subsequent rise an upward correction, wave 2{-7}, which is still underway and internally is in its 3rd wave, wave C{-8}.

The rule for 2nd waves is this: Wave 2 cannot move above the beginning of the preceding wave 1. That 1st wave began at the January 4 peak, 2808.25, leaving ample room for wave 2{-7} to complete its rise before the downtrend continues with wave 3{-7} to the downside.

Yesterday I entered a bear position on SPY based on the old principal analysis. The reasoning behind the trade remains valid under the new analysis.

1:05 p.m. New York time

S&P 500 index invalidates 4th-wave count. The S&P 500 index has moved above the low of January 10. In terms of Elliott wave theory, that low point, 4582.84, was then end of wave 1{-7}. This morning’s principal count had labelled the rise from January 24 as wave 4{-7}. if a 4th wave moves beyond the end of the prior 1st wave, then it’s not a 4th wave, and something else is going on. I’ll post a fresh analysis half an hour before the closing bell.

12:55 p.m. New York time

SPY breaks the 4th wave rule. The exchange-traded fund SPY, based on the S&P 500, joined the S&P 500 futures in moving above the end of the preceding 1st wave, which beaks a rule of Elliott wave theory. See my extensive discussion of the question from this morning. The S&P 500 index, the decider in case of conflicting signals, remains below the end of the preceding 1st wave. The 1st wave terminus for SPY was $456.60, and the price has moved above that level, so far, by 8 cents.

10:20 a.m. New York time

FB earnings play entry. I’ve entered a short bull put options spread on FB timed to coincide with its earnings announcement after the closing bell today. I’ve posted an analysis of the trade.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures rose overnight to 4580 and then fell back, remaining above the 61.8% Fibonacci retracement level.

What does it mean? The futures high exceeds the end of the first leg of the downtrend that began on January 4, violating a rule of Elliott wave analysis. If that violation is confirmed by the index, then the principal count will be replaced by the alternative count. More on the discrepancy in the Elliott wave theory section.

What’s the alternative? The downward movement from the January 4 peak, 4808.25, was a correction within an ongoing uptrend, which has now resumed and will reach new heights.

[S&P 500 E-mini futures at 3:30 p.m., 80-minute bars, with volume]

What does Elliott wave theory say? The rules and tendencies governing market behavior described by R.N. Elliott are heavy on the tendency side. The markets are too complex and unruly to march to the beat of a single drummer. Rather, the more accurate comparison is to the unruly Feast of Fools in medieval France However, there are a few rules. One is that the 3rd wave of a trend can’t be the shortest of the three waves in the direction of the trend. Either wave 1 or wave 3 must be shorter. Another rule, applicable in this case, is that the 4th wave can’t move beyond the end of the preceding 1st wave. If it does, then it’s not a 4th wave, and something else is going on.

When Elliott created his theory, there was no S&P 500. He used the Dow Jones Industrial Average. Moreover, there were no index futures and no index-based exchange-traded funds (ETFs) such as SPY. He lived in a market world having far less ambiguity than ours does.

The S&P 500 futures wave 4{-7} moved above the end the wave 1{-7} first during the London market session, and again during the Tokyo market session. The U.S. markets were closed, and the S&P 500 index only tracks prices during the U.S. market session.

There’s also the problem of granularity. The index moves in penny increments with, while the futures move in 25-cent increments, both with prices in the four figures. SPY, the S&P 500 ETF, moves in penny increments with prices in the three figures, meaning its granularity is far less than that of the index.

So, if the futures have violated the 4th wave rule, but the index and ETFs have not, how do we analyze the chart? An expert wise in the ways in Elliott wave analysis once told me that they are separate products and must be analyzed separately. And yet, the futures and the ETFs are clones of the index, closely following it while operating under separate rules and separate platforms.

We’ve been here before. In the run-up of wave 3{-1} after the early pandemic crash, several times the three platforms diverged, and within a few days regained their unanimity. My practice then, when the futures broke a rule but the index did not, was to analyze the futures as though the rule hadn’t been broken. I designated the index as the rule-keeper and required that it also break the rule before changing the analysis.

And that’s what I’ll do today.

Under my principal analysis, wave C{-8} continues it’s rise, trading in the area between the 61.8% and the 78.6% Fibonacci retracement levels. The upward correction parent, wave 4{-7}, continues its upward movement.

Under the alternative analysis, the downward correction that began on January 4 ended on January 24, and wave 5{-7} within wave 5{-6} has resumed its upward course.

At the opening bell the S&P 500 index and SPY remain below the end of wave 1{-7}, which is4582.24 on the index and 456.60 on SPY.

We Are Here.

These are the waves currently in progress according to my principal analysis. Each line on the list shows the wave number, with the subscript in curly brackets, the traditional degree name, the starting date, the starting price of the S&P 500 E-mini futures, and the direction of the wave.

  • 5{0} Intermediate, 12/21/2018, 2316.75 (up)
  • 3{1} Minor, 3/23/2018 2174 (up)
  • 5{-2} Minute, 10/4/2020, 4267.50 (up)
  • 4{-3} Minuette, 1/4/2022, 4808.25 (down)
  • A{-4} Subminuette, 1/4/2022, 4808.25 (down)
  • 1{-5} Micro, 1/4/2022, 4808.25 (down)
  • 1{-6} Submicro, 1/4/2022, 4808.25 (down)
  • 2{-7} Minuscule, 1/24/2022, 4212.75 (up)
  • C{-8} Subminuscule, 1/26/2022, 4263.75 (up)

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, February 2, 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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