Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The overnight low, 4101.75, has ended the downtrend that began on February 2. After the the opening bell the price has risen so far to 4252.25 in what is the first leg of what will most likely be a three-part upward correction. I expect to it to take the form of a Flat, a sideways corrective pattern. So far it has moved above a 23.6% retracement of the decline. The 23.6% retracement is part of the Fibonacci series, and quite often prices will pause at Fibonacci levels. The next one higher is the 38.2% retracement, at 4289.82.

In Elliott wave terminology: Wave 5{-8} and its parent wave 3{-7} ended at 4101.75, the overnight low, and the subsequent upward movement is wave A{-8} within wave 4{-7}, a correction to the decline.

Fourth waves often end within the range of the the 4th wave one degree smaller within the preceding 3rd wave. In this case it would be wave 4{-8} within wave 3{-7}; the 4th subwave started at 4354 and ended on February 16 at 4484.50. Those start and end points are my expectation for the range within which wave 4{-7} will end, roughly a 50% to a 78.6% retracement.

The upward correction, wave 4{-7}, will contain three subwaves (unless it extends into a compound correction) — A, B and C, all at the {-8} degree — and will be followed by a declining wave 5{-7}, which will carry the price below the 4101.75, perhaps significantly lower.

2:40 p.m. New York time

LYFT earnings play exit. I’ve exited my short bear call vertical spread on LYFT for 70% of maximum potential profit and have updated the trade analysis with full results.

10:20 a.m. New York time

SPY options position exit. I’ve exited my short bear call vertical spread on SPY for 51% of maximum potential profit and have updated the trade analysis with full results.

10:05 a.m. New York time

DIS earnings play exit. I’ve exited my short bull put vertical spread on DIS for 29.4% of maximum potential profit and have updated the trade analysis with full results.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continued to decline in overnight trading, reaching a low of 4101.75 so far, the lowest it has been this year.

What does it mean? The downtrend that began on January 4 from 4808.75 and that, after an upward correction, resumed on February 2 continues. So far it has fallen more than 700 points below the January 4 peak, with more downside to come, with the usual corrections along the way that will interrupt its progress.

What’s the alternative? At this point I have none. The chart patterns have a high degree of clarity. As always, ambiguities will arise, but not today.

[S&P 500 E-mini futures at 3:30 p.m., 140-minute bars, with volume]

What does Elliott wave theory say? Wave 5{-8} is underway, tracing its course within wave 3{-7} within wave 1{-6}, all declining in the direction of the downtrend that began on January 4.

In Elliott, the term for a wave moving in the direction the trend is an impulse wave. Within wave 3{-7}, the 5th wave, the ending wave within an impulse wave, is the longest of the three. Normally, the 3rd (middle) wave is the longest. The Elliott wave analysis rule is only that the 3rd wave can’t be the shortest of the three waves moving in the direction of the trend, the 1st, 3rd and 5th.

Wave 1{-8} is the shortest of three, at 124 points; wave 3{-8} is next, at 231 points; and wave 5{-8} is the longest, at 382.75 points. So the Elliott wave rule is satisfied.

There is no rule limiting on how far a 5th wave can travel, although a grotesquely outsized 5th wave should prompt the analyst to re-evaluate the work.

I’ve seen headlines this morning linking the market decline to the Russian attack on the Ukraine. A principle of Elliott wave theory is that market movements, the waves, are driven by the public mood, what German philosophrs called the Zeitgeist. The public mood anticipates events, and so the market weeks ago priced in the war in Ukraine. The movements we see today will be anticipations of what happens next, not responses to what happened earlier today Ukraine time.

We Are Here.

These are the waves currently in progress under 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)
  • 4{-7} Minuscule, 2/24/2022, 4101.75 (up)
  • A{-8} Subminuscule, 2/24/2022, 4101.75 (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 24, 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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