Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 has fallen a bit further during the session, to 4195.25 on the futures, and then bounced up slightly, remaining below 4300 so far. Downtrending wave 5{-8} is still underway. I’ve updated the chart.

10 a.m. New York time

GE earnings play entry. I’ve entered a short bear call vertical spread on GE and have posted an analysis of the trade.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continued to fall overnight, reaching a low of 4218.75 before the opening bell.

What does it mean? The downtrend that resumed on April 21 continues, with a tentative target of 4145, give or take.

What’s the alternative? The ambiguity at this point is the size of the decline. I made a revision in my analysis over the weekend, which I discuss in detail in the Elliott wave theory section below.

[S&P 500 E-mini futures at 3:30 p.m., 4-hour bars, with volume]

What does Elliott wave theory say? Downtrending wave 5{-8} within wave 5{-7} within wave 1{-6} continues.

Wave 5{-7} began on March 29. The question since that beginning has been the degree of the subwaves, often a point of ambiguity in Elliott wave analysis.

I worked with the chart this weekend and have changed the subwave degree, raising it by one. Under the new numbering the decline that began on April 21 is wave 5{-8}. There’s only one guideline in Elliott for determining a wave’s degree: It must be proportional to other waves of that same degree. As wave 5{-7} has progressed, it has become clear that promoting the subwaves from degree {-9} to degree {-8} is ore proportional

That change impacts what happens next. Fifth waves will often hit a lower price channel touching the end of the preceding 3rd wave that is parallel to a line drawn from the end of the 2nd wave to the end of the 4th. Wave 5{-8} is the final wave within wave 5{-7}, and so the {-7} degree price channel will determine the target. Wave 4{-7} ended slightly above wave 2{-7}, so the price channel is tilted upward. As of today — Monday — the target price would be about 4145. This is a guideline, not a rule, so the price could go lower, or it could fall short.

The end of wave 5{-7} also marks the end of wave 1{-6}. which began on January 4 from 4808.25. It will be followed by an upward correction, wave 2{-6}. Second waves usually take the form of a Zigzag. So how high can wave 2{-6} go? A firm rule of Elliott wave analysis says that a 2nd wave cannot move beyond the start of the preceding 1st wave. Wave 1{-6} began at 4808.25. Assuming that wave 2{-6} begins from the target price, that gives wave 2{-6} 663 points to work with, which would work to be 16% rise at best, and most likely shorter, perhaps quite a bit so.

The 4808.25 price — the high of January 4 — will be revisited time and time again in discussion of the S&P 500. Wave 1{-7} is a 1st wave within an increasingly larger series of parent waves going all the way up to wave 1{-2}. As each 1st wave within each degree works its way lower, the 2nd wave upward correction will always be in relation to 4808.25, which will be a permanent cap on price increases for some time to come.

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.

  • Index:
  • 5{0} Intermediate, 12/26/2018, 2346.58 (up)
  • 4{-1} Minor, 1/4/2022 4818.62 (down)
  • 1{-2} Minute, 1/4/2022 4818.62 (down)
  • Futures and index:
  • 1{-3} Minuette, 1/4/2022, 4808.25 (down) (futures), 4818.62 (down) (index)
  • Futures:
  • 1{-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)
  • 5{-7} Minuscule, 3/29/2022, 4631 (down)
  • 5{-8} Subminuscule, 4/21/2022, 4509, (down)

Learning and other resources. Elliott wave analysis provides context, not prophecy. As the 20th century semanticist Alfred Korzybski put it 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, April 25, 2022

Disclaimer

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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Based on a work at www.timbovee.com.