Trader’s Notebook

4 p.m. New York time

PHM earnings play exit. I’ve exited my short bear call spread on PHM two days after entry for 6.2% of maximum potential profit and have updated the trade analysis with results.

3:45 p.m. New York time

KO earnings play exit. I’ve exited my short bull put spread on KO seven days after entry for 39.2% of maximum potential loss and have updated the trade analysis with results. This exit is under a new rapid turnover tactic that I’m trying out and that I will describe in detail in a post this weekend.

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 fell throughout the session, reaching a low so far of 4145.50 on the futures, slightly above where the rise began, from 4136.75. The initial rise, to a peak of 4303.50, was wave A{-10} within the upward correction, wave 2{-9}. The subsequent decline was wave B{-10}. It will be followed by a wave C{-10} rise that will likely move higher than the wave A{-10} did. No change in the analysis. I’ve updated the chart below.

1:15 p.m. New York time

LW earnings play exit. I’ve exited my short bear call vertical spread on LW, 21 days before expiration, for 89% of maximum loss and have posted updated the trade analysis with results.

10:35 a.m. New York time

UAL earnings play exit. I’ve exited my short bear call vertical spread on UAL for 73% of maximum potential loss, managing the position 21 days before expiration, my normal management date. I structured the position in expectation of a decline after earnings were announced. The price rose instead. I’ve updated the trade analysis with results.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures rose to 4303.50 in overnight trading and then fell back slightly.

What does it mean? The upward correction that began on April 26 continues, taking back some of the decline that began on April 21 from 4509. The overnight rise briefly pierced the 38.2% Fibonacci retracement level before retreating.

What’s the alternative? The upward correction could be larger than my principal analysis would have it, retracing a portion of the decline that began on January 4 from 4808.25. The high the price rises, the more like the alternative scenario becomes.

[S&P 500 E-mini futures at 3:30 p.m., 75-minute bars, with volume]

What does Elliott wave theory say? I’ve placed a Fibonacci retracement ladder on the chart to better track the progress of the correction. To avoid confusion, I’ve changed the two parallel lines that are the price channel for wave 1{-6} from red lines to dotted black lines.

Under my principal analysis, the upward correction, wave 2{-9}, continues retracing a portion of the wave 1{-9} decline, which began on April 21. The correction began on April 26.

Under my secondary analysis, April 26 was the beginning of a far larger correction, wave 2{-6}, retracing a portion of the decline that began on January 6.

A 2nd wave typically will take the form of a Zigzag, and there’s one firm rule that applies to a 2nd wave correction: It never moves beyond the start of the preceding 1st wave Wave 1{-9} began on April 21 from 4509, and that’s the ceiling for the present wave 2{-9}. If the price does move above that level, then the analysis doesn’t match the chart and must be revised.

Within wave 2{-9}, the rise that began April 26 from 4136.75 is wave A{-10}. Since the corrective pattern is a Zigzag, the A wave will have five waves internally, followed by a B wave back down, usually with three waves internally, and finally a C wave back up, with five waves usually carrying the price to new heights within the correction. Wave B can follow one of several different patterns. If wave B is a Zigzag, which it seems to usually be in charts I’ve worked with, then it will retrace roughly 50% to 80% of the preceding A wave.

Once wave C has ended, then things get interesting. Most often the end of that C will be will the end of the parent 2nd wave, and a 3rd wave will begin, taking the price below the end of the preceding 1st wave — 4136.75 in the case of wave 1{-9} — and perhaps significantly below that level. Alternatively, the 2nd wave can trace through a separator wave, called an X wave, and then go through a second corrective pattern in a compound correction. Some compound structures will contain three corrective patterns.

Under the alternative scenario, the analysis is the same, except the maximum price of the correction is higher than under the principal analysis. Under the alternative, the wave 2{-6} correction must remain below 4808.25, the start of wave 1{-6}.

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 29, 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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