Trader’s Notebook

3:50 p.m. New York time

DIS earnings play exit. I’ve exited my short bull put spread on DIS for 55.1% of the maximum potential loss and have updated the trade analysis with results.

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 rose during the session and then resumed its decline, pushing down to a low so far of 3855. Wave 3{-10} within wave 3{-9} within wave 5{-8} continues. The three waves, each a degree larger than the one listed before, are all downtrending. I’ve updated the upper chart.

10:50 a.m. New York time

What happens in the long run? I’ve added an second analysis, below the Elliott wave analysis section, titled “The road down, and back up, and down again”, that puts the present decline in the context of the equities market stretching back to before the New York Stock Exchange even existed, to the coffee-houses where traders bought and sold shares on the London Stock Exchange, the origin of the present U.S. collection of exchanges.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continued to decline overnight, reaching a low of 3883.25 right after the opening bell.

What does it mean? The decline from May 4 has retraced 167% of the rise from May 2 to May 4. That ratio is well in excess of the Elliott wave guidelines for the ratio between the middle wave and the first wave of a Flat correction. The map no longer matches the territory, and when that happens, the map must change.

Under my principal analysis, the upward correction that began on April 26 ended on May 4, and the subsequent decline is a resumption of the downtrend that began on April 21. I’ll discuss the change in analysis in greater detail in the Elliott wave theory section.

What’s the alternative? The alternative is that my previous count is correct, the upward correction is still underway, and the overly long middle wave is just an outlier. The Elliott wave guidelines say that the middle wave of a Flat correction generally reaches no further than 138% retracement of the first wave of the correction. But it’s a guideline, not a rule.

However, the new count is quite clear and that alternative seems far less plausible at this point. If the price reverses soon and exceeds 4303, then that will signal that the implausible analysis is in fact the correct one.

The Charts. I’m posting two S&P 500 charts today. The upper chart, the S&P 500 futures, shows a close-up view of the decline that began on April 21. The lower chart, the S&P 500 index, shows a big-picture view of the massive expanding Diagonal Triangle that began on December 26, 2018.

[S&P 500 E-mini futures at 3:30 p.m., hourly bars, with volume]
[S&P 500 index at 9:32 a.m., 2-day bars]

What does Elliott wave theory say? The issue that required a change in the former analysis is the ratio between wave A{-11} and wave B{-11} within wave 2{-10}, an upward correction. The Elliott wave guidelines for a Flat corrective pattern say that the ratio generally ranges from 100% to 138%. Yesterday’s low was a 144% retracement, a bit too far. Today’s retracement of 167% (so far) is far larger than seems reasonable.

The upper chart above shows the new principal analysis. For a chart of the old analysis, see the May 11 Trader’s Notebook.

The revision to the count is similar in method — raising waves to higher degrees — although not identical in outcome, to my alternative count in Elliott wave theory section of the May 6 Trader’s Notebook.

Under my principal analysis, the decline that began on May 4 from 4303 is wave 3{-9} within wave 5{-8}, which began on April 21 from 4509.

Within wave 3{-9}, the most straight forward count of the internal structure has wave 1{-10} complete on May 9, followed by a brief wave 2{-10} that ended on May 11, and the present wave 3{-10}.

There’s no rule limiting on how far a 3rd wave can go, beyond the need for proportionality with other waves of the same degree. A 3rd wave is usually longer — quite a bit longer — that the preceding 1st wave.

Wave 1{-10} covered 417.25 points. Wave 3{-10} began on May 11 from 4050.50. If wave 3{-10} covers the bare minimum — one point longer than wave 1{-10}, then the price will carry down to 3632.25. If it covers double the length of the 1st wave, then the price would reach 3216, a level last seen in July 2020.

Whatever the actual distance covered turns out to be, 3{-10} has the capacity to carry the price down a significant distance. And after the future 4th wave upward correction that will follow, wave 5{-10} will carry the price down even further.

As the longer-term chart shows, the ultimate target of the decline that began on January 4 is the lower boundary of the expanding Diagonal Triangle that began on December 26, 2018. That lower boundary is presently in the 1900s, and it will move lower each day the S&P 500 and its derivatives are traded, which for the futures is every day except Saturdays and holidays.

Under the highly implausible alternative analysis, downward wave B{-11} within the upward correction, wave 2{-10}, that began on May 2 is still underway, despite having exceeded the Elliott wave guidelines for the ratio between an A wave and a B wave in a Flat corrective pattern.

The road down, and back up, and down again. The nature of the markets is that trends don’t run in a straight line. Elliott wave theory is correct in placing stress on the fractal nature of market prices — each downtrend contains smaller uptrends within it, and those uptrends in turn contain still smaller downtrends.

Looking at the decline that began on January 4 from 4808.25 on the futures, 4818.62 on the index: That point marked the beginning of a wave 1{-6}, which within it contains trends of increasingly smaller degree: downtrending wave 5{-7}, downtrending wave 5{-8}, downtrending wave 3{-9} and downtrending wave 3{-10}.

In the Elliott wave analysis section above, I spoke of the ultimate goal of the decline as being the lower boundary of an expanding Diagonal Triangle that began on December 26, 2018, with the price reaching below 2000, and perhaps significantly so. (See the lower chart below.)

As always, the path downward won’t be straight path. Wave 3{-10] will be followed by a 4th wave upward correction and then a 5th wave downtrend. The end of that final wave will also mark the end of wave 3{-9}, which will in turn also be followed a larger upward correction and then a larger 5th wave downtrend.

The end of wave 5{-9} will also mark the end of several waves, of ascending degree: Waves 5{-8}, 5{-7} and 1{-6}, the last wave having begun on January 4. The end of a 1st wave means that the trend at that particular degree has another four waves to go: An upward 2nd wave, downward 3rd, upward 4th and downward 5th.

Wave 1{-6} is embedded with a series of 1st waves of increasingly higher degree: Wave {-5} through wave 1{-2}, each with four additional up and down waves before reaching completion. At those higher degrees, each downtrending wave and upward correction will potentially feel very much like a major bear market and bull market.

The wave that will carry the price down to the lower boundary of the expanding Diagonal Triangle is wave 4{-1}, which began on January 4. It will be followed by wave 5{-1}, which will carry the price back to the upper boundary of the correction, which is presently in the 5200s and will have climbed much higher by the time the price reaches it again.

The end wave 5{-1} will mark the end of the entire Triangle, wave 5{0}, which in turn will mark the end of three 5th waves, each a degree larger than the one before: Waves 5{+1}, 5{+2} and A{+3} within wave 4{+4}. Wave 4{+4}, according to research by Robert Prechter, the head Elliott Wave International, the pre-eminent center of Elliott wave analysis, had its beginning, long the long before American independence, on the London Stock Exchange, which was established by Queen Elizabeth 1 in 1571.

The downtrending wave 5{+4} that follows 4{+4} will define the lives of many generations of traders as they profit and lose from the massive ups and downs within it.

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, May 12, 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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