Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 shot above Friday’s high, 4016.25 on the futures, into the 4040s, in a move that began before the Federal Open Market Committee increased the Fed Funds Rate by 75 basis points. Although the movement was triggered by an event, the market response must still fit within the rules and norms of Elliott wave analysis.

As indeed this response does. The rise above Friday’s high triggers the alternative analysis from this morning. It’s ambiguous, but the power of the rise tilts the analysis in favor of the third wave of the upward correction having begun from the overnight low, 3913.25.

In Elliott wave terminology: An upward correction, wave 4{-12}, which began on July 14, is still underway. Wave A{-13} within it ended on July 22 at 4016.25. Wave B{-13} ended today, July 27, at 3919.27, just a few cents above the usual range for a B-wave (as discussed in this morning’s analysis). Wave C{-13} is now underway. A C wave often about the same length as the preceding A wave. That would suggest that wave C{-13} will rise by 292.50 points, to 4202.75 — more or less; it’s a tendency, not a rule.

I’ve retained this morning’s chart for comparison and have posted a new one.

[New principal analysis: S&P 500 E-mini futures at 3:30 p.m., 135-minute bars, with volume]

2:40 p.m. New York time

BG earnings play exit. I’ve exited my short bull put vertical spread on BG for 45.3% of maximum potential loss and have updated the trade analysis with full results.

2:20 p.m. New York time

CHRW and EQT earnings plays entries. I’ve entered short bull put vertical spreads on CHRW and EQT, using options that trade for the last time on August 19, and have posted analyses of each trade: CHRW, EQT.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures rose slightly in overnight trading, remaining in the mid-3900s.

What does it mean? The descending middle leg of the upward correction that began on July 14 is underway. If it’s typical, it will end somewhere between 3905 and 3795. It will be followed by an ascending final leg of the corrective pattern that most likely will rise above 4016.25, the price where the correction’s first leg ended.

What is the alternative? It’s possible that the price will rise above 4016.25 without falling any lower. If it does, then it will present the analysis with a huge ambiguity: Is the first leg of the correction still underway, or was rise the third leg of the correction following an unusually short second leg?

The chart. On the S&P 500 futures chart below, I’ve marked the most likely range for the descending middle leg of the correction to end, using dashed lines for the upper boundary, 3905.10, and the lower boundary, 3795.17. More on this in the Elliott wave theory section below.

[Outdated principal analysis: S&P 500 E-mini futures at 9:35 a.m., 135-minute bars, with volume

What does Elliott wave theory say? The decline from July 22 is wave B{-13} within an upward correction, wave 4{-12}. The correction began on July 14 from 3723.75.

Wave B{-13} will be followed by an upward wave C{-13}, which most likely will move above the end of wave A{-13}, at 4016.25.

How far wave B{-13} is likely to decline depends upon what form the overall correction is taking. The two most common forms are the Zigzag and the Flat, which with three waves internally. The type of form among those two is defined by the number of waves one degree lower within the A wave. If wave A has five waves internally, then the correction is a Zigzag. If wave A has three waves, then the correction is a Flat.

Wave A{-13} is, quite frankly, a bit messy. I can count it either way, but five-wave count seems less messy to me than does a three-wave count. So I consider wave 4{-12} to be a Zigzag.

In Zigzags, the B wave tends to retrace between 38% and 79% of the preceding A wave. Wave A{-13} has a length of 292.50. Therefore, wave B{-13} will end between 111.15 to 231.08 points below the end of wave A{-13}, giving price targets in the range of 3905.10 to 3795.17. Futures prices move in 25-cent intervals, so there will be some rounding on the chart as wave B{-13} progresses. And there is no guarantee that this Zigzag will behave typically. The 38% to 79% retracement is a tendency, not a rule.

Wherever it ends, wave B{-13} will be followed by ascending wave C{-13}, which typically will move above the end point of the preceding A wave: 4016.25.

Most likely, wave C{-13} will be the end of wave 4{-12}, which will be followed by wave 5{-12}, a resumption of the 5{-11} downtrend that began on June 28. An exception would be if wave 4{-12} formed a compound structure, linking two or three corrective waves together and delaying the start of wave 5{-12}.

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.

  • S&P 500 Index:
  • 5{+3} Supercycle, 7/8/1932, 4.40 (up)
  • 5{+2} Cycle, 12/9/1974, 60.96 (up)
  • 5{+1} Primary, 3/6/2009, 666.79 (up)
  • 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)
  • S&P 500 Futures and index:
  • 1{-3} Minuette, 1/4/2022, 4808.25 (down) (futures), 4818.62 (down) (index)
  • S&P 500 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)
  • 5{-9} Bitsy, 5/30/2022, 4202.25 (down)
  • 3{-10} Subbitsy, 6/2/2022, 4189 (down)
  • 5{-11} Deci, 6/8/2022, 4164 (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, July 27, 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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