Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 has trended downward during the session, reaching a low so far of 4220.75 on the futures. Wave 4{-11}, a downward correction, continues. I’ve updated the chart.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures fell overnight, reaching into the 4240s, nearly 90 points below the August 16 peak.

What does it mean? At this point I’d say that the principal analysis, shown on the chart, and the alternative analysis are of nearly equal likelihood.

I’ve switched the principal and the alternative from yesterday. Under the new principal analysis, the decline from the August 16 peak, 4237.50, is a downward correction of the rise that began on July 18. The August 16 peak was the end of the final leg of that uptrend, which began on August 9. Under this scenario, the correction is larger and the uptrend will eventually resume, but not quickly.

What are the alternatives? The alternative — yesterday’s principal analysis — is to consider the August 16 peak to be a stopping point within the ongoing uptrend and the subsequent decline to be a correction within that uptrend. Under this scenario, the correction is smaller and the uptrend will quickly resume.

[S&P 500 E-mini futures at 3:30 p.m., 100-minute bars, with volume]

What does Elliott wave theory say? There is a powerful ambiguity to the downtrend, and it points to a major difficulty in applying Elliott wave theory to a current chart.

Under the principal interpretation, the uptrend that began August 9 is wave 5{-13} within wave 5{-12} within wave 3{-11}. Internally, wave 5{-13} is in its final wave, 5{-14}, which began on August 11 from 4202.75.

Under the alternative interpretation, wave 5{-13} ended at the August 9 peak, as did its larger encompassing waves, 5{-12} and 3{-11}.

This sets up different scenarios for the decline. Under the principal analysis, the decline is wave A{-13} within wave A{-12} within wave 4{-11}, a downward correction. Fourth waves usually take the form of a Flat — three waves, the first two with three internal waves and the third with five internal waves (3-3-5). Under the alternative analysis, the decline is wave 4{-15} (perhaps), a 4th wave correction within uptrending wave 5{-14} within wave 5{-13}.

The decline so far has shown five waves, but that only means that they are of a smaller degree within wave A{-12} — perhaps wave 1{-14} or 1{-15} within wave A{-13} within wave A{-12}. Or it could be that the correction is forming a Zigzag pattern, with internal waves 5-3-5. A Zigzag 4th wave is slightly less common than a Flat, but it happens often enough.

I chose to switch the analyses from yesterday because the final wave of the uptrend, 5{-14}, was becoming disproportionate to the preceding third wave. That is, it seemed longer than usual, although there is no rule forbidding an extended 5th wave.

Of course, a reversal and a rise above the August 16 peak, 4237.50, will mean that my new principal analysis doesn’t match the chart and the alternative analysis is the better choice.

These ambiguities are happening within wave 3{-10}, an uptrend that began on July 14 from 3723.75. When wave 4{-11} is complete, it will be followed by an uptrend, wave 5{-11}, that will carry wave 3{-10} to completion and, most likely, to new heights.

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, August 19, 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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