Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 has worked its way higher during the session, reaching into the 4150s on the futures. The rise isn’t enough to draw any conclusions about whether the first leg of the downward correction that began on August 16 is complete. That’s wave A{-12} within wave 4{-11}. So, no change in the analysis. I’ve updated the chart.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continued to trade in a narrow range overnight, falling to 4110.25 and then reversed, reaching back into the 4140s,

What does it mean? The downward correction that began on August 16 continues and is in its first of what will likely be three legs. When complete, the first leg will be followed by a rise that will remain below the August 16 peak, 4327.50, and then will fall again. If the correction forms the common three-leg pattern, then that fall will be the end of the correction and a rise that will probably reach above the August 16 peak.

What is the alternative? Each lower low could be the end of that first leg decline. The higher any reversal travels, the more likely it is that the alternative analysis best matches the chart.

[S&P 500 E-mini futures at 3:30 p.m., 110-minute bars, with volume]

What does Elliott wave theory say? Wave 4{-11}, a downward correction, began on August 14 from 4327.50. Internally, under the principal analysis, it is in the late stages of wave A{-12}, the first wave of the correction. Fourth waves tend to take the three-wave Flat pattern, with three waves within wave A, three within B and five within C (3-3-5).

The price has spent two trading sessions trading narrowly around the 38.2% Fibonacci retracement level (the Fibonacci ladder is shown on the chart in red). The most common end points for 4th wave are retracement levels 38.2%, 50% and 61.8%. Typically, the end point will be reached within the third subwave of the correction, wave C{-12} in this case.

Fourth waves tend to end within the range of the 4th subwave of the preceding 3rd-wave rise. Wave 4{-12} within wave 3{-11} ran from 4147.25 to 4080.50, so wave A{-12} is already within that range.

Wave 4{-11} will be followed by uptrending wave 5{-11}, which likely will carry the wave above 4327.50, the starting point of wave 4{-11}. Fifth waves sometimes fall short of that level, in which case it’s called a “truncated 5th”. Other times 5th waves add subwaves and rise higher, sometimes to extraordinary heights, in which case it’s called an “extended 5th”.

In any case, wave 5{-11} will remain below the January 4 high, 4808.25, which was the beginning of a major downward wave of much higher degree, wave 4{-1}.

Bottom line: We have some upside ahead but the future beyond that is a major downer, with the usual smaller ups and downs along the way.

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 24, 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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