Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 has traded narrowly during the session, from the 4140s to the 4180s on the futures. The downward correction, wave 4{-11}, continues. 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 rose in overnight trading, reaching a high of 4187.75, nearly 80 points above the August 23 low,4110.75, and then reversed to the downside slightly.

What does it mean? This gets a bit complicated because of the fractal nature of the structure. It involves three degrees of size, from the smallest to the largest. The August 23 low was the end of the downward middle subwave within the larger downward first subwave within the downward correction that began on August 16.

What is the alternative? It’s possible to count the internal movement within the first subwave as being complete at the August 23 low. If that proves to be the case, then the second subwave within the larger correction is now underway.

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

What does Elliott wave theory say? A downward correction, wave 4{-11}, has been underway since August 16 and is taking the form of a Zigzag. A Zigzag correction has three internal waves: A, with five waves within it; B, with three internal waves, and C, with five waves internally.

Under the principal analysis, the first leg of the correction, wave A{-12}, is underway. The August 23 low marked the end of wave 3{-13}, the middle wave of wave A{-12}’s five-wave structure. Wave 4{-13} will be followed by wave 5{-13}, the final wave within A{-12}. It would be reasonable to expected wave 5{-13} to carry the price down to the 50% Fibonacci retracement level, around 4074. (The Fibonacci retracement ladder is shown in red on the chart.)

Under the alternative analysis, the August 23 low was the end of wave 5{-13} and also the end of its parent, wave A{-12}. Under this scenario, wave B{-12} is now underway.

The principal analysis seems more proportional to me. Under the alternative analysis, a quite shallow reversal on August 22 is the 4th wave within A{-12} and is followed by an extremely small 5th wave. There’s no rule against it in Elliott wave analysis, but I think the more proportional reading of the chart, as the principal analysis has it, is more likely to be the correct interpretation.

In any case, wave B{-12} will be followed by downward wave C{-12}, which may fall below the wave A{-12} low and which will complete its parent, wave 4{-11}.

This is all happening within uptrending wave 3{-10}, which began on July 14 from 3723.75. When wave 4{-11} is complete, wave 5{-11} will most likely carry wave 3{-10} above August 16 high, 4327.50, and it will remain below the January 4 high, 4808.75, the beginning of wave 4{-1}, a major downward movement that may not be complete until 2023 or 2024.

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 25, 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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