Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 has continued to fall, reaching into the 4070s on the futures as the closing bell. approached. All that has transpired is part of a larger downward correction of the rise from July 18 to August 16. Today’s decline carried the correction from the 23.6% Fibonacci retracement level to the 50% retracement level. (The Fibonacci ladder is shown on the chart in red.)

I’ve updated the upper chart.

1:30 p.m. New York time

Falling Down Jackson Hole. The S&P 500 fell sharply from an hour before Lewis Powell, the Federal Reserve Chair, began his remarks at the Fed’s symposium in Jackson’s Hole, Wyoming. The price on the futures peaked at 4217.25 at 9 a.m., and reached its low of the day — so far — at 4099.25, about three hours later. A 118-point plunge — not bad for an 11-minute speech.

The decline introduced huge ambiguity onto the chart. In Elliott wave terminology: The decline either (scenario 1) ended rising wave A{-14} within wave 4{-13}, an upward correction that began on August 23, or (scenario 2) it ended that correction entirely.

Scenario 1 will require that wave 4{-13} take the form of a Flat within wave A{-14}. The reason is that the Jackson’s Hole decline, wave B{-14}, carried the price below the start of wave 4{-13}, and that breaks a firm rule of behavior for a Zigzag corrective pattern. A Flat corrective pattern can move below that level within the rules of Elliott wave analysis.

The A wave within a Zigzag has five waves internally. Within a Flat, the A wave has three waves internally. I count five waves within wave A{-14}, which this morning was how I labeled the rise from August 23 to August 26 (today). That’s scenario 1. However, scenario 2 — today’s high marks the end of wave 4{-13} in its entirely — also requires three waves for the August 23 to August 26 rise.

Basically, we’re left with two bad choices with no way to distinguish between them.

If I squint my eyes and suspend my disbelief, I can sort of see three waves within that rise, if I treat the first very small bump up and retreat as being a wave of a lower degree. And so that’s what I’ll do, and in doing so, it makes more sense to see today’s high as the end of the A wave, with the parent 4th wave correction still underway: Scenario 1.

That’s the minimum necessary change to resolve the contradictions, and that’s how I’ve updated the upper chart. Wave B{-14} with wave 4{-13} is now underway.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures traded narrowly overnight, fluctuating from the 4180s to the 4210s. Federal Reserve Chair Jerome Powell is scheduled to speak at the agency’s Jackson Hole Wyoming symposium at 10 a.m., half an hour after the opening bell, a venue closely watched for clues to the Federal Open Market Committee’s intentions regarding interest rates.

What does it mean? The downward correction that began on August 16 is still underway and is in its first of three legs. Internally, the first leg is in its 4th segment, a rising correction that will be followed by a 5th, declining wave. The first leg will be followed by the rising 2nd leg.

What is the alternative? At this point I see little ambiguity in the chart, although I’m certain that ambiguities will develop, as they as always do.

The charts. The upper chart shows the S&P 500 futures dating back to July. the lower chart shows the S&P 500 index and the expanding Diagonal Triangle, which has been underway since December 2018 and which is now in its 4th subwave.

[S&P 500 E-mini futures at 3:30 p.m., 115-minute bars, with volume]

What does Elliott wave theory say? The downward correction, wave 4{-11}, is in its first wave, falling wave A{-12}, which in turn is in its next to the last segment, rising wave 4{-13}. When wave 4{-13} is complete, it will be followed by falling wave 5{-13}, which will complete wave A{-12}. Rising wave B {-12} will follow, retracing a portion of the wave A{-12} decline, and then declining wave C{-12} will follow, completing the corrective pattern.

This is all happening within wave 3{-10}, an uptrending wave that began on July 14. Looking at the longer term, the S&P 500 has been in a large downward movement, wave 4{-1}, since January 4. It is the next to the last wave of an expanding Diagonal Triangle, wave 5{0}, which began on December 26, 2018.

To give some idea of scale of the triangle, rising wave 1{-1} took 14 months to reach completion, wave 2{-1} — the early pandemic crash — was over in four days, and rising wave 3{-1} stretched out for nearly two years. Most likely, wave 4{-1} will carry us to 2023 and perhaps later by a year. Or two.

[S&P 500 index at 9:30 a.m., 3-day bars]

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 26, 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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