Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. I noted this morning that the S&P 500 was close to violating a rule of Elliott wave analysis under the principal scenario I’ve been working with for the past month or so. And around midday, it did just that, reaching a low of 3903.50. I discussed the rule in question in this morning’s post, below.

When an analysis falls afoul of a rule, it’s not the case that the market got it wrong. It’s that the analysis doesn’t match the reality of the chart. Down toward the end of every Trader’s Notebook I quote the 20th century semanticist Alfred Korzybski, who wrote: “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 that’s what happened today. The map no longer matched the territory, the empirical world had developed differently, and as is always the case when that happens, it’s time to redraw the map. I’ve retained the chart posted this morning, which shows the earlier analysis, now outdated by the new analysis.

A good basis for any analysis is the adage, “When in doubt, return to the beginning.” The beginning on stock charts in September 2022 is the high of January 4, 2022, which marked the end of a major rise that began on February 23, 2020, the low point of the early pandemic crash.

The decline after January 4 is a major correction within that rise. And within that corrective decline, the market movements are structured as a series of smaller downtrends and upward corrections, as we would expect, given the fractal nature of the market’s charts.

At this point, I’m going to switch to Elliott wave terminology, first posting a chart that shows the S&P 500 E-mini futures from the January 4 peak to the present, marked with the new analysis.

[S&P 500 E-mini futures at 3:30 p.m., 10-hour bars, with volume]

Under my new principal analysis, the downward correction that began on January 4 is wave 4{-1} within a larger expanding Diagonal Triangle, wave 5{0}, which began on December 27, 2018.

Early on in a trend, the degree of the wave being tracked is more or less a guess. I’ve chosen to treat the decline from January 4 to June 16 was wave 1{-6} within wave 4{-1}. The preceding rise, wave 3{-1}, took nearly two years to complete, so the {-6} degree for the first wave down doesn’t seem out of proportion. That may well change as wave 4{-1} continues to unfold.

Wave 1{-6} has been followed by an upward correction, wave 2{-6}, which ended on August 16. Alternatively, the August 16 high could be the end of wave A{-7}, the first leg of the correction.

Under the principal analysis, the decline that began on August 16 is downtrending wave 3{-6}, and internally it is in the middle leg, wave 3{-8} within the larger downtrend, wave 3{-6}.

This is all happening within a nested series of larger 1st waves, from wave 1{-5} up to wave 1{-2}, all of which began on January 4. And of course, above wave 1{-2} is wave 4{-1}, discussed above.

Here is a chart of the S&P 500 index showing the entire expanding Diagonal Triangle that began in December 2018.

[S&P 500 index, 3-day bars, with volume]

Beginning with tomorrow’s Trader’s Notebook, I’ll focus more closely on understanding the new analysis of the internals of the decline that began on August 16.

10 a.m. New York time

NTNX earnings play exit. I’ve exited my short bull put options spread on NTNX for 66.3% of maximum potential profit and have updated the trade analysis with full results.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures fell further overnight, reaching a low of 3921.

What does it mean? The downtrend within a downward correction that began on August 16 continues.

What are the alternatives? The preceding uptrend that began on July 14 ended on August 16 and the subsequent decline is a downtrend of higher degree than the principal analysis would have it.

The chart. I’ve added in the Fibonacci retracement ladder, in red, showing that the retracement has reached the 78.6% level.

[Outdated analysis: S&P 500 E-mini futures at 9:35 a.m., 2-hour bars, with volume]

What does Elliott wave theory say? Under the principal analysis, wave 4{-11} within uptrending wave 3{-10}, a downward retracement, has been underway since August 16. A 78.6% retracement is deep for a 4th wave. Typically, this 4th wave would have ended around the 38.2% to 50% retracements. But that’s a tendency, not a rule, and the analysis complies with the rules of Elliott wave analysis.

There are very few rules that apply to 4th waves. One is that it cannot move past the end of the preceding wave 1, which was at 3909.50 in this case — wave 1{-11} on July 18. The overnight low is only 11.5 points above that level, which means that wave 4{-11}, under the principal analysis, is perilously close to breaking an Elliott rule. If it does, then the alternative analysis normally would replace the present principal analysis.

Under the alternative analysis, the August 16 peak was the end of wave 5{-11} within wave 3{-10}. That is, the internal count of the rise from July 14 to August 16 would be revised. the subsequent decline is wave 4{-10}. However, wave 4{-10} under this scenario has moved beyond the end of wave 1{-10}, which peaked on June 28 at 3950, breaking a rule of Elliott wave analysis.

So the count will have to be revised in some other way. Figuring that out is my project for today.

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, September 1, 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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