Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 moved higher this morning, reaching 4010.75 on the futures. 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 reached a high of 3996 in overnight trading and then retreated downward into the 3940s.

What does it mean? The overnight rise was the middle leg of the middle segment of the final wave in a corrective pattern that began on September 1. The decline that followed is the next-to-the-last segment of that middle wave. When the pullback is complete, the rise will resume, with a target range of 3999.25 to 4074.50. The end of the final wave is likely to be the end of the correction, which will be followed by a downtrend that will take the price down into the 3800s and perhaps lower.

What are the alternatives? There are two.

Alternative #1: Some corrections form a compound pattern, containing two or three corrective patterns. If that should happen in the present correction, then the first corrective pattern will be followed by a connector wave, and then by a second corrective pattern. The first corrective pattern may have ended at the overnight high.

Alternative #2: The correction ended at the overnight high..

[S&P 500 E-mini futures at 3:30 p.m., 45-minute bars, with volume]

What does Elliott wave theory say? The upward correction that began on September 1 is wave 4{-10}. It is presently in the final wave of the corrective pattern, wave C{-11}. Internally, the C wave completed its middle wave, 3{-12}, and is now in its next-to-the-last segment, wave 4{-12}. Wave 5{-12} will complete the corrective pattern.

The corrective pattern has taken the form of a Flat, and in a Flat, the C wave is usually between 1 and 1.65 times the length of the preceding A wave, which is 115.75 in length. Wave C{-11} began from 3883.50, giving it a price target ranging from 3999.25 to 4074.50.

If wave 4{-10} is a simple correction, then wave C{-11} will end the 4th wave and will be followed by wave 5{-10}, a downtrend that will most probably carry the price into the 3800s or lowers. Probably. Fifth waves sometime come up sort, called “truncation” in Elliott wave terminology. Sometimes the 5th wave will add to the normal five internal waves in an expansion, ending up with nine internal waves that carry the price further than expected.

Alternative #1: If wave 4{-10} is a compound correction, then wave C{-11} will be followed by downward wave X{-11}, a connector wave, and then by a second corrective pattern, which may differ from the first. Altogether a compound correction can have up to three corrective patterns. It’s possible that the first corrective pattern ended at the overnight high, 3996, and the subsequent decline is wave X{-11}.

Alternative #2: Wave 4{-10} ended overnight at 3996 and the subsequent decline is wave 5{-10}.

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 8, 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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