Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 reversed to upside during the session, moving above the October 26 high of 3897.50 on the futures to a new peak, 3913.75, precisely retracing half of the decline from August 16.

The reversal means that this morning principal analysis no longer matches the chart. The alternative analysis has been promoted to principal status.

Under the new principal analysis, the first subwave within the upward correction that began on October 13 is still underway and internally is in its final segment. In Elliott wave terminology: Wave A{-8} within the upward correction, wave 2{-7}, is still underway and internally is in wave E{-9}, the final wave of wave A{-8}.

The new alternative analyses concern where the chart stands within wave A{-8}:

Alternative #1: The sharp rise during today’s session is the middle wave, C{-9}, within wave A{-8}.

Alternative #2: As has been the case for days, any new peak in the rise since October 13 can be seen as the end of wave A{-8}, and we’ll know whether that was the end only when we’ve seen what happens afterward. It’s a truism: 20-20 hindsight is an analysts’s best friend.

9:55 a.m. New York time

XOM earnings play exit. I’ve exited my short bull put options spread on XOM for 21.1% 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 traded sideways overnight. The price remained above a low of 3757.50 set by a sharp decline in the last half hour of yesterday’s session, and below the high of 3870.75 set early in that session.

What does it mean? The decline was sufficient to persuade me that the downward middle wave of the upward correction has begun from the October 26 peak, 3897.50, with a price target ranging from the 3740s to the 3580s.

What are the alternatives? The decline from the October 26 peak is a correction within the first wave of the upward correction. The more the price falls, the less likely this scenario becomes.

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

What does Elliott wave theory say? Declining wave B{-8} is now underway, a subwave of an upward correction, wave 2{-7}, that began on October 13 from 3502. The first wave of the corrective pattern, wave A{-8}, ended on October 26 at 3897.50.

The B wave within a 2nd wave tends to retrace between 38% and 79% of the preceding A wave. Wave A{-8} covered a distance of 395.50 points, giving a price target of 3747 for the shortest correction, and 3585 for the longest. Or, of course, somewhere in between. Those targets result from a tendency, not a strict rule, according to the tenants of Elliott wave analysis.

Wave 2{-7} has taken the form of a Zigzag, and that means there is a strict rule that wave B{-8} cannot move below the starting point of wave A{-8}. That rule sets 3502 as an absolute limit on how far B{-8} can decline. Caveat: My analysis is of the S&P 500 futures, whose price moves in 25-cent increments. In the past I’ve seen futures prices go slightly beyond the boundary set by a strict rule. I think it’s a matter of rounding error caused by the 25-cent increment in pricing.

A Zigzag has five subwaves within the A wave, and that wave is complete. There will be three subwaves within the B wave, now underway. And after wave B is complete, a rising wave C{-8}, with five subwaves, will carry the price back up, most likely higher than the peak of wave A, 3897.50.

Wave C{-8} will complete wave 2{-7}, unless the 2nd wave takes a compound form that links together two or three corrective patterns. A 2nd wave is less likely form a compound structure than is a 4th wave, which is the other corrective wave in a trend.

Wave 2{-7} will be followed by an energetic decline to the downside, wave 3{-7}, which will carry the price below 3502, the starting point of wave 2{-7}, and most likely significantly below that level.

This is all happening within downward wave 3{-6}, which began on August 16 from 4327.50. It is contained within a series of nested downtrending 1st waves up to wave 1{-2}, which is a subwave of wave 4{-1}, the next to the last wave within a large expanding Diagonal Triangle, wave 5{0}, which began on December 26, 2018 from 2346.58 on the index.

We Are Here.

These are the waves currently in progress under my principal analysis. Each line on the list shows the wave number, with the subscript in curly brackets, the traditional degree name, the starting date, the starting price of the S&P 500 E-mini futures, and the direction of the wave.

  • S&P 500 Index:
  • 5{+3} Supercycle, 7/8/1932, 4.40 (up)
  • 5{+2} Cycle, 12/9/1974, 60.96 (up)
  • 5{+1} Primary, 3/6/2009, 666.79 (up)
  • 5{0} Intermediate, 12/26/2018, 2346.58 (up)
  • 4{-1} Minor, 1/4/2022 4818.62 (down)
  • 1{-2} Minute, 1/4/2022 4818.62 (down)
  • S&P 500 Futures and index:
  • 1{-3} Minuette, 1/4/2022, 4808.25 (down) (futures), 4818.62 (down) (index)
  • S&P 500 Futures:
  • 1{-4} Subminuette, 1/4/2022, 4808.25 (down)
  • 1{-5} Micro, 1/4/2022, 4808.25 (down)
  • 3{-6} Submicro, 8/16/2022, 4327.50 (down)
  • 2{-7} Minuscule, 10/13/2022, 3502 (up)
  • B{-8} Subminuscule, 10/16/2022, 3897.50 (down)

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, October 28, 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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