Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 continued to fall during the session, reaching the 3960s on the futures. For the moment I’m staying with this morning’s principal analysis: The upward correction continues.

If the price drops below the 50% Fibonacci retracement level — at 3914.75 — and continues to fall, then I’ll switch to the alternative analysis: The upward correction ended at 4050.75 on October 15 and a downtrend has begun.

I’ve updated the chart.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures gapped downward by 11 points, to 4020.25, when trading resumed Sunday evening. The price reached a low of 3392.25, moving below the 61.8% Fibonacci retracement level, before rising slightly.

What does it mean? The 61.8% retracement level — 4012.16 — is important, since corrections often end near there. The next higher Fibonacci retracement level is 78.6%, at 4150.84. The lack so far of a fall to the 50% retracement level suggests that the final leg of a two-week-old upward correction is still underway. The upward correction is the 2nd wave within a larger 3rd wave that began on August 16.

What is the alternative? The upward correction may have ended on November 15. The most recent high in the correction was 4050.75, on that date. That price is slightly above the 61.8% retracement. Under this scenario, the decline since the high point is the beginning of a significant downtrend. The internal count suggests that 4050.75 isn’t the end, but wave analysis always has ambiguities, and it’s possible — just barely — to see this alternative in the chart.

What happens next? A powerful downtrend, the 3rd wave within the larger 3rd wave, will follow the downward correction, most likely carrying the price into the 3400s and even below. The downtrend will be followed by another upward correction, a 4th wave, and then a further push to the downside, a 5th wave.

Batten down the hatches! In my personal trading I’m taking this downtrend quite seriously. I’ve put stop/losses on my stock holdings, and will lean to the bear side in my options trades. I’m putting the cash freed by my holdings into 13-week Treasury bills as a temporary home. The bills were yielding 4.41% annually as of Friday. My strategy is to stay out during the 3rd, 4th and 5th waves, and then re-enter one the parent 3rd wave is complete and a large upward correction has begun.

Chart notes. I’ve returned the Fibonacci ladder to the chart, in red, to better see the retracement levels that are important to analyzing this chart.

[S&P 500 E-mini futures at 3:30 p.m., 4-hour bars, with volume]

What does Elliott wave theory say? The upward correction that began on October 13 is wave 2{-7}. Within it, rising wave C{-8} is underway. A subwave of C{-8}, falling wave D{-9}, is underway. It will be followed by rising wave E{-8}, which will complete the larger wave C{-8} and most likely the correction as a whole. If wave 2{-7} forms a compound structure, then the end wave C{-8} will be followed by a connector, wave X{-8}, and then a second corrective pattern. Compound corrections can have up to three corrective patterns within them. Compounding is uncommon in 2nd waves.

Under the principal analysis, the correction is incomplete. Under the alternative analysis, wave 2{-7} ended on November 15.

When wave 2{-7} is completed, it will be followed by wave 3{-7}, a powerful downtrend. The principal analysis says that wave 3{-8} lies ahead. The alternative analysis says that it has already begun. An upward correction, wave 4{-7}, will follow, and then a final downtrend, wave 5{-7}, that is likely to push the price to still lower levels.

The end of wave 5{-7} will also be the end of the parent, downtrending wave 3{-6}, which encompasses all of the waves described above. An upward correction, wave 4{-6}, will follow, and then another large push to the downside, wave 5{-6}. Wave 3{-6} is already three months old, so I expect wave 5{-6} to carry us well into 2023, and 2024 is not an impossibility.

My personal trading strategy is to stay out of during the rest of wave 3{-6}, wave 4{-6} and wave 5{-6}, and to re-enter during the upward correction that will follow, wave 2{-5}.

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)
  • C{-8} Subminuscule, 11/3/2022, 3704.25 (up)

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, November 28, 2022

Disclaimer

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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Based on a work at www.timbovee.com.