Trader’s Notebook

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures peaked at 4104.75 in overnight trading and then paused.

What does it mean? The upward correction that began on October 13 has entered its end game.

How high can it go? There are guidelines but no certain rules. The correction, a 2nd wave within a larger downtrend, is in its third and final leg. In Elliott wave parlance, a C wave. Within an upward correction of this type, C waves…

  • …often have about the same length as the first wave of the correction, an A wave. The A wave was 422.5 long. The C wave began at 3704.25. Add 422.50, and that gives a target of 4126.50, a bit more than 25 points above the overnight high.
  • …almost always move beyond the end of wave A. Done that. Wave A ended at 3924.25.
  • …sometimes end at certain retracement levels. The next such level up is the 78.6% retracement, at 4151.
  • …and tend to reach the upper price channel, presently around 4210 and rising.

There is a limit. Never, ever does a 2nd wave correction move beyond the start of the preceding 1st wave. That sets of a firm upper limit on the correction of 4327.50.

Any alternatives? There is one. A correction usually goes through three smaller waves — in an upward correction, up-down-up. But sometimes a correction will form a compound structure, linking together two or three corrective patterns. Compound corrections are rare in second waves but not entirely unheard of. Could happen.

Coming soon to a stock chart near you: Downtrend. Whether simple or compound, the correction will be followed by a powerful downtrend, the third wave within a downtrend that began on August 16.

  • It will certainly move below the starting point of the 2nd wave that came before, 3502. This is a firm rule.
  • Most likely, it will be longer than the 1st wave that came before. That 1st wave was 825.50 in length. If the overnight peak were to be the end of the correction, then a potential target would be 3278.75 or lower. The higher the 2nd wave goes, the higher that potential target. Methodology: Pick your peak for the correction, and subtract 825.50. That’s your new minimum target.

The only scenario that would allow the 3rd wave to be shorter than the 1st would be if the 5th wave were even shorter. The firm rule is that a 3rd wave can’t be shorter than both the 1st and 5th waves.

Chart note. R.N. Elliott, a depresssion-era accountant, worked his way through 75 years of stock data while developing the theory that bears his name and that is the basis of this analysis.

Elliott called each market movement in a single direction a “wave”. He found that there are two sorts of waves.

  • An impulse wave travels in the direction of the trend and has five waves within it.
  • A corrective wave travels in a direction contrary to the trend and has three waves within it.
  • There are less common patterns that sometimes show up, but impulse and corrective are the main ones.

Those internal waves were another important insight Elliott found in his work: Each wave is built from smaller waves, each of which is built from even smaller waves, all following the same patterns: Impulse and corrective. And each larger wave, in turn, is a building block within a still larger wave, all with the same patterns.

This is sometimes called a fractal pattern.

Using Elliott’s findings, once we know where we are within the subwaves of a larger wave, we can know what lies ahead. It’s like reaching a curve in the road. Without a map, we have no idea what lies ahead. With a map, we can see where we’ll be in the future, if we keep driving. Elliott’s studies provide the map.

On the chart, I’ve labeled the impulse waves with numbers and the corrective waves with letters. I’ve used subscripts, within curly brackets, to indicate the relative size of each wave — it’s position within the hierarchy of waves.

[S&P 500 E-mini futures at 9:35 a.m., 4-hour bars, with volume]

What waves matter? Today chart shows the S&P 500 futures within the downtrending wave that began on August 16. That wave is wave 3{-6}, the third wave within a larger wave, 1{-5}, which began on January 4.

At present, the waves to watch are:

  • The upward correction that is nearing its end, rising wave 2{-7}.
  • The third and probably final leg of the correction, rising wave C{-8}
  • The final wave within the C wave, wave 5{-9}.

When wave 5{-9} reaches its end, it will also be the end of waves C{-8} and 2{-7}.

The powerful downtrending wave 3{-7} will come next, as described above.

A change in labeling. I labeled the subwaves of wave C{-8} with letters. This was an error, because wave C{-8} is an impulse wave internally, built from five subwaves.

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, December 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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