Trader’s Notebook

3:30 p.m. New York time

The downtrend has begun. The S&P 500 futures confirmed that an upward correction that began on October 13 ended on December 1. It lasted 49 days and covered 608 points, from its starting point, 3502 to end end, 4110.

The downtrend is the middle wave of a larger downtrend that began on August 16, from 4327.50. All trends have five waves within them, and the middle wave — the third — is almost always the longest and most powerful. Internally, the middle wave is within its first wave of five, the first step of the decline.

In Elliott wave terminology:

  • The upward correction, wave 2{-7}, ended on December 1. It gave confirmation by moving below the price channel of the final wave within the correction, wave C{-8}.
  • The downtrend, wave 3{-7}, is the middle wave of the larger downtrend, wave 3{-6}, which began on August 16. Internally, it is in wave 1{-8}.

How low can this downtrend go?

  • It will almost certainly move below 3502, the end of the previous first wave in the correction, wave 1{-7}.
  • It is never shorter than both wave 1 and wave 5. Assuming that the future 5th wave will be shorter than the present 3rd wave, at a minimum wave 3{-7} will carry the price below3285, the starting points of wave 3{-7} minus 825, which is the length of wave 1{-7}.

And that’s just the bare minimum. I expect wave 3{-7} to move substantially below the 3200s.

And yet, alternatives. How could things go differently?

  • Sometimes, a price can move beyond the price channel boundary, and yet resume the trend. If that happened here, then the 2nd wave upward correction is still underway.
  • A corrective wave can form a compound structure, linking two or three corrective patterns together. It’s not common for that to happen on 2nd wave corrections, but it’s not unheard of. If wave 2{-7} is forming a compound correction, then December 1 was the beginning of wave X{-8}, connecting the corrective pattern just ended with a second corrective pattern.

Under both of those scenarios, the downtrend has not begun and still lies in our future.

And there’s more downtrend ahead. Wave 3{-6} is the a building block of a series of increasingly larger downtrending 1st waves, all the way up to wave 1{-2}, four degrees higher. Wave 1{-2} is, in turn, the first wave of downward wave 4{-1}, the next to the last wave within an expanding Diagonal Triangle, wave 5{0}, which began on December 26, 2018.

[S&P 500 index at 3:15 p.m., 3-day bars]

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures fell slightly after the trading resumed overnight, from the 4070s to the 4040s.

What does it mean? The shortness of the movement leaves unresolved whether the upward correction that began on October 13 is still underway, or whether it ended on December 1 at 4110.

  • I’ve labeled the chart to show the upward correction as still being underway. A failure to move below the lower boundary of the price channel and a reversal upward would strengthen the case for this principal scenario. I expect the price to move above the prior high in the correction, 4110.
  • The alternative is to label the December 1 high as the end of the upward correction. A decline below the lower boundary of the price channel on the chart, around 3996 at present, would strengthen the case for this alternative scenario.

What happens next? Whichever scenario proves to be correct, once the upward correction is complete, the next move will be a powerful downtrend, the second downtrending wave within a larger downtrending wave that began on August 16.

  • A possible price target for the downtrend, if it began on December 1, is in the 3270s. Price targets are iffy things. The price could fall short of the target, or whiz right past it.

Chart note. I’ve placed tools on the chart to aid to understanding the context of the price movements.

  • The first is a price channel, two dotted black boundary lines, tracking the course of the final segment of the upward correction. In a perfect world, the price would end at the upper boundary and then reverse in a downtrend if the correction is still underway. Or it would continue to fall, through the lower boundary, if the downtrend began on December 1.
  • The second is a set of price reversal points, levels that have been shown to be where price movements tend to end and reverse. The levels are a retracement percentage of the downtrend that preceded the upward correction. The levels are in red on the chart, with the price on the left and the percentage of retracement on the right.

[S&P 500 E-mini futures at 3:30 p.m., 2-hour bars, with volume]

What does Elliott wave theory say? R.N. Elliott’s theory of how markets move, developed in the 1930s, is based on a few simple ideas.

  • A movement in one direction or another in called a “wave”.
  • A trending wave has five waves within it.
  • A corrective wave almost always has three waves within it (unless it takes the form of a triangle).
  • Each wave is a building block within a larger wave, and in turn is built from smaller waves, all of them following the same patterns.

In labeling waves, I give the wave number (1 through 5 for trending waves and A through C for corrective waves), followed by a subscript in curly brackets showing the relative size, the degree, of the waves.

Under the present analysis, these are the waves that matter:

  • Wave 2{-7}, which began on October 13, is a rising corrective wave, the first within a larger downtrending wave, 3{-6}, which began on August 16.
  • If wave 2{-7} is still underway, it is in its last legs: Wave C{-8} is a rising wave, the final wave within the correction. The C wave in turn is in its last building block, rising wave 5{-9}.
  • If wave 2{-7} ended on December 1, then declining wave 3{-7} is underway, a powerful downtrend that is the middle wave within a larger powerful downtrend, wave 3{-6}, which began on August 16.

So where are we now? Wave 2{-7} or wave 3{-7}? There’s no way to tell until the price does something decisive.

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)
  • 3{-7} Minuscule, 12/1/2022, 4110 (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, December 5, 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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