Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 futures has continued to trade in the 3900s throughout the session. 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 traded in a narrow range overnight, staying in the 3900s.

What does it mean? The sideways movement is a low-level correction within the first leg of a downtrend that began on December 1.

What are the alternatives? There are two, unchanged from the last couple of days. The lower the price goes, the less likely these alternatives become.

  • Alternative #1: The upward correction is still in the third and final wave of its corrective pattern and the price will soon reverse, rising above the December 1 high, 4110.
  • Alternative #2: The upward correction is forming a compound structure, containing two or three corrective patterns, and the present decline is a wave connecting the first corrective pattern with a second one.

Chart note. I’ve moved the chart closer in to better show the scale of the present downtrend, which began on December 1, to the larger downtrend, which began on August 16.

R.N. Elliott, the accountant who developed Elliott wave analysis, called a directional movement on the chart a “wave” and identified two types; An impulse wave, in the direction of a trend, and a corrective wave, moving counter to the trend. Impulse waves have five subwaves, and corrective waves usually have three subwaves.

An upward corrective wave ended on December 1 and a downward impulse wave began. I’ve marked the minimum price target of that downward impulse wave, 3285, with a dashed line. I expect the price to fall significantly below that level.

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

What does Elliott wave theory say? These are the important waves today.

  • The downtrend that began on December 1 is wave 3{-7}. Third waves tend to be powerful and are almost always the longest of the five subwaves of an impulse pattern.
  • Wave 1{-8}, the first subwave of wave 3{-7}, is now now underway.
  • Wave 3{-7} is a subwave of a larger third wave, 3{-6}, which began on August 16.

Elliott found that waves are built from smaller waves and are in turn the building blocks of larger waves. He called the relative size of a wave compared to others in the hierarchy its “degree”. On the chart, I label the waves with a number, for impulse waves, or a letter, for corrective waves, with a subscript in a curly bracket showing the wave’s degree relative to other waves.

As with all waves, wave 3{-7} will contain smaller impulse waves, trending downward, and small corrective waves, moving upward.

  • Wave 1{-8} will be followed by an upward correction, wave 2{-8}, and then by a powerful downtrend, wave 3{-8}, another upward correction, wave 4{-8}, and then a final push to the downside, wave 5{-8}. All are one degree smaller than wave 3{-7}.
  • Wave 3{-7} will be followed by an upward correction, wave 4{-7}, and then a final push to the downside, wave 5{-7}.
  • One degree higher, wave 3{-6} will follow an identical pattern but with larger swings: A wave 4{-6} upward correction followed by a wave 5{-6} downtrend.

Bull trades are possible even in downtrending markets because it’s possible to trade upward corrections. My favorite wave to trade within an upward correction is the C wave — the 3rd subwave of the correction. Important caveat: the larger the degree of the correction, the more it can support a longer-term position. Smaller degrees require a willingness to rapidly move in and out of a position.

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)
  • 1{-8} Subminuscule, 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 8, 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.