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 decline during the session, reaching 3908 in a fall that began from 4180. The lower the price falls, the more likely it is that the upward correction that began on October 13 ended on December 13. For now, I’ll continue to mark the chart as though the correction, wave 2{-7}, is still underway. I think it’s just as likely that the correction has ended and a significant downtrend, wave 3{-7}, has begun. I’ve updated the chart.

10:35 a.m. New York time

DRI earnings play entry. I’ve entered a short bull put spread on DRI, using options that trade for the last time on January 20, and have posted an analysis of the trade.

9:35 a.m. New York time

What’s happening now? An overnight decline on the S&P 500 futures, into the 3960s. Is the upward correction still underway, or has a significant downtrend begun? Honestly, it’s a coin toss. Are stocks even worth the effort anymore?

What does it mean? For my principal analysis, I’ve continued with the view that the upward correction that began on October 13 is underway and is in its last leg. However, the sharp decline that began on December 13 adds credence to the first alternative analysis…

What are the alternatives?

Alternative #1: …, which is that the upward correction ended at the December 13 peak and a significant downward correction has begun, one that will carry the price into the 3200s at a minimum and most likely far below that level. At this point, the choice between the principal analysis and the first alternative is a coin toss.

Alternative #2: This far less likely scenario sees the December 13 high as the end of the first corrective pattern within a compound correction that will contain two or three such patterns. The decline of the last two days is a connecting wave between the first and second pattern. The present upward correction is the first correction within a larger downtrend that began on August 16. Compound corrections happen most often in the second correction within a trend.

Chart note. Market corrections tend to pause or reverse at certain points that are known as Fibonacci retracement levels, named after an Italian mathematician on the 12th and 13th centuries, Lionardo Fibonacci. Each number in the Fibonacci sequence, upon which the retracement levels are based, is the sum of the two numbers that come before it in the sequence. The Fibonacci ladder, shown on the chart in red, converts the Fibonacci numbers to the upward movement’s percentage of correction of the prior decline.

On this chart, the December 13 high comes just above the 78.6% retracement level, the last Fibonacci stop before a 100% retracement. The decline that ensued has brought the price below the 61.8% retracement level.

The developer of Elliott wave analysis, R.N. Elliott, used the word “wave” to describe a directional movement of a stock or index. He saw market charts as containing waves within waves, all following the same patterns whatever their relative size, which he called the wave’s degree.

On the chart I number waves within a trend and use letters to label waves within a correction. I show the degree of each wave as a subscript within curly brackets.

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

What does Elliott wave theory say? Under the principal analysis, wave 2{-7}, an upward correction, is still underway and internally is in its final leg, wave 3[-8}.

Under Alternative #1, wave 2{-7} ended on December 13 and wave 3{-7}, a powerful downtrend, has begun. The downtrend internally is in wave 1{-8}.

Under Alternative #2, wave 2{-7} is forming a compound correction, and the decline that began on December 13 is wave X{-8}, connecting the first corrective pattern that ended with wave C{-8} and a future corrective pattern that will began with wave A{-8}.

All of this is happening within wave 3{-6}, a downtrend that began on August 16. That downtrend is contained within a series of increasingly larger downtrends, up to wave 4{-1}, which began on January 4, giving the markets a distinctively bearish direction.

“Bearish???” Are stocks even worth the effort? It depends upon a trader’s risk aversion and time horizon. As a 76-year-old retiree trading for myself, I’m fairly risk averse and have a shorter time horizon. Younger trader’s can assume more risk within a decades-long time horizon.

Which brings me to yesterday’s Federal Open Market Committee announcement. The FOMC slowed the speed of its interest rate increases, from 75 basis points each meeting to 50 basis points. But the most interesting part of the info they released was committee members’ expectations for interest rates over the next few years.

The Fed Funds Rate, set by the committee, at present is 4.375%. A majority of committee expects the rate in 2023 to be 5.125%, and a plurality see it at 4.125% in 2024.

As a trader who routinely has both wins and losses, a risk-free return of 4%-plus in a declining market is something akin to trading heaven. Treasury bills tend to pay interest close to the Fed Funds Rate, and I’m in the process of transferring the bulk of my trading funds over the 3-month Treasury bills. As the rate declines over the next few years, as it inevitably will, I’ll make decisions about moving funds back into the market, based also on my Elliott wave analysis.

For the Fed Funds Rate projections, see Table 2 on the FOMC’s Projection Materials page.

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 15, 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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