Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 futures have continued to fall during the session, reaching a low so far of 3855.25. 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 continued to fall in overnight trading. The price is now closer to the starting point of the upward correction that began on October 13, from 3502, than it is to the correction’s December 13 peak, 4180,

What does it mean? As has been the case for much of the week, the chart presents two possible interpretations of equal likelihood.

The one I’ve chosen as the principal analysis today sees the upward correction as having ended at the December 13.peak and a significant downtrend as having begun.

What are the alternatives? … and then, there’s…

Alternative #1, which sees the upward correction as still being underway, although it is nearing its end.

So, how to choose between them?

If the price moves below 3502, where the correction began, then it’s sort of a no-brainer — the correction ended on December 13 and the downtrend began on that date.

If the price moves below 3704.25, the beginning of the final segment within the upward correction, that’s a fairly good indication that the downtrend has begun.

Everything above that level? There’s still some uncertainty.

Alternative #2: This is the outlier among possible interpretations. Sometimes corrective waves contain more than one corrective structure. Rather than three waves and it’s done, the wave will trace out a connecting wave, and then go through a second three-wave corrective pattern. And sometimes it will add in a third corrective pattern. A corrective wave with two or three corrective patterns within it is called a compound correction. The present correction is the first within a larger downtrend that began on August 16, and compound corrections are more common within the second correction within a downtrend, so it’s unlikely. Nonetheless, it’s not unheard of and so counts as a genuine alternative scenario.

Chart note. The red structure superimposed on the chart shows levels where reversals or pauses commonly happen, based on how much of the prior trend a correction has retraced. The December 13 peak was slightly above the 78.6% retracement level, which weighs in favor of that peak being the end of the correction. The price fell back through the 61.8% retracement level without pausing, and then did it again with the 50% retracement level. For those reasons, I’m fairly confident that the downtrend has begun.

The retracement levels are based on Fibonacci numbers, a mathematical sequence. Click here for an explanation.

On the chart below, I’ve numbered waves within trending waves and used letters for subwaves within corrections. Waves are fractal in their structure. This means larger waves contain smaller waves, which in turn contain still smaller waves. And a larger waves is a subwave within a still larger wave. And all of those waves, big or small, adhere to the same set of patterns and follow the same rules.

Where a wave sits within the fractal structure of waves bigger and smaller is called its “degree”, meaning its relative size. I’ve used subscripts, in curly brackets, to show the relative degree of each wave on the chart.

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

What does Elliott wave theory say? Here are the waves that are important to today’s analysis.

Principal analysis:

  • The downtrend that began on December 13 is wave 3{-7}.
  • The current subwave within the downtrend is wave 1{-8}, the first of five waves. So, early days.

Alternative #1:

  • The upward correction, still underway, is wave 2{-7}.
  • The current subwave is wave C{-8}, the last of three subwaves.

Alternative #2:

  • The December 13 peak was the end of the first corrective pattern within an upward correction — waves A{-8}, B{-8} and C{-8} within wave 2[-7}.
  • The ensuing decline is wave X{-8}, which will connect the first corrective pattern with a second corrective pattern.

The principal analysis and the alternatives are happening within wave 3{-6}, a downtrend that began on August 16. That downtrend is a subwave of wave 1{-5}, a larger downtrend that began on January 4.

How far will the wave 3{-7} downtrend go? It’s anyone’s guess, really. Here’s what we know.

  • The downtrend is a 3rd wave, the middle wave, and is likely to be the most power of the five waves in the trend.
  • Wave 3{-7} will, at a minimum, move below the starting point of the correction, 3502.
  • The 3rd wave in a trend is never shorter than both the 1st wave that preceded it and the 5th wave that will follow.
  • The 1st wave — wave 1{-7} — was 825 points in length. Subtract that from the starting point of the wave 3{-7} downtrend, 4180, and we get 3355 as the likely minimum end point of wave 3{-7}. It’s likely to go much further.
  • However, as long as the future 5th is shorter than the present 3rd wave, then the structure is within the rules of Elliott wave analysis. So wave 3{-7} could be shorter than wave 1{-7}, and as long as the future wave 5{-7} is shorter still, then the analysis is valid.

How could this principal analysis be invalidated? If the price reverses and moves above the end point of wave 2{-7}, which is 4180, then the 2nd wave correction has not yet ended and the 3rd wave downtrend has not yet begun.

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 16, 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.