3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 has risen during the session, reaching a high for the day so far of 3818.75 on the futures. That level is well below the starting point of the downtrend, 4180, on December 13, and is consistent with this morning’s analysis. The downtrend, wave 2{-7}, continues and is in its first subwave, 1{-8}. I’ve updated the chart.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures rose slightly in overnight trading, reaching the 3880s.

What does it mean? This is a small move that has no serious impact on the analysis. The downtrend that began on December 13 continues and is in its first leg.

What are the alternatives? The two alternatives that have been with us for a week are still possible interpretations of the chart.

Alternative #1: The final leg of the upward correction that began on October 13 is still underway. A decline below 3704.25, the beginning of that final leg, would invalidate this alternative.

Alternative #2: The upward correction is taking a compound form, with two or three corrective patterns within it. The December 13 high ended the first corrective pattern, and the decline that followed is a segment connecting the first, completed, corrective pattern with the future second corrective pattern.

Chart note. Stock prices form fractal structures when plotted on a chart. This form of analysis called each directional movement a “wave”. Larger waves contain smaller waves, which in turn contain still smaller waves, and each larger wave is a subwave of a still larger wave. And all of those waves, big and small, form the same sets of patterns and follow the same rules.

The relative position of a wave within the fractal structure is called its “degree”. On the chart I indicate the relative degree of each wave with a subscript, contained within curly brackets. The smaller the subscript number, the smaller the wave’s degree.

[S&P 500 E-mini futures at 3:30 p.m., 150-minute bars, with volume]

What does Elliott wave theory say? These are the waves I’m tracking for the principal analysis.

• The downtrend that began on December 13 is wave 3{-7}.
• It’s first leg is wave 1{-8}.

For both alternatives:

• The upward correction that began on October 13 is wave 2{-7}.

For Alternative #1:

• The final wave within wave 2{-7} is wave C{-8}, which is still underway.
• The decline that began on December 13 is a smaller correction with wave C{-8}.

For Alternative #2:

• Wave C{-8} ended on December 13, completing the first corrective pattern within a compound correction, wave 2{-7}.
• The decline that followed will connect wave C{-8} with the first wave of a second corrective pattern, wave A{-8}. The connecting wave is wave X{-8}.

The principal analysis at this point is very much about scale. Waves don’t come with signs saying “Hello! My degree is {-8}”. The best an analyst can do is to compare the duration and perhaps the size of the wave being considered with past waves of similar degree. The duration won’t be identical — there’s always a lot of variation — but it’ll be in the ballpark.

So what about the waves within wave 3{-7}, the downtrend that began on December 13? On the chart we can visibly see that three waves are complete and a fourth one is underway. Are they one degree smaller than wave 3{-7}, or something smaller still?

Framing it in wave terminology, is that rising rightmost wave on the chart wave 4{-9} (or smaller) within wave 1{-8}? Or is it wave 4{-8}?

To answer that question, I turn to wave 1{-7}, which ran from August 16 to October 13. It is the first wave within wave 3{-6}, which encompasses all of the waves described above.

Wave 1{-7} took 58 days to complete its course. Within it, the first subwave, 1{-8}, ran for 21 days.

Applying those figures to the present provides some useful guidelines.

If the present decline that began on December 13 is the first subwave within the larger downtrend, then a 21-day timespan would carry it until January 3. That makes it far more likely that the four waves we see on since December 13 are subwaves within wave 1{-8}. Indeed, the of those four waves lasted less than a day, so treating those four waves as being of degree {-8} would mean that wave 1{-8} the same day it began.

Applying the same analysis to wave 3{-7} gives some idea of how long the downtrend might last. As noted above, the wave 1{-7} that began on August 16 ran for 58 days.

Now, wave 3{-7} will most likely be the largest wave within the larger downtrend, wave 3{-6}. A 3rd wave is never the shortest wave in a trend. But that’s a question of how far the wave falls, not the time it takes to get the end.

If wave 3{-7} has the same duration as wave 1{-7}, then it will run until February 9, more or less. If it lasts twice as long — not an unusual ratio between 1st and 3rd waves — then it will last until around April 8.

Now, wave 3{-7} could last much longer, or it could end faster. There’s no way to know in advance what will happen. What is clear is that the present labeling of wave degrees, which says wave 1{-8} within wave 3{-7} is still underway, is a better fit with what has happened before. It’s more consistent with the durations of comparable waves within wave 3{-6}.

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 21, 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.

License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.