Trader’s Notebook

9:35 a.m. New York time

Market holiday. The U.S. markets won’t hold their regular sessions today, remaining closed in observance of the holiday honoring the American civil rights leader Martin Luther King Jr.

What’s happening now? The S&P 500 E-mini futures resumed trading Sunday evening, initially falling slightly but then rising, reaching 4028.25, a new high of within the upward correction that began on December 19, 2022. Afterward the price fell back into the 3990s and then began to rise again.

What does it mean? There are two possible alternatives of equal likelihood, a not uncommon occurrence during the end game of a market movement. As principle analysis I’ve chosen to consider the upward correction to still be underway, with the overnight high being a stopping point within the ongoing rise. One argument for giving greater weight to this interpretation is that the high remains below a Fibonacci retracement level, a point at which prices tend to reverse. The level retracing 61.8% of the preceding decline is 4036.18, nine points above the peak.

What are the alternatives? The alternative is to consider the upward correction to have ended at the overnight high and a downtrend to have begun. Reversal at Fibonacci levels is a tendency, not a firm rule.

Chart notes. Compared to last week’s charts, I’ve moved closer in to better assess the retracement levels. I show the Fibonacci retracement ladder in red, with the retracement levels marked with both the percentage and price. Traditionally, Fib ladders show some non-Fibonacci retracement levels: The 50% level is not a Fibonacci number, and neither is the 78.6% level. For this chart, to remove some of the clutter, I’ve chosen the purist approach and show only the true Fibonacci retracement levels: 23.6%, 38.2% and 61.8%.

R.N. Elliott, who developed Elliott wave analysis in the 1930s, called a directional market movement a “wave”. Elliott’s practice, which persists to this day, was to designate the subwaves of trending waves with numbers and the subwaves of corrective waves with letters.

Elliott’s great insight was that the waves on a chart form a fractal structure — waves within waves. Smaller waves are the building blocks of larger waves, and are in turn built out of smaller waves. And all of those waves, big and small, trace the same patterns according to identical rules.

The position of a wave within this complex fractal hierarchy is called its “degree”, and I designate the degree with a subscript, in curly brackets, after the wave number or letter. The smaller the subscript value, the smaller the degree, and vice versa. The waves on the present chart are of relatively small degree, and so the subscripts are negative numbers.

[S&P 500 E-mini futures at 9:35 a.m., 90-minute bars, with volume]

What does Elliott wave theory say? Under the principal analysis,

  • The upward correction that began on December 19, 2022 is wave 2{-9}
  • It is in its final subwave, E{-10}.
  • The end of wave E{-10} will also be the end of wave 2{-9} and the beginning of a downtrend, wave 3{-9}

Under the alternative analysis,

  • A downtrend, wave 3{-9}, began overnight on January 15, at the point where wave 2{-9} ended with a high of 4028.25.
  • Wave 3{-9} will have five subwaves — three trending and two upward corrections at the {-10} degree — and is presently in downtrending wave 1{-10}.

Under both analyses,

  • Wave 2{-9} and the following wave 3{-9} are subwaves of wave 1{-8}, a downtrend that began on December 1, 2022.
  • As a third wave, 3{-9} will typically be the powerful of the trending waves, carrying the price significantly lower.
  • Wave 1{-8} is a subwave within a series of downtrending waves of increasing size, from wave 3{-7}, which also began on December 1, up to wave 1{-2}, a downtrending that began on January 4, 2022.
  • Wave 1{-2} is a subwave of downtrending wave 4{-1}, a subwave that began on January 4, 2022 within an expanding Diagonal Triangle, wave 5{0}, which began on December 26, 2018.
  • Wave 4{-1} will be followed by wave 5{-1}, an uptrending wave that will rise significantly above the prior peak, within the parent wave 5{0}.
  • The end of wave 5{0} will also be the end of a series of larger 5th waves and will mark the beginning of a major downward movement that will take decades to resolve.

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)
  • S&P 500 Futures:
  • 4{-1} Minor, 1/4/2022 4808.25 (down) [4818.62 (down) (index)]
  • 1{-2} Minute, 1/4/2022 4808.25 (down)
  • 1{-3} Minuette, 1/4/2022, 4808.25 (down) (futures)
  • 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, January 16, 2023


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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