Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The futures moved a few points higher after my 1:20 p.m. reanalysis, peaking at 4056.75 and then declining sharply, back into the 4020s. It’s possible, although not a certainty, that the peak marked the end of wave A{-10}, the first segment of an upward correction, wave 2{-9}, that began on January 22.

An alternative reading sees today’s peak as being the end of wave 2{-9}, the entire upward correction.

If wave 2{-9} is still underway, then we’ll see more upward movement, followed by a downward retracement, and then a final push to the upside.

If wave 2{-9} ended at today’s peak, then downtrending wave 3{-9} is underway and will carry the price below 3778.50, the starting point of wave 2{-9}, and most likely significantly below that level.

No change in the afternoon reanalysis. I’ve updated the upper chart.

1:20 p.m. New York time

This morning’s analysis? Invalidated. The S&P 500 futures, in an upward correction, has risen sharply during the session, reaching into the 4050s. The rapid movement breezed beyond the starting point of the downtrend that began on January 17 on 4035.25.

The upward correction is a 2nd wave within the five waves that make up a downtrend.

Under the rules Elliott wave analysis, if a rise marked as the 2nd wave on a chart moves above the start point of preceding 1st wave, then it’s not a 2nd wave and the analysis must be redone. And that’s the chore than I’m undertaking now.

All of this is happening within a larger downtrend, wave 3{-7}, which began on December 13 from 4180. If the price moves above 4180, then this analysis will also be invalidated.

From this point I’ll use Elliott wave terminology. See this morning’s Chart Note below for a brief explanation. First, the new chart. I’ll retain the old chart from this morning for comparison.

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

The upward correction under the new analysis is wave 2{-9}. That’s one degree higher than the label on this morning’s chart, which was 2{-10}.

Wave 2{-9} is correcting the preceding wave 1{-9], which began at the same point as the parent wave, 1{-8}, at 4180. Under the rules and patterns of Elliott wave analysis, wave 2{-9} can be expected to stay below 4180, the 1st wave’s starting point.

Internally, wave 2{-9} commonly can take the form of a Zigzag, with five subwaves in the first wave of the correction, waved A{-10}, or of a Flat, with three subewaves in the correction’s first subwave. The wave count within wave 2{-9} is a bit messy, but I think wave A{-10} is in its 5th wave, which would make the pattern a Zigzag, the form most office seen within 2nd waves.

A note on the analysis.

This is the first time I’ve had to change analyses twice in a single day. It’s a stern reminder of an important truth about Elliott wave analysis: It doesn’t predict the future. It places context around the present so that we can understand the possible futures.

9:35 a.m. New York time

Note: The following analysis has been invalidated by later events. The revised analysis can be read above, at the 1:20 p.m. update.

What’s happening now? The S&P 500 E-mini futures hit 4000 in overnight trading.

What does it mean? The rise invalidated Friday’s analysis and I’ve redone the chart. Under the revised principal analysis, the first wave within a downtrend that began on January 17 ended on January 19 at 3901.75. The price then rose in the first of two upward corrections within the trend. The correction is in its first wave.

See the Elliott wave theory section below for more on why Friday’s analysis is no longer valid.

What are the alternatives? The two alternative analyses listed on on Friday remain possibilities.

  • Alternative #1: The final wave of the upward correction continues, and the decline that began on January 17 is a downward movement within the correction.
  • Alternative #2: The correction is taking a compound form, containing two or three corrective patterns. The first corrective pattern ended on January 17, and a second pattern will begin once the present decline, linking the two patterns, is complete.

Chart note. R.N. Elliott, as he was doing the research in the 1930s that became Elliott wave analysis, called directional price movements “waves”. As he studied the charts, he realized that he wasn’t just seeing a simple meandering of prices, a walk, random or purposeful, but that the waves formed patterns within a complex structure. He came to understand that smaller waves were contained within larger ones, which in turn were contained within still larger ones. And the smaller waves contained still smaller ones. Such a nested structure today is called a fractal structure.

In labeling a chart, the analyst must show two items: The number of the wave, or its letter if its within a correction, and the placement of that wave within the fractal hierarchy, called its “degree”. Elliott chose to give names to degrees. I find that there’s greater clarity to be had if the degrees are numbered, using subscripts which, for greater visibility, I’ve placed within curly brackets.

The chart below covers the S&P 500 futures from January 13 to the present, a span of 10 days.

[INVALIDATED: S&P 500 E-mini futures at 9:35 a.m., 15-minute bars, with volume]

What does Elliott wave theory say? An attractive characteristic of Elliott wave analysis is that, although it has rules, there aren’t a lot of them. And when later events on the chart invalidate an analysis by breaking it a rule, it must be taken seriously.

The rule that invalidated Friday’s analysis is that a 4th wave correction cannot move beyond the end of the preceding wave. That is, it can’t enter the territory of the preceding 2nd wave.

The 1st wave in question, wave 1{-11}, ended on January 17 at 3996.25, and subsequent prices above that point are part of wave 2{-11}.

Wave 4{-11}, in overnight trading on January 23, move above that price. That violates a rule of Elliott wave analysis: If wave 4 moves beyond the end of wave 1, then it’s not a 4th wave.

In reanalyzing the chart, I saw that wave 3{-11} could well have ended prior to the January 19 low. On Friday I labeled that low point as the end of wave 3{-11}. I changed the analysis to show wave 3{-11} ending earlier, and labeled the low point as the end of wave 5{-11}.

That change brought to an end wave 1{-10}, the first wave of the downtrend that began on January 17. The rise that followed is wave 2{-10}, which isn’t bound by the rule violated by events after the earlier analysis.

Here are the waves under the principal analysis that I’m following today:

  • A downtrend that encompasses everything I’ve described so far is wave 3{-9}, which began on January 17 from 4035.25.
  • Wave 3{-9}, like all trending waves, will have five waves internally — three in the direction of the trend and two corrections.
  • Wave 2{-10}, the first upward correction, began on January 19 from 3901.75.
  • Internally, wave 2{-10} is in its first subwave, wave A{-11}.

For both alternatives, wave 3{-9} has not yet begun. The upward correction preceding it is still underway, wave 2{-9}, which began on December 19, 2022.

  • In Alternative #1, the decline is a downward wave within wave E{-10}, the final subwave within wave 2{-9}.
  • In Alternative #2, the decline is wave X{-10}, connecting the first corrective pattern within wave 2{-9} with a second corrective pattern that will follow.

For both the principal analysis and the alternatives.

  • Waves 3{-9} and 2{-9} are subwaves of downtrending wave 1{-8}, which began on December 13, 2022 from 4110.
  • Wave 1{-8} is a subwave of a series of nested downtrending waves reaching up seven levels to wave 4{-1}, which began on January 4, 2022 from 4808.25.

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, 12/13/2022, 4110 (down)
  • 1{-8} Subminuscule, 12/13/2022, 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 23, 2023

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
Creative Commons 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.

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