Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 futures reached a high of 4078 early in the session and then declined, falling so far into the 4030s. The price remains slightly above the 61.8% Fibonacci retracement level, 4029.30, which is often a major resistance point.

No change in this morning’s analysis. I’ve updated the chart.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures declined after trading resumed overnight, reaching a low so far of 4040, well below the January 27 high, 4109.25, but above the 61.8% Fibonacci retracement level, 4029.30.

What does it mean? The decline is a part of the first segment of an upward correction that began on December 22, which is still underway although nearing its end. Under this scenario, the price will quickly reverse and move higher. The further the price falls, the more likely it becomes that an alternative scenario better matches the chart.

What are the alternatives? The alternative scenarios consider the upward correction further advanced than does the principal analysis.

In Elliott wave analysis, each segment — a directional movement called a “wave” — has a characteristic called a “degree”, which places it within the complex fractal structure of waves containing smaller waves and being contained by larger waves, with all waves producing the same patterns and following the same rules.

A reading of how far advanced the correction is depends upon how we read the degree of each wave. And there is no reliable way to do that in advance. We only know the degrees for sure one a pattern is complete.

So consider the waves within the rise from December 22. In the principal analysis, I place those waves two degrees below the entire correction. In the alternatives, I move those waves one degree higher. Having done so, we have two alternatives.

Alternative #1: The correction is in its third and final segment, and the decline from January 27 is a subwave of that segment. The price will soon reverse and move higher. For the analysis to be correct, the price must remain below 4180, the starting point of the downtrending wave that preceded the correction.

Alternative #2: The January 27 high marks the end of the final segment of the correction, and of the correction itself. The decline that has followed is the first segment of a downtrend, which will carry the price below 3785.50, the starting point of the upward correction, and most likely significantly below that level.

Chart note. I’ve placed a Fibonacci retracement ladder on the chart, to better understand the upward correction’s retracement of the preceding downtrending wave. The 61.8% retracement level is a major decision point for prices, a place where they either reverse or breakthrough and continue onward. For this correction the 61.8% retracement is at 4029.30.

Either way, the movement brings clarity to the chart. A bounce back to the upside lends credence to the principal analysis and alternative #1. A breakthrough downward favors alternative #2.

I show the degree of each wave using a subscript, within curly brackets, showing the position of the wave in relation to a very large wave, the base, that began in December 2018 and that encompasses everything that has happened on the chart since that date. The upward correction has the subscript {-9}, meaning it is nine degrees below the base. The smaller the subscript number, the lower the degree.

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

What does Elliott wave theory say? The upward correction is wave 2{-9}, nine degrees below the base, wave 5{0}.

Under the principal analysis, wave 2{-9} is in its first subwave, A{-10}.

Under alternative #1, wave 2{-9} is in its third and final subwave, C{-10}.

Under alternative #2, wave 2{-9} ended on January 27 and downtrending wave 3{-9} began on that date. Wave 3{-9} is presently in its initial subwave, 1{-10}.

All of this is happening within downtrending wave 1{-8}, which began on December 13. Wave 1{-8} is a subwave within a series of nested downtrending waves of increasing size, running from wave 3{-7}, which also began on December 13, up to wave 4{-1}, which began on January 4, 2022.

Up an additional degree is the base, wave 5{0}, an expanding Diagonal Triangle that began on December 26, 2019. The present decline, wave 4{-1}, is the next to the last wave within the triangle. It will be followed by wave 5{-1}, which will rise above wave 4{-1}’s starting point, 4808.25 on the futures, and perhaps significantly above that level.

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 and index:
  • 4{-1} Minor, 1/4/2022, 4808.25 (down) (futures), 4818.62 (down) (index)
  • S&P 500 Futures:
  • 1{-2} Minute, 1/4/2022, 4808.25 (down)
  • 1{-3} Minuette, 1/4/2022, 4808.25 (down)
  • 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 30, 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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