Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 futures quickly rose to a new high, 4157.75, early in the session and just as quickly fell back into the 4120s. As was the case with the March 31 high, the peak could mark the end of the middle wave, C{-10}, within the final wave, C{-9}, of the upward correction that began on March 13, or not. We’re fishing for a top, and when we’re fishing, we never know if we’ve caught anything until after the fish bites. I’ve updated the chart.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures kept to a narrow range after trading resumed overnight, remaining below the March 31 peak of 4142.50 and reaching into the 4120s.

What does it mean? There are three levels of nested waves in play — three “degrees”, in Elliott wave terminology. The largest is the ongoing upward correction that began on March 13. Next down is the final wave within the correction, which began on March 24. And down one more is the 3rd of five waves, which may have ended at the March 31 peak, or may not have. We’ll know when we see what happens next.

When the smallest of those three waves is complete, it will be followed by a downward movement and then by a rise above the March 31 high. That rise will be the final wave within the final wave of the upward correction. When that smallest final wave is complete, the correction will be over and a powerful downtrend will begin, carrying the price below 3839.25 — the starting point of the upward correction, and most likely significantly below that level.

What are the alternatives? The ambiguity lies in whether the end of the final wave of the correction will actually be the final wave. Most corrections have three waves internally. But not always. Some corrections form a compound structure, linking two or three corrective patterns together. The present correction is the 2nd of five waves in a downtrend. Compound corrections are far more common in 4th waves. Nonetheless, 2nd-wave compound corrections aren’t unheard of.

[S&P 500 E-mini futures at 3:30 p.m., 110-minute bars, with volume]

What does Elliott wave theory say? I’ll begin with the Elliott wave terminology for the three nested waves described above in the “What does it mean?” section, from larger to smaller,

Principal analysis:

  • The upward correction that began on March 13 is wave 2{-8}.
  • Down one degree, wave C{-9} is the final wave within that correction.
  • Within that final wave, wave C{-10} is underway, It will be followed by a decline, wave D{-10}, and then by a wave E{-10}, which will carry the price above the March 31 high, 4142.50.

Wave 2{-8} will be followed by a downtrend, wave 3{-8}, that will carry the price below the correction’s starting point, 3839.25, and most likely significantly below that level.

Alternative analysis:

  • Wave 2{-8}, the upward correction, will form a compound structure, linking together two or three corrective patterns.
  • Under that alternative, if it should occur, the present rising wave C{-9} will be followed by a declining connector wave, X{-9}, and then the first wave of a second corrective pattern.
  • The correction is a 2nd wave, and compounding is seen less often in 2nds. However, they do happen on occasion.

Bigger structures:

  • This is all happening within downtrending wave 3{-7}, which began on February 2.
  • Wave 3{-7} is a subwave of downtrending wave 3{-6}, which began on August 16, 2022.
  • Wave 3{-6} is encompassed by a series of larger declining waves, the smaller within the larger, stretching up five degrees to wave 4{-1}, which began on January 4, 2022.
  • Wave 4{-1} is the next-to-the-last wave within a large expanding Diagonal Triangle, wave 5{0}, that began on December 26, 2018
  • When wave 4{-1} is complete, wave 5{-1} will begin and will carry the wave above the January 4 high, 4808.25, and back to the upper boundary of the triangle, which gets higher continually and is in the 6090s.

Reading the chart. Elliott wave analysis views the chart as a complex structure of smaller waves nested within larger waves, which in turn are nested within still larger waves. My labeling system assigns numbers to the subwaves of trending waves, and letters to the subwaves of corrections. Each number or letter is followed by a subscript, in curly brackets, showing the waves position within the complex structure, called its “degree” in Elliott wave parlance. The smaller the number, the lower the degree. On this chart we’re dealing with relatively small waves, so the degree numbers are negative.

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, 2/2/2023, 4208.50 (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, April 3, 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.

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Based on a work at www.timbovee.com.