Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 futures headed south during the session, dropping into the 4110s, well below the overnight high, 4171.25. The sharp decline reduces for the present the potential violation of the rules of Elliott wave analysis, discussed in this morning’s “What does it mean?” section.

I’ve revised this morning principal analysis as follows.

  • The overnight peak marks the end of the middle subwave, C{-10}, within the final wave, C{-9}, of the upward correction that began on March 13, wave 2{-8}.
  • Within wave C{-9}, the 4th subwaves of five, wave D{-10}, is now underway.
  • Wave D{-10}, which is declining, will be followed by rising wave E{-10}, which will complete the upward correction, unless it forms a compound structure, as discussed this morning in the “What are the alternatives section?”.
  • Wave E{-10} cannot carry the upward correction above the beginning of preceding 1st wave, 4208.50. If it does exceed that level, then the chart will be reanalyzed.

I’ve retained this morning’s chart and am posting a new one showing this afternoon’s changes in the principal analysis.

[S&P 500 E-mini futures at 3:30 p.m., 180-minute bars, with volume]

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures rose overnight, reaching a high so far of 4171.25 as the opening bell approached.

What does it mean? The upward correction that began on March 13 continues and is in its final wave. The correction is a 2nd wave within a five-wave downtrend. A strict rule of Elliott wave analysis says that a 2nd wave can’t move beyond the starting point of the preceding 1st wave. If it does, then it’s not a 2nd wave and something else is going on. In this case, the 1st wave began on February 2 from 4208.50. If the present upward correction reaches above that level, then the wave count will be revised.

The futures are derivatives of the S&P 500 index, whose comparable 1st wave began from 4195.44 and whose 2nd wave has reached a high so far of 4127.66.

The index moves in one-cent increments, and the futures in 25-cent increments. The index moves only during the session, and the futures trade every day except for Saturday. So it’s possible for the futures to go above the start of the 1st wave while the index remains below. Another way of putting it is that the futures are vulnerable to rounding error. On the other hand, the futures provide a more detailed pictures of investor sentiment, since it is traded while markets around the world are open. The index reflects only the American market sessions.

And meanwhile…

The Elliott wave rule has not been broken, yet, so the analysis remains what it was yesterday. Here is that analysis, word-for-word, along with the alternative identified yesterday:

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.

[Updated by the chart above]

[S&P 500 E-mini futures at 9:35 a.m., 180-minute bars, with volume]

What does Elliott wave theory say? Here are the waves in play at this point, as updated based on this afternoon’s revision of the principal analysios..

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, declining wave D{-10} is underway, It will be followed by wave E{-10}, which likely will carry the price above the April 4 high, 4171.25.
  • If wave 2{-8} moves above the starting point of wave 1{-8}, from 4208.50, then then analysis will have broken a rule of Elliott wave analysis and will be redone.
  • 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 4, 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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