3:30 p.m. New York time

Half an hour before the opening bell. The S&P 500 futures traded between the 4190s and the 4220s during the session, as the upward correction that began on October 13, 2022 works its way through its final phases. I’ve posted a close-up chart, showing the final subwave within the correction. In Elliott wave terminology, it’s wave C{-8} within wave 2{-7}.

Internally, wave C{-8} is in its 5th and final wave, E{-9}, which in turn is probably in its middle wave, C{-10}. I say probably because there’s a bit of ambiguity in the count. The middle wave scenario seems to be the best map for this part of the chart.

Here’s the near-term chart, just updated.

[S&P 500 E-mini futures at 3:30 p.m., 120-minute bars, with volume]

9:35 a.m. New York time

A note on this Trader’s Notebook. There’s a lot going on in today’s Trader’s Notebook, in addition to the usual sections.

A section titled “A revised analysis” describes changes I made to the Elliott wave analysis over the weekend that impacts the numbering of the upward correction we’ve been following for more than half a year.

The section “How far is down” attempts to determine the magnitude of the decline that will follow the upward correction, in light of the reworking of the analysis.

Enjoy.

What’s happening now? The S&P 500 E-mini futures stayed in a narrow range after trading resumed overnight.

What does it mean? There are two possibilities, both concerning the status of the upward correction that began on October 13, 2022.

• 1) Under one interpretation of the chart, the correction ended on May 19 at 4227.25 and the subsequent decline is the early stage of what will become a significant downtrend.
• 2) Under another interpretation, the decline from the May 19 peak is a low-level pause before the correction resumes its rise.

I’ve marked the chart as though the upward correction were still underway, which is the second analysis.

Reading the chart. Readers will notice a change in the numbering of the upward correction. I’ll describe the changes in the next section, but first, a review of how the numbering system works.

Price movements — waves – – in Elliott wave analysis are labeled with numbers within trending waves and letters with corrective waves. The subscripts — numbers in curly brackets — designate the wave’s degree, which, in Elliott wave analysis, means the relative position of a wave within the larger and smaller structures that make up the chart. R.N. Elliott, who in the 1930s developed the form of analysis that bears his name, viewed the chart as a complex structure of smaller waves nested within larger waves, which in turn are nested within still larger waves. In mathematics it’s called a fractal structure, where at every scale the pattern is similar to the others.

I’ve pulled back the chart to show a full year, which shows where the changes were made. Key changes on the chart are the placement of the waves 1{-6} and 2{-6} endpoints, which set up the numbering for wave 3{-6}, the parent wave of the present upward correction, wave 2{-7},

A revised analysis. In working over the weekend I found a 1st wave that was disproportionately long and a 3rd wave that was disproportionately short. To fix those problems, I’ve redone the count, as follows:

• The decline from August 16 to October 13, 2022 is now wave 1{-7}
• The subsequent rise from October 13, 2022 to the present is now wave 2{-7}.
• Wave 2{-7} is the upward correction that in earlier posts had been numbered wave 4{-6}.
• Wave 2{-7} is very near it’s end — no change from earlier analyses.
• Wave 2{-7} will be followed by a powerful downtrend, wave 3{-7}, a downtrend that in earlier analyses had been numbered wave 5{-6}.

Long story short: The correction and other waves of the same degree have been moved down one level.

What are the alternatives? The principal analyses assume that the correction will take a simple structure, containing one three-wave corrective pattern. If the correction forms a compound structure, then the present corrective pattern won’t complete the correction. Instead, it will be followed by a declining connecting wave and then a second corrective pattern. Compound corrections can be formed from as many as three corrective patterns.

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

How far is down? The whole analysis at this point is focused on when big downtrend begins. Under the revised count described above, it is a 3rd wave, the middle wave of the larger downtrend that encompasses the upward correction (wave 2{-7} and the decline that preceded it (wave 1{-7}). The downtrend that follows wave 2{-7} is of the same degree and is numbered wave 3{-7}.

In his book, Elliott Wave Principle, Robert Prechter, the leading theoretician of Elliott wave analysis for the last half century, called 3rd waves “wonders to behold”. They’re energetic and sometimes extend much further than usual. Some 3rd waves have more energy than others. As with everything in the markets, it’s a matter of waiting to see how the chart plays out and then putting it in a context that suggests what is likely to come next.

There are some tendencies. One of them is that the length of a 3rd wave is often 1.5 to 3 times the length of the 1st wave that preceded it. So let’s use that guidance to gain a very tentative idea of how far wave 3{-7} might travel.

First, for now, I’ll assume that Friday’s high, 4227.25, is the start of the downtrend. The correction could go higher, and if it does, then the calculation will change.

Wave 1{-7} had a length of 749 on the S&P 500 futures.

• Multiply that length by 1.5 and we get a 3rd-wave end point of 3203, a decline of 32%.
• Multiply the length by 3 and we get a 3rd-wave end point of 2079, a decline of 103%.

On the S&P 500 index, wave 1{-7} had a length of 833.70.

• Multiply the length by 1.5 and the 3rd-wave end point is 3074.73, down 37.%
• Multiply the length by 3, and the 3rd-wave end point is 1824.18, down 131%.

It is important to keep in mind that the starting point is assumed and not proven. The multipliers are tendencies, not rules. A lot of other things can happen. The calculation produces an end-point if all of the assumptions and tendencies come true, which they rarely do. Myself, I never bet on a top or a bottom or a target price. I track the wave as it develops and make trading decisions based on the reality of the chart at the time.

The value of the calculation is that it gives a sense of the magnitude of what lies ahead. And even that can be wrong. The markets are filled with surprises.

This approach is based on something I say in every edition of Private Trader: “Elliott wave analysis provides context, not prophecy.”

What does Elliott wave theory say? Here are the waves that underly the analyses.

Principal analysis:

• An upward correction, wave 2{-7}, began on October 13, 2022 and is underway.
• The correction’s first subwave, wave A{-8}, had five subwaves, meaning the correction is taking the form of a Zigzag
• Wave 2{-7} is in its final subwave wave, C{-8}, which began on March 13, 2023.
• Wave C{-u} is taking the form of a Zigzag and as expected, has already exceeded the peak of the first subwave of the correction, wave A{-8}, which ended on December 13, 2022 at 4180.
• Wave C{-7} is in its final subwave, wave E{-9}.
• The end of wave E{-9} will cascade up the wave degrees, marking the end of waves C{-8} and of the correction, wave 2{-7}.

Alternative analysis, compound correction:

• The end of wave C{-8} may won’t be the end of the wave 2{-7} correction.
• Wave 2{-7} will form a compound structure and wave C{-8} ends the first corrective pattern.
• Wave C{-8} will be followed by a declining connector, wave X{-8}, and then by a second corrective pattern.

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, 3502 (down)
• 2{-7} Minuscule, 10/13/2022, 3502 (up)

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, May 22, 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

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.