Trader’s Notebook

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 futures continued falling throughout the session, reaching into the 4150s. The further it falls, our trader intuition tell us, the more likely it is that the upward correction, wave 2{-7}, ended at 4227.25 and that a powerful downtrend, wave 3{-7}, has begun.

I’m a big fan of intuition — the personality tests say it’s my main way of thinking — but can Elliott wave analysis give us something more substantial to guide our interpretation of the chart?

The key, I think, is the lowest degree wave that we’re tracking, marked as declining wave D{-10} on the chart. Wave D{-10} is the next-to-the-last subwave, the 4th of five, within rising wave E{-9}, the final wave within the final subwave of the correction, rising wave C{-8}.

Fourth waves usually have three subwaves, and indeed, we can clearly see on the chart that wave D{-10} is in the 3rd subwave of its decline, declining wave C{-11}. This gives us two possible outcomes after C{-11} ends:

  • If the wave reverses to the upside and rises above 4222.75, the prior peak within wave D{-10}, then the correction is underway as is its subwave, rising wave E{-10}.
  • If the wave reverses upward but remains below 4222.75, then the correction ended at 4227.25 and the downtrend, wave 3{-7}, is underway.

At this point I see 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 fell overnight, reaching into the 4180s.

What does it mean? The pullback is a low-level reversal within the final wave of an upward correction that began on October 13, 2022. The reversal will be followed by a final push that will likely exceed 4227.50, the correction’s peak so far. That rise, when complete, will mark the end of the correction and the start of a downtrend that will carry the price down a significant distance, into the 3200s and perhaps as much as a thousand points lower

What are the alternatives? There are two.

Alternative #1, game over: The upward correction ended at the May 19 peak and the downtrend has begun.

Alternative #2, compound correction. The correction will forming a compound structure. The end of 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 3:30 p.m., 120-minute bars, with volume]

Reading the chart. 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.

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{-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}.
  • Downtrending wave 3{-7} will follow the end of the correction and will carry the price a significant distance below present levels..

Alternative #1, game over

  • The upward correction, wave 2{-7}, ended on May 19 and the downtrend, wave 3{-7}, has begun and is in its early stages.

Alternative analysis #2, 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, 4327.50 (down)
  • 2{-7} Minuscule, 10/13/2022, 3577.75 (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 23, 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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