3:30 p.m.New York time

Half an hour before the closing bell. A major reanalysis of the S&P 500 futures, the second in one day.

The futures rose above 4745.75, for a second time violating a rule of Elliott Wave Theory: A 2nd wave can’t move above the start of the preceding 1st wave of the same degree. If it does, then something else is going on. The map no longer matches the territory and must be redrawn. The analysis no longer matches the chart and must be revised.

As was the case with this morning’s revision, and all of the revisions I recall over\r the past few years, the relative size of waves within the fractal structure — their degree — is where the map’s precision fails In Elliott wave analysis there is no certainty about the degree until later events unfold. Before then, the degree is a guess. And that is why in every Trader’s Notebook edition that I post contains a caveat: “Elliott wave analysis provides context, not prophecy.” Which is doubly true today.

In the discussion that follows I’ll be using the labeling system that appears on the chart. For a brief explanation of how it works, see the “Reading the chart” section further down.

The revision was triggered on the futures when wave 2{-4}, an upward correction, moved above the starting point of wave 1{-4}, a peak attained on July 27. Such a breakout hasn’t occurred on the S&P 500 index.

In this analysis I’ve chosen to go with the futures. The futures have risen less than cents above what was the wave 1[-4} starting point, staying within their 25-cent minimum move. However, the index, with a 1-cent minimum move, remains more than 100 points below the corresponding starting point.

That tells me that something real is happening over and above the granularity of the two products. The continual trading of the futures provide information missing from the index, and then lends credence to the futures. Could that be the wrong choice? Of course, and if it is we’ll all find out as the price progresses. Meanwhile, it’s an anomaly, a coin toss, and as the coin rose I called futures.

Going forward, the main implication of the new analysis is that the present upward correction is larger than it first appeared to be. The upward potential will be with us longer, and the net major downtrend has been pushed further into the future.

But the downtrend will arrive, eventually,and the key syllable is “trend”, A trend is always more powerful than a correction, and as a trader who is profoundly averse to a buy-and-hold strategy, I tend to treat my trades during a correction as short-term ventures.

Here’s the revised chart. I’ve kept this morning’s chart below for readers wanting to compare the two.

[S&P 500 E-mini futures at 3:30 p.m., 50-minute bars, with volume]

Here are the changes I’ve made in this afternoon’s analysis:

• Within wave 2{-3}, an upward correction that began on August 18…
  • The rise that began on August 18 has been changed from being in its third and final wave, wave C{-4}, to being in wave A{-4}, its first subwave.
  • The September 1 peak, which had been labeled wave A{-5}, the first subwave of the correction, has been labeled as wave C{-5}, a subwave of wave A{-4}, the first subwave of the wave 2{-3} upward correction.
  • The September 7 low, previously labeled as wave 1{-1}, the end of the first subwave of a downtrend, wave 3{-3}, which began on September 1, is now the end of wave D{-5}, the fourth of five subwaves within wave A{-4}, the first subwave of the wave 2{-3} upward correction.

Basically, everything was shifted up a degree, which required some smaller changes.

Here is revised Principal analysis summary:

• A downtrend wave 3{-2}, began on July 27 and is underway.
• Within wave 3{-2}, wave 2{-3}, an upward correction, began on August 18 and is in its first subwave, wave A{-4}.
• Wave A{-4} is in its final subwave, rising wave E{-5}.

I’ve known people who reject Elliott wave analysis because it’s analysis can require revision at the drop of a hat. Their observation is true, and I think of it as being both the gift and the curse of Elliott Wave Theory. A gift because unlike other methods, Elliott clearly signals when its wrong. A curse because things are often uncertain, and that can make analysis difficult.

10:25 a.m. New York time

BSX options exit. I’ve exited my short iron condor position on BSX for a 100% profit and have updated the entry analysis with full details.

10 a.m. New York time

Note: This morning’s analysis, below, has been overtaken by events. See the afternoon analysis, above, ofr a discussion of what has changed.

What’s happening now? The S&P 500 E-mini futures rose overnight, moving above the September11 high of 4543.50 as the opening bell approached and touched the September 1 high, 4547.75. The S&P 500 index moved above its September 11 high, 4490.27, but remained well below its September 1 high, 4541.25.

What does it mean? Under the rules of Elliott wave analysis, a 2nd wave cannot move above the beginning of the preceding 1sst wave. If it a does, then the chart must be revised.

The higher high means that the 2nd wave upward correction that began on September 7 is still underway on both the futures and the index charts. The 3rd wave downtrend that began on September 1 came close being eclipsed by a higher high on the futures, but the rise did not move above that high, so that upward movement’s labeling remains intact.

In Elliott wave labeling terminology, here are the changes:

• Downtrending wave 3{-4} has not yet begun.
• An upward correction that began on September 7, Wave 2{-4}, is still underway.
• Wave 2{-4} internally is in wave C{-4}, the final wave of the corrective pattern.

This is all happening within a larger downtrend, wave 3{-3}, that began on September 1 and that is a subwave of a still larger downtrend, wave 3{-2}, that began on July 27.

What are the alternatives? If the price on the futures rises above its high so far today, 4547.75, it will have moved above the start of the preceding 1st wave, on September 1 from 4547.75. The index remains well bellow the peak of the corresponding1st wave.

That creates a dilemma. The futures move in 25-cent increments, and the index, in 1-cent increments. In terms of price, the index has far more granularity. However, the futures trade 24-7 except for weekends, the index trades from 9:30 a.m. to 3 p.m. New York time. In terms of time, the futures have greater completeness than does the index.

So if that peak is exceeded on the futures but not the index, which do we believe? Good question. Still thinking about it.

[Note that this chart’s anlysis has been overtaken by events. See above for the latest.]

[S&P 500 E-mini futures at 10 a.m., 50-minute bars, with volume]

What does Elliott wave theory say? This section’s Principal analysis has been outdated by a revised analysis posted in the afternoon edition. I’ve retained it for readers wanting to run a detailed comparison of the two analysis

Here are the waves that underly the analyses as laid out in the morning analysis. See above for the afternoon revision of the Principal analysis.

Principal analysis

• A downtrend wave 3{-2}, began on July 27 is underway.
• Within wave 3{-2}, wave 3{-3}, a powerful downtrend, began on September 1 and is in its second subwave, wave 2{-4}, an upward correction that began on September 11.
• By one count, wave 2{-4} is in its final subwave, rising wave C{-5}, but it’s also possible that declining wave B{-5} is still underway.

Big picture

• Both the wave 2{-2} correction and wave 3{-2} downtrend are subwaves of wave 4{-1}, a downtrend that began on January 4, 2022.
• Wave 4{-1}, in turn, is a subwave of wave 5{0}, an expanding Diagonal Triangle that began on December 26, 2018.
• Wave 4{-1} may eventually reach the lower boundary of wave 5{0}, presently slightly below 1800 and declining further each day.
• Wave 4{-1} will be followed by rising wave 5{-1}, the final wave in the Triangle.

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, 4953.25 (down) (futures), 4818.62 (down) (index)
• S&P 500 Futures:
• 3{-2} Minute, 7/27/2023, 3502 (down)

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.

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, September 14, 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.