3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 futures fell during the session, reaching a low of 4355.50.

The decline is the first three subwaves of a low-degree initial wave within a 5th wave downtrend that began from an overnight high of 4430.50. The small rise that followed the decline is a 4th wave upward correction.

The first steps of a trend also have a bit of uncertainty over where waves are situated in the fractal complexity of market price movement. The 5th wave is unambiguously wave 5{-5}. The downtrend so far is almost certainly taking place within wave 1{-6}. But the subwaves? No way to tell.

Based on a rough similarity in the days taken to complete the present subwaves and subwaves of the preceding downtrend, wave 3{-5}, I’ve chosen to label the three wave’s of today’s decline as being wave 1{-8} through wave 3{-8}, and the small upward correction as wave 4{-8}. All of them are subwaves of wave 1{-7}, which is a subwave of wave 1{-6} and, up a degree, wave 5{-5}.

Wave 4{-8} will be followed by further decline, wave 5{-8}. When complete, wave 5{-8} will be the end of wave 1{-7} and the beginning of an upward correction, wave 2{-7}, which will take back a portion of the decline. The Fibonacci retracement level 61.8% is a common end point for 2nd waves, and we’ll have that price number after wave 1{-7} reaches its end.

I’ve updated the chart.

2:30 p.m. New York time

SPY 8DTE options position exit. My short bear call, entered eight days before expiration, reached 50% of maximum potential profit 2 hours and 15 minutes after entry, and I followed my trading rules for such a position and exited. In Elliott wave terms, I entered as a downtrending 5th wave has just begun and so had a high confidence that it would carry the price much lower, which is profitable for a bear call spread. The rapidity took me by surprise. I had counted on holding the position into next week. My take-away is that used correctly, Elliott Wave Theory and short-term options trading are a powerful combination. Good to know.

12:05 p.m. New York time

SPY 8DTE options position entry. I’ve entered a very short term short bear call spread on SPY, using options that expire eight days from entry, on October 20 (“8DTE” = 8 days to expiration). For me, this is something of an experiment in trading options that will expire quickly. My normal days to expiration preference has been around 45 days. If I can reduce the trade to eight days with similar profits, then I’m money ahead — short trades open the possibility for more trades. I’ve posted an analysis of this trade.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures rose overnight until the latest inflation numbers were released. At that point the price fell swiftly, from 4430.50 to 4407.75, reversed and retraced about two-thirds of the drop, and then settled in the 4410s.

What does it mean? The rise took the 4th wave upward correction to a new high, and the sharpness of the decline suggests that the high was a significant peak of something. Or perhaps not. As always in the early hours of reversal, if that is what has occurred, all is in flux and ambiguities abound.

To describe the “something”, I’ll need to use subscripts to identify the degree of each wave, its position in the fractal structure of the chart. The subscript, within curly brackets, shows the degree in relation to the the Intermediate degree, which at present is a large 5th movement, wave 5{0}, that began on December 26, 2018 and is still underway.

Prior to the overnight peak, the upward correction, wave 4{-5} — five degrees below the Intermediate degree — was in its 3rd and possibly final subwave, wave C{-6}, which in turn was in its final subwave, wave 5{-7}. That final subwave was also in its final subwave, wave 5{-8}, the smallest wave that I track on the chart.

Under this morning’s new principal analysis, the overnight high of 4430.50 was the end point of waves 5{-8} and 5{-7}, which in turn means it was the end of wave C{-6}, of the corrective pattern that began on September 27 and most likely of wave 4{-5} itself.

Some corrections take a compound structure, stringing together two or three corrective patterns. If that’s the case, then the peak is the end of the first corrective pattern within wave 4{-5}, with one or two more to come. But that’s an alternative.

Under the principal analysis, wave 4{-5} ended at the peak, and wave 5{-5} is underway. As a 5th wave, it can have tremendous power, or it an be a dud. The price will at a minimum is almost certain to return to the 4270s — the starting point of the prior correction, wave 4{-5} — and perhaps a significan distance below that level. If wave 5{-5} is a truncated 5th wave, then it will stop before reaching 4277, the starting point wave wave 4{-5}.

What are the alternatives? There are two.

Alternative #1: The final leg of the upward correction — wave C{6} within wave 4{-5} — is still underway as the price quickly reverses and moves above the present correction high.

Alternative #2: The final leg of the upward correction — wave C{-6} within wave 4{-5} — ended at the overnight high and the correction takes a compound structure. Declining wave X{-6}, a connector wave, has begun and will be followed by a second corrective pattern.

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

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

Here are the waves that underly the analyses.

Principal Analysis:

• A downtrend, wave 3{-2}, began on July 27 and is underway.
• Within wave 3{-2}, a smaller downtrend, wave 3{-3}, began on September 14 and is in its initial subwave, wave 1{-4}.
• With wave 1{-4}, subwave 5{-5}, an downtrend, is underway, having begun on October 12.
• Wave 5{-5} is in its first subwave, wave 1{-6}.

Alternative analyses #1 and #2:

• Wave C{-6} is underway and will either the final wave of the wave 4{-5} correction or the end of the first corrective pattern within a compound wave 4{-5} correction.

Big picture:

• The wave 3{-2} downtrend is a subwave 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, October 12, 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

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Based on a work at www.timbovee.com.