3:30 p.m. New York time

Half an hour before the closing bell. The first subwave, wave A, of the upward correction that began on January 5, a 2nd wave of relatively low degree, has entered its 5th and final subwave. When the 5th subwave is complete, wave A will also be complete and will be followed by a declining B wave.

Changes from this morning: I’ve moved the endpoint of wave 4{-9}, a subwave of wave A{-8} within wave 2{-7} (the upward correction) to the January 9 reversal point, and labeled all that follows as part of wave 5{-9}.

I’ve updated the chart.

1:20 p.m. New York time

Trade. I’ve exited my short Iron Fly options position on XSP on expiration day, a day after entry, for a 13.3% profit and have updated the trade analysis with results.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures rose overnight from the 4780s to 4804, again setting a slightly higher high in the upward correction that began on January 5, and then fell back.

What does it mean? The correction is a 2nd wave and internally is in its first subwave, wave A. The correction is taking the Zigzag form, which means tht the A wave has five subwaves. It is present in its next-to-the-last subwave, declining wave 4. A final rising wave will complete wave A and begin declining wave B, which under the rules of Elliott Wave Theory will remain above the starting point of the preceding A wave, 4702.

All of the wave 2 drama described above is contained within a much larger downtrending wave 3, which began on December 27, 2023. In Elliott Wave Theory, stock prices form a fractal structure, meaning the patterns larger waves contain smaller patterns of the same sort, a reality that works its way down from the very large, such as the 5th wave that began on July 8, 1932 and is still underway, to the individual tick, a single transaction and the movement it causes in the price.

I label a wave’s place in the fractical structure as a subscript within curly brackets showing the wave’s position as levels above or below the uptrending 5th wave that began on December 26, 2018 and is taking the form of an expanding Diagonal Triangle. That 5th wave — wave 5{0} — is at what Elliott Wave Theory calls the Intermediate degree within the fractal structure. The downtrending 3rd wave mentioned above is wave 3{-2} — two degrees below wave 5{0}. The small 2nd wave upward correction that began on January 5 is wave 2{-7} — seven degrees below wave 5{0}.

What are the alternatives? And that complex structure is a set up for two alternatives.

There are two, unchanged from yesterday.

Alternative #1: The 2nd wave rise that preceded the 3rd wave is still underway and is taking a compound form. The present decline is an X wave, which will link the first corrective pattern within wave 2 to a second corrective pattern. A compound correction contains up to three corrective patterns.

Alternative #2: This is more of a general observation. Assigning a degree to subwaves early in a correction is, frankly, little more than an educated guess. The degrees I’ve assigned may change over time as the downtrend progresses.

[S&P 500 E-mini futures at 3:30 p.m., 25-minute bars, with volume]

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

Principal Analysis:

• Wave 5{0}, an expanding Diagonal Triangle, began on December 26, 2018.
• Within it, a downtrend, wave 4{-1}, began on January 4, 2022 and is underway.
• Wave 4{-1} is the parent wave of a downtrend, wave 3{-2}, that began on January 2, 2024 and is in wave 1{-3}, the first of five subwaves.
• Deep within that downtrend’s 1st wave, downtrending wave 5{-8} and its parent, wave 1{-7}, ended at the overnight low, 4702. Wave 2{-7} is now underway, an upward correction of low degree, and within it, wave A{-8} is underway.
• The final subwave within wave A{-8} — wave 5{-9} — began on January 9.

Alternative #1:

• Wave 2{-2}, an upward correction that began on October 13, 2022, continues and is taking a compound form.
• Wave X{-3} is underway, connecting the now complete first corrective pattern and the not-yet-begun second corrective pattern.

Alternative #2:

• The upward correction that began on January 5, labeled on the chart was wave 2{-7}, is actually wave 2{-6}, or perhaps wave 2{-5}, or maybe even larger.

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:
• 2{-2} Minute, 10/13/2022, 3491.58 (up)

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, January 10, 2024

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.