3:40 p.m. New York time

Trades. I placed three short-term trades today, all of them structured as short Iron Fly positions.

I exited SPY for a 19% profit after holding over the long holiday weekend.

I entered QQQ and XSP one day before expiration (1DTE).

I’ve updated the SPY trade analysis with results and have also posted QQQ and XSP trade analyses.

3:30 p.m. New York time

Half an hour before the closing bell. During the session, the S&P 500 futures continued to bounce between the 4810s and the 4770s, moving below the wave B target price range three times so far. This morning’s analysis is unchanged. The middle subwave, wave B, of the 2nd-wave upward correction that began on January 5 continues.

I’ve updated the chart.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures fell after trading resumed overnight, opening at 4813.50 and dropping to 4785.25, before recovering part of the decline.

What does it mean? The 2nd-wave upward correction that began on January 5 continues to work through its middle subwave — downward wave B. The rising C wave that follows will complete the three-wave corrective pattern — a Zigzag — and most likely the correction itself. A downtrending 3rd wave will follow, carrying the price lower by a significant distance.

The overnight low pierced the upper boundary of the B-wave’s target price range, the 3rd time that has happened. The range — 4786 to 4730 — is shown on the chart in red.

The correction is a small part of a much larger 3rd-wave downtrend that began on December 27, 2023. That larger downtrend will reach below 3502 — the end of the preceding 1st wave and the start of the 2nd-wave correction — and almost certainly a large distance below that level.

According to Elliott Wave Theory, the movements on a stock chart are of a fractal character, patterns within patterns, and whether small or large, the same sorts of patterns appear. On the chart, I use a subscript within curly brackets to show the level of a wave within the fractal structure, relative to a very large wave, 5{0}, that began on December 26, 2018 and that encompasses all that has impacted the market since: The Covid Crash of 2020, the inflation, the Federal Reserve’s decision to raise interest rates more quickly than anytime in the last 40 years — everything.

The 2nd-wave upward correction that began on January 5 is wave 2{-7}, meaning it is smaller than the large encompassing wave 5{0} by seven degrees. The 3rd wave downtrend that began on December 27, 2023, is wave 3{-2}, two waves smaller than the encompassing wave 5{0}.

Of course, the encompassing wave itself is a subwave of larger structures. Wave 5{0}, which is taking the form of an expanding Diagonal Triangle, is the final subwave of wave 5{1}, a larger uptrending 5th wave that began on March 6, 2009 at the end of the Great Recession. And wave 5{-1} is in its 4th of five subwaves, wave 4{-1}, a downward wave that will eventually reach the lower boundary of a price channel encompassing the expanding Diagonal Triangle that is wave 5{0}, presently below 1800 and falling further each day. (See the January 12 Trader’s Notebook for a chart of the S&P 500 index showing wave 5{0} in its entirety.)

Most commentary on the markets speaks in simple terms: Bull market, bear market. Up, down. New high, new low. Elliott Wave Theory sees market movements as being far more complex.

What are the alternatives? The lower the price travels, the more likely the principal analysis becomes. Nonetheless, each of the three alternatives now on the table have a greater-than-zero chance of being an accurate description of what’s happening on the chart.

Alternative #1: The 2nd wave rise (wave 2{-2} on the chart) that preceded the 3rd wave (wave 3{-2}) 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. So for example, wave 2{-7} on the chart could well be wave 2{-6} or 2{-5}.

Alternative #3: The low-degree B subwave — wave B{-8} — may in have have ended at the overnight low, and if so, then the rise that followed is part of wave C{-8}, the final subwave within wave 2{-7}.

[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.

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, declining wave B{-8} is underway and is within the first, wave A{-9}, of three subwaves.

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.

Alternative #3:

• Wave B{-8} ended overnight and wave C{-8} is underway.

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, 12/27/2023, 4841.50 (down)
• 1{-3} Minuette, 12/27/2023, 4841.50 (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, January 16, 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.