3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 futures rose during the session, reaching 5840 and then pulling back slightly.

That session peak has exceeded the starting point of wave of a smaller 1st subwave and a larger parent 1st wave.

In this morning’s discussion I described a rule of Elliott Wave Theory and the possiblity that it would be broken. That higher high broke the rule, and I have reanalyzed the chart. See the “What does it mean?” section below for a discussion of the rule.

A new analysis. In order to bring the analysis back within the rule, I had to change the wave count of the current rise that began on October 7 from a corrective wave to a motive wave. To do that I had to rework the wave labeling all the way back to the decline that began on August 28.

This morning I described the wave labeling system, and I’ll repeated that here.

On the chart each wave is labelled with a wave number or letter followed by a subscript in curly brackets showng the waves distance in degrees from the Intermediate degree, presently wave 5{0}, which began in December 2018.

Here are the wave number changes, and the ending date of each:

• wave 3{-8}, unchanged, August 28
• wave 3{-11} to wave 4{-8}, September 6.
• wave 4{-11} to wave 3{-9}, September 26
• wave 1{-13} to wave 4{-9}, October 2
• wave 1{-14} to wave 2{-10}, October 7
• waves 3{-13 and 2{-14} to waves 5{-8} and 5{-9}, underway

The chart immediately below is based on the new analysis. I’ve left this morning’s chart in place for comparison. Two sections, “What are the alternatives?” and “What does Elliott Wave Theory say”, will remain as they were this morning and will be revised for the October 10 morning analysis.

[S&P 500 E-mini futures at 3:30 p.m., 90-minute bars, with volume]

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures reached a low overnight of 5780.75 and then rose, reaching just above 5800.

What does it mean? Elliott Wave Theory have a rule that might come into play with the chart’s present configuration.

The present wave line-up, from lower degree to higher, is rising wave 2 within falling wave 3 within within falling wave 1 within falling wave 5.

On the chart each wave is labelled with a wave number or letter followed by a subscript in curly brackets showng the waves distance in degrees from the Intermediate degree, presently wave 5{0}, which began in December 2018.

The wave line-up on the chart, from lower degree to higher, is wave 2{-14} within wave 3{-13} within wave 1{-12}. All of that is within wave 5{-11}, a downtrend that began on September 26.

Elliott Wave Theory rules, if broken, invalidate the analysis.

For example, the smallest degree on the chart is wave 2{-14}. The rule is that if a 2nd wave moves beyond the start of the of the preceding first wave, the wave in question isn’t a 2nd wave and something else is going on. Wave 1{-14} began on October 6 from 5808. If the present rising 2nd wave moves above 5808, then the anaysis will be redone.

Most likely, the revised analysis would conclude that the wave one degree higher, wave 2{-13}, didn’t end on October 6. Instead, the high on that date was the end of the final subwave of wave 2{-13} — wave C{-14}. The alternative analysis had seen this possibility since I marked wave 2{-13} as having ended — Alternative #2 in today’s report.

Of course, the 2nd-wave rule also applies to wave 2{-13} — if it moves above the start of wave 1{-13}, then it’s not a 2nd wave and requires a reanalysis. Wave 1{-13} began on September 26 from 5830. If the price moves above that level, then it’s time for a reanalysis.

The beauty of Elliott Wave Theory isn’t that analyses are never wrong. Stock charts are filled with ambiguity. Elliott Wave Theory, compared to other methods, always shows the analyst precisely what went wrong.

This chart has been replaced by a chart showing the afternoon analysis based on alternative #3, which has become the principal analysis. See the afternoon analysis, above.

[S&P 500 E-mini futures at 9:35 a.m., 90-minute bars, with volume]

What are the alternatives? There were two, and both are now invalid in light of a fresh analysis in the afternoon post. See above.

Alternative #1:

Occasionally a subwave will take a compound form, containing two or three corrective patterns, each composed of three subwaves — waves A, B and C — and connected to the prior pattern by a wave called an X wave. This would mean that the 4th-wave upward correction is still underway and would delay the start of the following 5th wave downtrend.

Alternative #2:

The small 2nd-wave uptrend that began on October 2 is still underway, has completed its first two subwaves, waves A and B, and is now in its final subwave, wave C.

What does Elliott wave theory say? Here are the waves that underlaid the morning analyses. They are now invalid in light of a fresh analysis in the afternoon post. See above..

Principal Analysis

• Rising wave 5{0} is underway. It is a wave of Intermediate degree that began in December 2018.
• It is in its final subwave, wave 5{-1}.
• Within wave 5{-1}, rising waves 5{-2}, 5{-3} and 5{-4} are underway, as is wave 5{-5}.
• Wave 5{-5} is in its initial subwave, wave 1{-6}, which in turn is in its middle subwave, wave 3{-7}.
• Wave 3{-7} is in its next-to-the-last subwave, wave 4{-8}, a downward correction.
• Wave 4{-8} is in its final subwave, wave C{-9}, which is within wave 5{-10}.
• Wave 5{-10} is in its initial subwave, declining wave 5{-11}, which in its 1st subwave, declining wave 1{-12}, which in turn is in a 3rd-wave downtrend, wave 3{-13}.
• Wave 2{-14}, a subwave of wave 3{-13}, is now underway.

Alternative #1:

• Wave 4{-11} a rising correction, is taking a compound form,
• The three subwaves — waves A{-12}, B{-12} and C{-12} — have completed the first corrective pattern. A declining connector wave — wave X{-12} is underway.

Alternative #2

• Wave 2{-13}, an upward correction, continues and is in its 3rd subwave, wave C{-14}.

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 9, 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

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Based on a work at www.timbovee.com.