Live: Thursday, July 9, 2020

10:20 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continued its sideways movement.

What does it mean? The chart’s “You Are Here” marker is ambiguous at this point.

What does Elliott wave theory say? Let’s try to reduce the ambiguity by reducing the problem to a series of alternatives, expressed as If…then statements.

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S&P 500 E-mini futures, 4-hour bars
  • If the price moves above 3397.50 (tan line), the beginning of Primary wave 1, then the decline from February 19 is complete and the upward trend that began in December 1974 is continuing: Cycle wave 5 within Supercycle wave 5 within Supercycle wave 3. I consider this to be a very low probability outcome, but the odds of it happening are greater zero.
  • If the price moves above 3231.25 (green line), the end of Primary wave 2, then Primary 2 is still underway.
  • If the price moves above 3184 (blue line), the end of Minor wave 2, then Minor wave 2 is still underway.
  • If the price moves below 2923.75 (red line), the beginning of Minor wave 2, then Minor wave 3 within Intermediate wave 1 within Primary wave 3 is underway and the drop below that price confirms it.
  • If the price moves below 2174 (purple line), the beginning of Primary wave 2, then Primary wave 3 is definitely underway and drop below that price confirms it. I consider this to be, eventually, a very high probability.

What about my trades? My shares in SDS gain as the S&P 500 drops. I’m waiting on options trades until Intermediate

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Live: Wednesday, July 8, 2020

10:10 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continue to dither 20 points or so below the channel that began on February 19.

What does it mean? I’ll keep it brief, since it is well covered ground: Topping behavior, a smaller scale decline ahead,  followed by a smaller scale upward correction and then a significant decline.

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S&P 500 E-mini futures, 1-hour bars

What does Elliott wave theory say? Minor wave 3 to the downside began July 6. It is a subwave within Intermediate wave 1, which in turn is a subwave of Primary wave 3. It is Primary 3 that will provide the bulk of the coming decline, carrying prices down to the low 2000s or lower.

What is the alternative?  The price pushes above the July 6 high 3184, extending Minor wave 2 still higher. The wave under the rules of Elliott wav analysis cannot exceed 3231.25, the peak of Primary wave 2.

Learning and other resources. The market’s pause before making a decisive move frees up time to review my favorite subject. Here’s a selection from my book shelf.

Elliott Wave International has long been the leading analytical house based on Elliott wave theory. They make available a number of free educational materials and other resources, in addition to their for-pay subscriptions.

I recommend two books, both by people associated with EWI.

First, Elliott Wave Principle by Robert Prechter and A.J. Frost is the book that, along with Prechter’s analyses, that created the revival of Elliott wave theory. I first read it in 1984, and it has had a profound influenced on my thinking about markets ever since.

Second, I’ve found Visual Guide to Elliott Wave Trading by Wayne Gorman and Jeffrey Kennedy, both of EWI, to be a useful book that relates Elliott wave theory to practical trading. The authors are hands-on Elliotticians, and for an active trader, that’s exactly what’s needed — less theory and more how-to. The first chapter of the book gives a very nice thumbnail run down of what Elliott wave theory is all about.

Terminology. Here are some links to information about some of the technical jargon I use.

Charts. On my charts, waves have a subscript showing the degree above or below the Intermediate degree. Here are the subscripts and the degree each represents:

  • {+3} Supercycle
  • {+2} Cycle
  • {+1} Primary
  • No subscript: Intermediate
  • {-1} Minor
  • {-2} Minute
  • {-3} Minuette

By Tim Bovee, Portland, Oregon, July 7, 2020

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Live: Tuesday, July 7, 2020

10:20 a.m. New York time

What’s happening now? The S&P 500 E-mini futures bounced back slightly after setting another post-June 8 high.

What does it mean? The pattern looks like topping behavior, in the language of traditional chart analysis. A mentor told me decades ago that such hesitancy on the chart meant there was a balance between bulls and bear.

Screen Shot 2020-07-07 at 7.16.02 AM
S&P 500 E-mini futures, 4-hour bars

What does Elliott wave theory say? What the traditionalists call “topping” is the end of a rising wave in Elliott wave theory. In this case the wave is Minor wave 2 within Intermediate wave 1 within Primary wave 3, which on June 8 began its mighty descent to come. Minor wave 2 has come within six points of the upper boundary of the Primary degree channel, linking the start of Primary wave 1 on February 19 and Primary wave 3 on June 8.

What is the alternative? Under the rules of Elliott wave analysis, the price of Minor 2 can pierce that upper boundary of the channel — a throw-over — but it cannot pierce the beginning of Minor wave 1 down, which is 3231.25.

What about my trades? I’m waiting until the start of Intermediate wave 3 before entering bear call options spreads on SPY.

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Live: Monday, July 6, 2020

10:20 a.m. New York time

Over the weekend I posted a big-picture look of the market uptrend from 1974 that got us to the February peak. The essay, “How We Got Here“, attempts to make a case for the February decline being a major reversal to a high-magnitude downtrend rather than a correction within a continuing uptrend.

What’s happening now? Contrary to my conclusion on Friday, the S&P 500 E-mini futures still had some upside left, by about 16 points.

What does it mean? The upward movement that began March 22 may have completed its correction of the decline that began February 19, opening the path for Minor wave 3 within Intermediate wave 1, both to the downside.

Screen Shot 2020-07-06 at 6.57.14 AM
S&P 500 E-mini futures, 30-minute bars

What does Elliott wave theory say? The present Minor wave 2 has fulfilled all of the requirements of a zig-zag pattern, so it could be over now or could have a bit more upside to go. Under the rules of Elliott Wave Theory, the price must remain below the beginning of the preceding wave 1 of Minor degree, 3231.25 on June 8.

What is the alternative? We won’t for know for sure if Minor wave 2 is complete until the price moves below the end of wave 1 of Minor degree, 2923.75 on June 15. It’s possible, although it would be unusual, for Minor wave 2 to extend in a combination pattern, pushing the decline further into the future. But the decline will come, eventually.

What’s the pattern ahead? It will go like this: Minor wave 2 to the upside will end. Minor wave 3 will push to at least the 2920s and perhaps quite a bit below that, Minor wave 4 will most likely perform a sideways movement of three waves or more internally, and then Minor wave 5 will push below the end of Minor wave 3. That will end Intermediate wave 1, Intermediate 2 will follow as an upward correction, and then Intermediate 3 will give a strong decline that will strip all traders of their remaining optimism.

Our Future: Up a little, Down, Sideways, Down, Significant Up, Shockingly big Down.

What about my trades? Biding my time as I wait for Intermediate wave 3, which is the big Down of Our Future.

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How We Got Here

4:30 p.m. New York time

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Dow Jones Industrial Average, quarterly bars

December 1974 wasn’t an exciting month. Sen. Gerald Ford had taken his oath as president four months earlier, upon the resignation of Pres. Richard Nixon. The year whose end was drawing near would see an inflation rate of 11.1%. It seemed high, and it was high, eight times higher than it had been a decade earlier. No then new that the time would come, only a few years later, when that figure would be surpassed by a large margin.

Nixon three years earlier, on August 13, 1971 suspended the conversion of the dollar into gold at a fixed rate, turning the U.S. currency into fiat money, which had value only because the government said it did. In 1974 some of older folks still grumbled, blaming the higher cost of living on the transformation of the mighty greenback into “funny money”. And who’s to say they were wrong?

The unemployment rate in 1971 peaked at 7.2%, and that seemed high, too. It had been rising for 14 months, beginning at 4.6%.

But also in 1974, something happened so quietly that it escaped all notice. The stock market — as measured by the Dow Jones Industrial Average — on December 9 ticked above its low point for years of 570, and began rising. It rose all of the next year, 1975, and then paused in January 1976, thereafter meandering until 1982, when it began to rise again.

And Dow kept on rising, with trips and stumbles along the way. But it never again returned to its starting of 570, and continued to rise, in a series of higher highs and higher lows, until February 13, 2020, when it reached a high of 29,568.57.

Then the crash came, along with a pandemic that in its first few months killed more than 132,000 Americans, one quarter of the deaths globally as of Independence Day 2020.

Since the crash I’ve interpreted the decline as the beginning of a major trend change. The upward trend since December 1974 is at last spent, and a downward trend of similar magnitude has begun. In the discussion that follows, I shall make a case for the new downtrend interpretation. I have money on the table, in that my trading is based on that interpretation. If I’m wrong, it’s going to be painful.

One of my mentors once told me, “You don’t need the fancy analytics. You can see the trend without them. A series of higher highs and higher lows is an uptrend. A series of lower higher and lower lows is a down trend. It’s that simple.”

Look over to the far right of the chart, the final two bars, and the Crash of 2020 doesn’t seem like much. True, it’s deeper than any of the other four lower lows since 1974, three times lower or more. So that suggests that someone other than the run-of-the-mill correction is going on.

On the other hand, there’s nothing that excludes the possibility of an exceptionally deep correction within an uptrend. We a model that provides a more nuanced view than that of my mentor. Elliott Wave Theory is an answer.

Elliott wave analysis uses a collection of market patterns to how far advanced a trend is. Behind all the jargon, it is simply a way of placing a “You Are Here” sign on the chart. Elliott distinguishes between the primary trend and the countertrend, breaking each trend into a series of waves. Movements in the direction of the primary trend are called “motive waves”; those in the direction of the counter are “corrective waves”.

In Elliott terminology, the question I must answer in order to understand this market is whether the decline is a motive wave or a corrective wave.

Each wave, whether motive or corrective, contains its own motive and corrective waves within it. A stock chart is the perfect model of a fractal design. Elliott wave analysis deals with the fractal nature of the chart by labeling waves according to their degree, what might be considered their level. The rise from 1974 to the February 2020 peak is a wave of Cycle degree. Each major subwave within it is one degree down, the Primary degree, and down one further is the Intermediate degree.

Since February by my count we have seen one wave of Primary degree to the downside within one wave of Cycle degree, also downtrending.

A motive wave internally has five waves, three motive waves and two corrective waves, alternating. The motive wave labels are numbers, with 1, 3 and 5 being motive waves, and 2 and 4 being corrective waves.

A corrective wave internally has three waves, labelled A, B and C — A and C being the direction of the countertrend and B being in direction of the larger trend.

Corrective waves have a lot more variation in the ways they play out. Motive waves, by contrast, are pure simplicity. That’s one reason why I trade only motive waves; there are fewer surprises, and as a trader, I hate surprises.

Back to the chart. In order to know whether the rise from 1974 is complete, we have to know how many motive waves it has completed. The Elliott wave numbering is fairly clear across that period, and by my count it has traced five waves. Having met that requirement, there is no barrier to declaring the rise since 1974 to be over. The deeper the decline, the less any doubt that the trend has changed.

How far down can it go in these early stages?

I’ve superimposed a Fibonacci retracement grid showing the common stopping points in a retracement. The levels within the grid aren’t equidistant because they’re based on percentage change rather than point change, a necessity when charting over a long span of time. It can give some some idea of the scale of decline we can expect during Cycle this wave 1 decline.

Cycle 1 to date has take back 38.2% of the rise since 1974, all of it due to its first subwave, Primary wave 1. It then traded an upward correction in the 2nd wave of Primary degree, taking back 86% of the initial decline. to 18,213.65,

How does that compare to the previous Primary wave 1 up, which began its rise in December 1974? First, the old 1st wave was long, It lasted more than 12 years and carried the price up more than 380%. The Primary wave 2 down, which began last February, lasted for nine days and declined by 36%. That’s not just my count. After I published my assessment, the leading Elliott wave analysts in the business published theirs, and we agreed. That sort of difference doesn’t break the rules that R.N. Elliott formulated. However, it certainly gives me pause, and perhaps should inspire a degree of skepticism in any trader using the Elliott Wave Theory.

As always with Elliott wave analysis, time will resolve all ambiguities, in such a way that the trader can know exactly how the ambiguity was resolved and what that means for the future course of prices. No other analytical technique provides that density of information.

The reality is that we can’t yet put a lower boundary on Cycle wave 1. All we can say is that it will stay below 29,568.57, the peak of the prior uptrend from 1974.  If the price breaks above that level, then we are not in a  new major downtrend but a correction within Cycle wave 5 to the upside.

There’s no rule saying how far down a 1st wave can go. So we have an upper limit that can make-or-break the interpretation of decline since February as being the start of a downtrend of Cycle degree or larger, and very little downside information at all.

Of the downside all we can say is that if this is indeed a new downtrend of high degree, then the 570 level from which the Cycle degree rise began eventually will be pierced by one of the two remaining motive waves , either the 3rd or the 5th.

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Live: Friday, July 3, 2020

11:35 a.m. New York time

The S&P 500 E-mini futures traded briefly this morning, despite the stock and bond market holiday in observation of the U.S.  Independence Day. So, let’s analyze.

What’s happening now? The S&P 500 E-mini futures completed their corrective within the downtrend that resumed on June 8. The correction peak was 3156.50, attained on July 2.

What does it mean? I expect the resumption of the decline to be of significant scale. Today the impact would be described as shaking the confidence of the markets. Back in the day traders would have thought it in more color terms: “It’ll scare the bejesus out of the markets. It’ll scare their pants off”.

Screen Shot 2020-07-03 at 8.33.38 AM

What does Elliott wave theory say? The decline that began June 8 is Intermediate wave 1 within Primary wave 3. The rise that began on June 15 from 2923.75 is Minor wave 2 within Primary 3. And the peak of July 2 marks the beginning of Minor wave 3 within Primary wave 3. A 3rd of 3rd tends to be powerful.

All of this is happening within the 1st wave down of Cycle degree. So there’s a lot of down that lies ahead of us.

The channel, based on the start points of Minor waves 1 and 3, suggests that the Minor degree decline will carry the price down to the 2850 level or lower.

What is the alternative? It’s possible that the drop after the July 2 peak is a head fake, a whipsaw, an event loathed by all traders. If it is, then Minor wave 2 is still underway. A decline below 2923.75 will confirm that Minor wave 3 is truly underway.

What about my trades? I’m already positioned on my stocks, an inverse S&P 500 exchange traded fund with the ticker SDS. It possible that Minor wave 3 will be playable with options, as short bear call spreads. I’ll take a look at it after the holiday.

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Live: Thursday, July 2, 2020

10:40 a.m. New York time

What’s happening now? The S&P 500 E-mini futures have continued to rise, exceeding by a few points the length of the preceding downward move, in the direction of the dominant trend.

What does it mean? Usually, a movement in this position correcting the A 100% retracement in a correction at this point following the preceding wave.

Screen Shot 2020-07-02 at 7.33.57 AM
S&P 500 E-mini futures, 1-hour bars

What does Elliott wave theory say? A 4th wave generally ends within the 4th wave of lower degree in the preceding 3rd wave. That would have put the retracement at around a Fibonacci 38.2%. Instead, the 4th wave has retraced 100%. It doesn’t break a rule but does go against a guideline.

Internally, the rise from July 26 breaks down in to five waves, suggesting that a subwave of Minor wave 4 — a Minuette wave A, to be followed by a B wave to the downside and then a C wave to upside. Minor wave 2 was a zig-zag, and so Minor 4 is likely to be a flat. And yet, the first wave within a flat has three waves, not five. And no matter how hard I squint, I can’t manage to see fewer than five waves within the rise.

The chart in the Elliott wave framing is ambiguous, a not uncommon occurrence, especially in the corrective waves: Wave 2 and wave 4. So I’ll have to see how the subsequent decline plays out to gain certainty about this pattern.

Working this low-level degree, we’re trying to get a grip on the timing of things. The higher degrees have no ambiguity; The first wave within Primary wave 3 to the downside is underway, and it will be significant enough to cause what traditional analysts call a “capitulation”, when optimists lose hope and start pulling out of the market.

What about my trades? Unchanged. Staying out of options until Intermediate wave 3 to the downside begins. Holding shares until Primary wave 1to the downside is nearing completion.

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Live: Wednesday, July 1, 2020

10:15 a.m. New York time

What’s happening now? Basically, little has changed since yesterday. The S&P 500 E-mini futures continue to rise in an upward correction.

What does it mean? The rise will be followed by a significant decline.

What does Elliott wave theory say? At the smaller degrees, the index in a rising 4th wave of Minor degree. In ascending order by size, the rise is happening within a 1st wave of Intermediate degree, which in turn is within a 3rd wave of Primary degree.

What is the alternative? I don’t see a clear alternative at this point.

The view from 20 years. Someday our grandchildren, now in college, will ask, “What was it like during the Great Pandemic?” If we’re honest, we’ll reply, “It felt like our world was coming an end, collapsing into chaos.” And we’ll say, “It felt as though any future we could imagine would be worse than what we knew before the Great Pandemic began.”

And our grandkids will say, “Gee, Grandpa. Things aren’t that bad. People don’t get sick anymore. We’re going to beach with our friends next weekend. When we graduate, we’re guaranteed to get a great job. And if we decide we’d rather become poets or artists rather than office ‘bots, we can live off of our national universal dividend and do whatever we like to do. What’s awful about that?”

Wise grandchildren. We went through bad times and we adapted.

One of my current projects, is to write a history of ancestors on the British Isles side of my family, and I just finished writing about some English multi-great-grandparents who went through the Black Death of 1348, a horrible global pandemic that is said to have killed 40% to 60% of the population in England. And the English endured, my multi-greats included, and made things better than they were before the plague. We’ll respond to this adversity the way they did, with more and better resources to speed the recovery.

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S&P 500, monthly bars

Back in the Great Recession of 2009-2010, it also felt like our world was coming to an end. But it didn’t. Indeed, the 20-year chart of the S&P 500 shows that the index had regained its pre-election peak by 2013, and then continued to rise, more than doubling by February 19, 2020, the day the markets faced the reality of the Great Pandemic and crashed.

The  S&P 500 fell by 58% during Great Recession a decade ago. So far during the Great Pandemic Crash of 2020, the index has fallen by 35%.

Does that mean happy days are here again? Not as I analyze it. The Great Recession was a downward correction within a larger rise In Elliott wave terminology, it was a Primary wave 4 correction within Cycle wave 5 to the upside, which in turn was within a rising Supercycle wave  5, the final upwave of Grand Supercycle wave 3.

And where are we today? I place us at Primary wave 3, descending, within Cycle wave 1 to the downside, which in turn is within a declining Supercycle wave 1, the first down wave of Grand Supercycle wave A.

So the downward trend is far more serious than what happened in 2009-2010, arguably at the Grand Supercycle level the largest decline we’ve had for three centuries. And trends of that magnitude are always accompanied by a great deal of chaos and unrest, and historically, by plagues and pandemics. In this instance, we’ve barely scratched the surface. The difficult times will continue for years, as I analyze the chart.

But it’s not in human nature to give up. Evolution and our genes have made us superb problem solvers, and as things collapse around us, we’ll be planning for the renaissance that lies ahead. Of that I have no doubt.

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Live: Tuesday, June 30, 2020

10:45 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continue the early stages of what will become a significant decline.

What does it mean? The movements we’ve seen since June 8 are the gentle opening bars of Wagner’s “Das Rheingold”, and as always, with Wagner and the markets, it will be followed by drama aplenty, in the form of a major decline

Screen Shot 2020-06-30 at 7.41.11 AM
S&P 500 E-mini futures, 2-hour bars

What does Elliott wave theory say? Minor wave 3 within Intermediate wave 1 began June 19. The encompassing degree, Primary wave 3, began June 8, and will carry price The movement of the encompassing degree, Primary wave 3,  will a significant distance toward the 2000 level, from the 3054 price as of this posting.

What is the alternative? It will take a break below 2976.25, the end of Minor wave 1 attained on June 15, for Minor wave 3 to be verified. Without the verification, it is possible that Minor wave 2 is tracing a complex course. I don’t consider this to be likely.

 

 

What about my trades? I anticipate no trades today. I’m waiting for Intermediate wave 3 before entering bear call options spreads on SPY. My shares, SDS, make money when the S&P 500 declines. They became unprofitable at the beginning of Primary wave 2 at 2174. So I’ll hold my shares during the ride down to 2000, and then begin trading in and out to catch impulse waves at the Intermediate degree.

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Live: Monday, June 29, 2020

10:10 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continue a course somewhere between sideways and down.

What does it mean? When the low-degree hesitation is over, the index will start a major decline to below 2050, perhaps well below. The likely target is set by the lower boundary of the channel, which moves lower every day.

Screen Shot 2020-06-29 at 6.56.36 AM
S&P 500 E-mini futures, 4-hour bars

What does Elliott wave theory say? The low degree of hesitation is Minor wave 2, and by some counts it could already be over. Or not. When Minor wave 2 to the upside is complete, it will be followed by Minor waves 3 down, 4 up and 5 down, before the the one degree higher movement to a upside, Intermediate wave 2. That upward correction will remain below 3231.25. It will be followed by the major decline, Intermediate wave 3

 

What is the alternative? The main variables are questions of timing. Intermediate wave 1 is already in its 25th day, so it’s overdo for a wrap-up. All any trader can do is watch closely and hope for clarification.

What about my trades? I’m holding no options on SPY at this point. I’m waiting for Intermediate wave 3. I’m continuing to hold my shares of SDS, which will gain value as the S&P 500 Intermediate wave 3 traces its decline.

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