Live: Wednesday, April 1, 2020

2:40 p.m. New York time

So where are we? The upward correction began on March 22, at 2174 on the S&P 500 futures. I’m placing the end at 2635.75, a high set on March 31. We have since then fallen to a low today of 2453.50, a decline of 6.9%.

In Elliott wave analysis terms, the upward correction is Intermediate wave 4 within Primary wave 1, and the fall since yesterday is the beginning of Intermediate wave 5, also within Primary 1.Screen Shot 2020-04-01 at 10.57.28 AM

Or is it?

As the chart to the left shows, we’re at the low point of a flat that was the second component of a combination correction — basically a cut-and-paste that puts several corrective forms together. It’s not an unusual thing to see in a 4th wave. I want to see a more robust decline to remove my doubts about declaring this move to be the 5th wave, rather than a continuation of the combination of patterns.

One metric we can use is the VIX, the implied volatility of SPY. It peaked on March 18 at 85.47, marking the end of the panic selling and a return to a more measured market. It then dropped to a low yesterday, March 31, of 50.88, a decline of 40.5%. If the wave 5 decline is truly underway, I would expect the VIX to kick up to a higher level, not necessarily back into the 80s but surely around 70.

Another tell-tale is the form of the present decline. Does it fit R.N. Elliott’s observations of what a 5th wave looks like?

We know that a 5th wave can be either a five wave decline (down-up-down-up-down), at the Minute level, with each down wave itself composed of five sub-waves, or a horizontal triangle, with the same down-up pattern but with each down wave composed of three sub-waves.

So far I see three short waves within the downward movement, two very short ones and a longer 3rd. Given the look-and-feel, I’m betting on a 5-wave decline, but a three-wave upward movement after the present third-wave of the downward movement would point toward a triangle.

One other thing we know from Elliott is that there’s no rule that says the 5th wave must move beyond the end of wave three — below 2174 in this case. In first writing about Elliott wave analysis after the crash began, I said that it was filled ambiguities. This is an example.

In any case, I’m positioned so that if the market goes down, I’m in good shape. And if it goes up, I have plenty of time to wait for a reversal, since my short bear call options spread don’t expire until May 15.

And the market will go down, because that’s the major trend. And ambiguities aside, that’s the value of Elliott wave analysis. It allows us to say with certainty what the main trend is.

By Tim Bovee, Portland, Oregon, April 1, 2020

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
Creative Commons 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.

By Tim Bovee, Portland, Oregon, April 1, 2020

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
Creative Commons 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.