Live: Tuesday, April 7, 2020

12:10 a.m. New York time

I mentioned early in my switch to a bear market strategy, in a run-through of how Elliott wave analysis works, that the method is often ambiguous. And that’s where we are today.

We’ve been in a major downtrend from 3397.50 on the S&P 500 futures since February 19, and we hit a low, 2744, in the downtrend on March 22. Of those two facts I have no doubts. At that point, it gets difficult.

We’re clearly in an upward correction. The main question is, what is being corrected?

  1. In the first scenario, the low at 2744 represents the end of wave 1 of the Primary degree and the correction is the 2nd Primary wave . If that’s the case, then we are presently in the 3rd wave of Intermediate degree within the A wave of the correction. The price is approaching a 50% retracement (2785.75). Generally a 2nd wave can be expected to end near the 61.8% Fibonacci point, which would be 2930.12. It’s a tendency, not a requirement. If the correction form is a zig-zag — common in 2nd waves — the A wave is followed by a B wave to the downside, and then a powerful C wave to a higher level that marks the end of the correction.
  2. The second scenario, which was my count until very recently, is that the low at 2744 represents the end of wave 3 of the Intermediate degree, and that the 1st Primary wave is still in force. The third wave would then have begun on March 13 at 2697.25. This scenario was proven false on Monday when the price moved above the end of wave 1 of the same degree, which is not allowed in Elliott wave analysis.

So the 1st scenario is correct, and as I count Primary wave 2 to the upside, we are now in the final section of its progress, Minor wave C.

It is possible that wave A is still in progress, and what I’m counting as waves B and the start of C are subwaves of A. If that proves to be true, then we’re not as far along in the process as I thought. By that count, we’re already 28 days into A, so it seems to me that the C-wave hypothesis is more likely to be correct.

What about my short bear call spread options positions, which are now at more than 80% of maximum potential loss? Well, the positions have 38 days to go before they expire. At this point, I hang on to them. They are entirely in the money — which is loss-making — but a lot an happen in 38 days.

If that’s the case, then the question is how long will that C wave take to complete its work. Within the entire decline from February 19, the longest minor wave was the 4th wave correction to the upside, which took 26 days to run, and the second longest was the 5th wave, which took 23 days. The shortest was the 2nd wave correction, which took only four days.

So I judge that I have time. The worst case scenario is that  the options get assigned and I have stock placed in my account. That hassle doesn’t outweigh the losses I would take if I exited now.

That’s where things stand: Keep cool, keep an eye on the chart, and watch the market work its will without taking action until Intermediate wave 3 has brought the price down.

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


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.

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