11:15 a.m. New York time

What’s happening now? The S&P 500 overnight broke out of its channel at 2806.07 and has hit a low so far today of 2747.25, which 2.1% below the channel’s lower boundary.

What does it mean? The decline may be the beginning of Primary wave 3 to the downside, although that count won’t be confirmed until the price drops below the end of wave 1, at 2174.

What does Elliott wave theory say? If this is indeed the beginning of Primary wave, then we can a decline of great power and velocity. Traditionalists have a term “capitulation”, when the market realizes that all of its past ideas were wrong. “All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses, his real conditions of life…” In other words, wave 3 will be an exciting ride for bear positions and a disaster for bull positions. My positions are on the bear side.

Primary wave 1 fell 1223.50, or 36%. Wave 3 can never be the shortest wave and often is the longest wave. Assuming that the future Primary wave 5 has a length of less than 1223.50, then we can calculate that wave 3 will fall from its peak of 2855 at the least to 1626.50, and potentially much further than that minimum. If wave 3 is less than wave, then wave 5 will have to be longer than the 1st wave, 1223.50.

What is the alternative? Primary wave 2 may in fact not be over. The subwave, Intermediate wave C, never touched the channel ceiling and in fact crawled along the channel floor like a cockroach. A touch of the channel ceiling and then a sharp decline, with a gap, would strengthen my conviction that Primary wave 3 had begun. Honestly, the decline below the channel so far has been rather, Meh! As noted above, a drop below 2174 will confirm that wave 3 has begun. A rise back into the channel will provide evidence that wave 2 is continuing.

What about my trades? My three short bear call options spread positions on SPY have improved to below maximum loss, with the loss metrics now ranging from 86.5% to 91.3% of maximum potential profit. The underlying’s price remains above the strike prices, which range from $261 to $263. The positions, lots 12, 13 and 14, all expire May 15. (The lot numbers link to the entry analyses.)

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

• Elliott wave analysis
• Fibonacci level
• The quote in the “What does Elliott wave theory say?” is from Karl Marx and Friedrich Engels, in the Communist Manifesto.

By Tim Bovee, Portland, Oregon, April 21, 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.

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Based on a work at www.timbovee.com.