10 a.m. New York time

What’s happening now? The S&P 500 has completed a 6.2% decline to 2717.25 from its April 16 reversal from 2885.00, the near term peak.

What does it mean? Most likely it is a small upward correction within a larger downtrend that began April 16. However, it could be a continuation of a larger scale correction to the upside that began March 22.

What does Elliott wave theory say? I have counted the larger downtrend as Intermediate wave 1 within Primary wave 3, both downtrending. The upward movement that began overnight is, in my opinion, a wave 2 of Minor degree within Intermediate wave 1. The preceding Minor wave 1 has shown five waves, meeting the Elliott wave theory standard. The assignment of Minor degree to the movement is very tentative. It could well be one degree lower, which is the Minute.

 

The beginning of Primary wave 3 within the decline from February 19 at last gives us the two points needed to draw a channel and to think about downside targets for the 3rd wave. The points of the channel ceiling are the start of wave 1 at 3397.50 and the start of wave 3 at 2885. The third point through which we draw the channel floor parallel to the ceiling is at 2174.

An often seen level for a wave’s end in a descending market is when the price meets the channel floor. The floor declines constantly, of course, and so the great unknown is what date we’re talking about.

The channel floor today is at 1980. A precipitous drop to that point from the present price of 2774 is unlikely, although not impossible.

Let’s say, though, that wave 3 will last as long as wave 1 did, which is 32 days. That takes us to May 18, when the floor will be 1844. That’s a bit more reasonable.

But 3rd waves are almost always longer than 1st waves. A 3rd have that hit the breaks at equality would be extremely weak, and that seems like an irrational assumption give the power of the 1st wave to the downside.

A 3rd wave will sometimes have a Fibonacci relationship with the 1st. The Fibonacci ratio 1.618 is often seen in all sorts of relationships on charts. If we apply that to the 32 day length of the 1st wave, we get 52 days, or June 8. On that date the channel floor will be at 1708, a decline of 1,177 points, or 68.9%, which is is close to the 61.8% Fibonacci point. (Fibonacci points often being where a wave calls it quits).

The reality, of course, is that we don’t know how long Primary wave 3 will last. All we know is that it will be a five wave pattern. We can also guess that wave 3 will take longer to trace its path; the 1st wave was super energized in the speed with which dropped. We’ll gain clarity about the 3rd wave as it unfolds over time, especially through channelling of the Intermediate waves within the Primary 3rd. Before the 3rd meets its end, we likely will be able to say with a reasonable degree of certainty about where they end will occur. And even these early attempts at target analysis give a since of the magnitude of what lies before us.

What is the alternative? The decline from the April 16 peak may be a continuation of Primary wave 2. A rise above the channel ceiling would suggest that the alternative interpretation is likely correct, and a rise above the April 16 peak would move to the alternative to the preferred interpretation. A decline below the beginning of Primary wave 2, at 2174, would eliminate the alternative interpretation.

What about my trades? I’m continuing to hold my three short bear call options spread positions on SPY: Lots 12, 13 and 14, all expiring May 15. (The lot numbers link to the entry analyses.) If the S&P 500 is indeed in Primary wave 3, then the positions will return to profitability quickly. If Primary wave 2 is continuing, then I’ll probably be taking losses.

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

• Elliott wave analysis
• Fibonacci level

By Tim Bovee, Portland, Oregon, April 22, 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.