Live: Wednesday, June 10, 2020

10:55 a.m. New York time

Why a recession? The easy answer to the question is, “Duh. Covid-19, Dummy.” But as is always true in the economy and in life generally, things aren’t always so simple.

Recessions in the U.S. are declared by the National Bureau of Economic Research, a private think-tank. In declaring on Monday that the U.S. has entered a recession in February, the NBER was only saying what everybody already knew.

But that’s only half the story. The NBER does two calculations, a monthly peak of economic activity, based on indicators that are published each month, and a quarterly peak, based on averages of monthly indicators with quarterly indicators added in.

And what’s the biggest quarterly indicator? GDP — the Gross Domestic Product. So while the monthly indicators but the peak of economic activity and the start of the recession in February, in the 1st quarter of this year, after Covid-19 had made its debut, the quarterly calculation places the peak in the 4th quarter of 2019, before Covid-19 had made the leap to humans and begun its rapid spread through the world population.

It means that we were in deep economic trouble, in a recession, before the pandemic began. Politicians will blame the recession on the coronavirus, I have no doubt, but the real cause lies elsewhere.

The conventional wisdom has been that since the pandemic caused the recession, control of Covid-19 will allow for a quick recovery. But if the recession began before Covid-19 existed in humans, then there’s no reason to think it will be any different than past recessions: A slow and painful limping toward recovery.

What’s happening now? The S&P 500 E-mini futures continue to hold near the level of their high two days ago, at 3231.25.

What does it mean? The analysis is unchanged from yesterday. A move above 3397.50 would force a complete rethinking of everything that has happened since February 19. The Relative Strength Indicators (RSI, at the bottom of the chart) has dropped below 70, which indicates that the market is ready to retreat from its overbought level.

Screen Shot 2020-06-10 at 7.33.30 AM
S&P 500 E-mini futures, daily chart

What does Elliott wave theory say? Monday’s peak by my count is (maybe) the end of Intermediate wave C within a Primary wave 2 upward correction. The next wave, Primary 3, will produce a significant decline.

What is the alternative? Two alternatives, really. The index could be still rising in Primary wave 2. Or what I’ve labelled as a major reversal of the rise over the past decades might in be a small correction that will be followed in short order by a resumption of the rise. Primary 2 could have some upside remaining. The second alternative, a minor downward correction rather than the start of a major downtrend, seems very unlikely to me. I don’t buy it.

What about my trades? I’m waiting for an entry point for options trades. No options are in my account at present. I’m continuing to hold my shares in SDS, which profit when the S&P 500 goes down.

Learning and other resources. 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, June 10, 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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