Live: Thursday, June 11, 2020

11:25 a.m. New York time

I’ve entered a short bear call options spread position on SPY and have posted the analysis.

9:55 a.m. New York time

Big picture: What has happened since February, when the market decline began.

Screen Shot 2020-06-11 at 6.51.47 AM
S&P 500 E-mini futures, 4-hour bars

 

9:40 a.m. New York time

What’s happening now? The S&P 500 E-mini futures have begun a major decline, ending a rise that began on March 22. The S&P 500 exchange-traded fund SPY began the day with a -2.4% opening gap. The Relative Strength Index (RSI), which had peaked in overbought territory, at 74.27 on June 8, and at the opening bell stood at 58.44, further evidence that a significant decline has begun.

What does it mean? The decline likely will be the longest and the most energetic downtrend of the bear market that began in February, working its way down within a channel whose lower boundary today stands at about 2090 and in each subsequent day will become lower each subsequent day.

Screen Shot 2020-06-11 at 6.36.25 AM
S&P 500 E-mini futures, 1-hour bars

What does Elliott wave theory say? By my analysis Primary wave 2 to the upside ended on June 8, at 3231.25, having retraced 86.4% of Primary wave 1, which began February 19, kicking off what I expect to be a bear market of epic proportion. We are now in Primary wave 3, and so far the chart shows three waves to the downside at a low degree, which I’ve labeled as the Minute wave 3. Whether that’s a degree too high or too low will become apparent as the parent wave, Intermediate 1, traces its course.

What is the alternative? Head fake. Whipsaw. The most frustrating part of trading. It is still possible that we are seeing yet another countertrend correction within uptrending wave 2. If that’s the case, then we have more upside ahead. If the price exceeds 3397.50, then a strict rule of Elliott wave theory — a 2nd wave must not move beyond the start of the preceding 1st wave — has been broken, and the entire count since February must be reassessed. (See my June 8 post for a discussion of how that might go.)

What about my trades? Finally, it’s time to consider re-entry. I held my shares of SDS (an inverse fund based on the S&P 500) through the Primary 2nd wave, and I shall continue to hold them as the 3rd wave decline brings them back to profitability. they 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.

Options are trickier. My ideal entry point is 45 days before expiration. The July 17 monthlies expire in 36 days, 11 earlier than the ideal, and the August 21 monthlies expire in 71 days, or 26 days later than the ideal. So if I were to go today, I would use the July options series, but would space out my contracts to gain some safety through time diversification. My preference is for 10 days either side of the ideal 45 days — 35 to 55 days. So the timing isn’t perfect.

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 11, 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.