10:05 a.m. New York time
What’s happening now? The S&P 500 E-mini futures are tracing a low-level correction to the upside within a larger decline that began July 23.
What does it mean? The blue chips are in the early stages of their resumption of the decline that began February 19 and have a long distance to go before that decline is complete.
What does Elliott wave theory say? The week-old corrective movement, from 3191.50, is Minor wave 2 within Intermediate wave 1 of Primary wave 3, which began July 23. My principle count shows Minor 2 is taking the form of a compound corrective pattern, most likely a double Zigzag — two three-wave movements connected with an X-wave separator.
What is the alternative? Minor wave 2 can also be seen as an expanding triangle (marked in red), one of the horizontal family of triangles. However, horizontal triangles almost always happen in the next to the last wave of a movement: A 4th wave within the main trend or a B wave within a correction.
Turning Minor wave 2 into a 4th wave created distortions: Short 1st, 2nd and 3rd waves compared to the triangular 4th wave, with a high risk that the 3rd wave would be the shortest of the five, which is forbidden under the Elliott rules. The distortions were too great for my taste, and therefore I’ve relegated the expanding triangle count to an alternative. It’s still, possible, though. Horizontal triangles, while rare, aren’t entirely unknown in the second wave position.
On the chart: A triangle, my alternative count, has five legs, labelled A through E. The compound pattern, my principle count, ultimately will have seven legs, labelled A through C, X, and another A through C. The chart is labelled with my principle count, with the red lines showing the the triangle-like formation that underlies my alternative count.
What about my trades? I’m awaiting Intermediate wave 3 within Primary wave 3 before putting on new option trades. I’m holding my bearish stocks (SDS), which rode through the Primary wave 2 correction and haven’t yet returned to profitability.