Live: Friday, July 10, 2020

10:25 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continues to work its way down in the early stage of a decline that began July 6.

What does it mean? The decline again aligns the index with the major downtrend that began February 19. The price will rise some days and fall in others, but the net direction will be down.

Screen Shot 2020-07-10 at 7.12.46 AM
S&P 500 E-mini futures, 4-hour bars

What does Elliott wave theory say? The Minor wave 3 downward movement since July 6 has taken the form of three complete waves down and is now in wave 4 of a small degree, perhaps Sub-minuette. Minor 3 will push below the starting point of the Minor 1 wave, 2923.75 (the red line). All of this Sturm und Drang has taken place within a declining Intermediate wave 1 that is in turn encompassed by Primary wave 3 to the downside.

What is the alternative? If the present wave, Minor 3, that began July 6 were to reverse and move above the level from which it started (3184 — the blue line), then under the rules of Elliott wave analysis, Minor wave 2 would not yet have reached its conclusion, and what which has happened since July 6 would be a downward correction within the uptrending Minor 2, itself a correction.

What about my trades? My major focus at that time is to decide what Elliott degree should govern my shares of SDS. If I’m correct in thinking that the downtrend will continue for several years at the higher degrees, the the best tax break is to hold the positions,  knowing that my Elliott wave analysis will tell me when that major downtrend has reached its end. Under U.S. law, shares held for more than a year incur a lower tax bill.

Primary wave 1 in this downtrend from February lasted nine days. Primary wave 1 in the Cycle degree uptrend that began December 9, 1974 lasted for 11 years 4 months. That’s quite a difference.

It may mean that the degree labeling is off, although R.N. Elliott found no absolute rules for how long a wave of a certain degree might last. Or it may mean that the time spans show the difference between traders climbing the wall of worry vs. those tumbling down the waterfall of fear. Worry is a chronic condition and can last for a long time. Fear is a rapid response to events.

So, tentatively, I shall use the Primary wave as my major guidance for entering and exiting my share holdings, and adjust it when possible in order to have a holding period of at least a year.

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, July 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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