Live: Wednesday, July 22, 2020

11:25 a.m. New York time

What’s happening now? The S&P 500 E-mini futures pulled back from yesterday’s peak of 3273.25, although by only 34 points or so.

What does it mean? The correction that began March 22 may have ended on July 21, or perhaps not. At this point my analysis is stuck in a swamp of ambiguity. A drop below the start of the present near-term push upward, beginning June 26 from 2983.50, would suggest that the correction had ended. A drop below 2174 (the purple line) would confirm it.

What is the alternative? If the price moves above 3397.50 (the tan line), then the rise that began in December 1974 is still underway, and what we’ve seen since the February crash has been a correction within an ongoing uptrend.

Screen Shot 2020-07-22 at 8.21.27 AM

What does Elliott wave theory say? The recent push up is Intermediate wave C in the second part of a double Zigzag pattern taken by the Primary degree 2nd wave correction that began March 22. Multi-Zigzag patterns are separated by an X wave in my nomenclature, so the decline following the completion of Intermediate C will be an X wave if the correction turns out to be a triple Zigzag. If not, then the correction is over, and the initial decline will be Intermediate wave 1 of Primary wave 3.

So how do we know which it is? That’s the great frustration of Elliott wave analysis, because we can’t know for sure until the price breaks one of the rules of Elliott. Until a rule is broken, then it’s all a matter of probabilities.

The rule governing the present chart is that a 2nd wave (such as our present Primary wave 2) cannot move below the start of the preceding 1st wave of the same degree. Primary wave 1 began on March 22 at 2174, and so if the price drops below that level then and only then can we say for certain that Primary wave 3 has begun. That’s a long drop before the uncertainty is resolved.

However, the further down the price goes, even if it is above the start of wave 1, the greater the likelihood that Primary wave 3 has indeed begun.

Another technique is to count the waves that are internal to the downward movement — the waves of Minor degree in this case. If the correction is not over, it will be an Intermediate X wave, which has three subwaves Minor degree. So if the price traces three waves to the downside, Minor A, B and C, and then reverses upward with conviction, the odds are higher that the Primary 2 correction is still underway.

If the correction is over, then the downward move will be Intermediate wave 1, which has five subwaves of Minor degree, numbered 1 through 5. If the 3rd wave down shows a great deal of energy and the following upward movement, wave 4, lacks conviction, then our certainty that Primary 3 is underway will increase.

All of which shows, yet again, that Elliott wave analysis is decidedly not a forecasting technique. It instead plants a “You Are Here” sign on the chart and provides us with concepts to understand the implications of that sign’s placement.

What about my trades? I’m awaiting Primary wave 3 before entering new positions.

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 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.

License
Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

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