9:55 a.m. New York time

The index dropped below the upper boundary of the price channel and I entered share positions of SDS, an exchange-traded fund that moves the opposite of the S&P 500. I.e., it’s a bear fund. My entry price was $17.09 per share. Shortly afterword, the price again moved above the channel boundary, so I halted my trading until the decline resumes.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures moved above the price channel of the decline that began in February, a movement known as a throw-over. The tip-off that a throw-over was likely came from the volume, which has been on the increase as the price approached the channel.

What does it mean? A throw-over is an exhaustion move, the last hoorah of a trend that will quickly reverse. I anticipate a decline that initially will move below 3200 and perhaps much lower as a the new trend kicks off.

What does Elliott wave theory say? The channel at its upper boundary connects the starting points of Primary waves 1 and 3, with the width determined by the end point of Primary wave 2.

The throw-over at the upper boundary marks the end of a Minor wave 2 correction to the upside. It will be followed by a return to the dominant trend, to the downside, with Minor wave 3 within Intermediate wave 1 within Primary wave 3.

At the least Minor wave 3 will move below the starting point of the correction, 3191.50, attained on July 24, and will most likely move quite a bit lower.

It will be followed by Minor wave 4, most likely a sideways correction, and then Minor wave 5 to the downside, which will mark the end of Intermediate wave 1.

At that point things get interesting for traders. The next move will be Intermediate wave 2, an upward correction. Second waves often take back nearly all of the decline of the preceding wave of the same degree. This second wave will likely bring the price back to up to almost where it is today. The correction will be followed by Intermediate wave 3, which will carry the price down significantly, with the great energy that third waves tend to bring to the chart.

What is the alternative? I have seen cases where throw-overs move significantly beyond the channel boundary. Usually there’s a quick reversal. But not always, and that can be devastating for traders who jump in too soon. The upper limit of the correction is 3397.50, the start of wave 1. Under the Elliott rules, no second wave can move beyond the beginning of the first wave.

What about my trades? My signal to get in will be the cross below the upper boundary of the price channel. At that signal, I shall add to my bear positions on the S&P 500 (using the inverse exchange-traded fund SDS).

Minor wave 3 may well be a reasonable options play, and I shall consider entering bear call spread options positions at the cross back to within the channel. If I were to enter today, I would use the options expiring September 18 as a vehicle, with profitable positions to be exited no later than August 28 (“management day”). The entry period under my rules ends August 11, so there’s time to allow some caution in choosing my entry point.

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.

• Elliott wave analysis
• Fibonacci level

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, August 3, 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

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.