10:50 New York time

What’s happening now? The S&P 500 E-mini futures rose to the 3355.50 level,  42 points below the start of the February crash.

What does it mean? The counter trend correction that began March 22 is on its final leg and will be followed either by a dramatic decline or a net sideways extension of the correction.

What does Elliott wave theory say? The index is close to the end of Minor wave 5 within Intermediate wave C of Primary wave 2. When Primary 2 is complete, it will be followed by a Primary wave 3 decline, eventually reaching below 2174 — the beginning of Primary 2 — and most likely significantly below that level. A drop below the beginning of the current Zigzag correction pattern, which began June 14 at 2923.75 (green line), will increase the odds that Primary wave 3 has begun. A drop below the start of the Primary 2 correction, 2174 (purple line) will confirm that the decline is underway.

What is the alternative? If those confirmations don’t happen, then the index will decline in an X wave — a boundary — and then embark on another three-wave correction pattern, the third of this compound correction. The price is so close to the correction’s upper boundary, 3397.50 (gold line) that any correction would likely trace a sideways pattern, known as a Flat in Elliott wave terminology. Internally, a Flat has an A wave with 3 waves within it, a B wave with 3 internal waves, and a C wave built from 5 internal waves. I used the “likely” hedge word because it’s possible that the pattern would play out as a Zigzag (5 wave, 3 waves, 5 waves), although a very shallow one.

A rise above the February 19 start of Primary wave 1, from 3397.50 (gold line), would eliminate the justification for labelling the decline from February as a downward correction of Cycle degree (the degree above Primary). Should that happen, the labelling of the chart will look very different.

What about my trades? I prefer to trade in the direction of the major trend (the whole, “The trend is my friend” thing loved by trading instructors) The trend has been down since February, so I’m waiting before resuming my options trades. I’m holding my existing bear stock positions (symbol: SDS).

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 10, 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.