Tuesday, September 22, 2020

9:50 a.m. New York time

What’s happening now? The S&P 500 index reversed into an uptrending correction, reaching a high so far of 3,298.18.

What does it mean? The correction, when complete, will be followed by a renewed decline that will carry the price to the the lower boundary of the price channel. Assuming that takes a couple of days, the price would reach down into the 3,170s, more or less.

[S&P 500 index, 5-minute bars]

What is the alternative? The timing of the decline is the question. Corrections sometimes trace extended patterns, and the longer the correction goes on, the further down the lower boundary drops. Target setting is quite problematic within this context.

What does Elliott wave theory say? The correction is wave 4 of the Subminuette degree, and the final push to the downside will be wave 5. Under Elliott’s Rule of Alternation, a 4th wave correction tends to trace a different pattern than the prior 2nd wave correction. Subminuette wave 2 was a simple Zigzag pattern, a single three wave climb to the upside. Under the rule, Subminuette 4 has a likelihood of being a Flat pattern — a sideways trend — or a complex pattern, stringing together several Flats or mixing Flats and Zagzags. At this point it’s impossible to understand how Subminuette wave 4 will play out.

My trading strategy. At present my short iron condor positions on SPY are at 21.5% of maximum potential profit (my target is 50%). I’m continuing to hold my shares in the inverse fund 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.

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, September xx, 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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