Wednesday, October 7, 2020

10:50 a.m. New York time

What’s happening now? The S&P 500 index his a low 3354.54 on Tuesday after falling from its a peak of 3431.56 set earlier in the day. At the end the day it reversed and so far has retraced about two-thirds of the decline.

What does it mean? I interpret the decline to be the end of the correction that began on September 24 and the beginning of a resumption of the downward trend that will carry the price to the 3100s or below.

What is the alternative? The decline could instead be a continuation of what would prove to be a more complex correction pattern.

[S&P 500 index, 15-minute bars]

What does Elliott wave theory say? The correction that ended on Tuesday is Minuette wave 4, and has been followed by the beginning of Minuette wave 5 to the downside. Within that downward movement it appears that Subminuette wave 1 may be complete, and the rise today is a Subminuette wave 2 correction. All of this is happening within downtrending Minor wave 1, which began on September 2 from 3588.11. A 2nd wave, such as the one we’re in presently at the Subminuette degree, often retraces a substantial portion of the 1st wave decline. It will be followed by a 3rd wave decline to lower lows.

If, instead, the wave 4 correction is tracing a more complex pattern, then wave 5 has not yet begun, and we’re seeing either an X-wave separator to the downside or a wave within a developing triangle.

My trading strategy. I continue to hold my bear call spread options position on IWM, an ETF that tracks the Russell 2000 and has a chart that closely resembles that of the S&P 500. Management day, when I exit if the position is profitable, is October 30. Before that, if the position reaches 50% of maximum potential profit, then I’ll exit immediately. If it’s unprofitable on management day, then I’ll assess the risks and either hold it a bit longer or exit for a loss.

I hold stock positions on SDS, and ETF that moves inversely to the S&P 500. When the index falls, SDS makes money.

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, October 7, 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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