Friday, October 9, 2020

10:45 a.m. New York time

What’s happening now? The S&P 500 index continued to rise overnight, carrying with it an unusually heavy load of ambiguity.

What does it mean? I’m reworking my analysis today, using a simple moving average technique to separate the signal from the noise.

[S&P 500 E-mini futures, 4-hour bars]

What does Elliott wave theory say? On the S&P 500 E-mini futures chart I’ve overlaid the price with a six-bar simple moving average, in garish purple, which aggregates the fluctuates and highlights the broader trend at any given point.

Starting with the September 2 peak, by this measure the futures traced five waves down in a movement that ended September 24, a 389-point decline. It then reversed and has reached a high so far today of 3474. That’s a 68% retracement. A 2nd wave tends to retrace heavily, sometimes taking back nearly all of the preceding 1st wave.

However — firm rule — a 2nd wave cannot move above the start of the 1st wave. If it doesn’t, then it’s not a 2nd wave and the chart must be recounted. The 1st wave on the S&P 500 index chart began, on September 2, at 3588.11. The corresponding point on the S&P 500 E-mini futures chart is 3587.

And so, the count. By this analysis, the five-wave decline from September 2 is wave 1 of Minuette degree, and the single-wave rise from September 24 is the Subminuette A wave — the initial subwave — of Minuette wave 2. Subminuette B will retrace somewhere between 38% and 70% of the preceding wave A, and then will come a C wave that, on this chart, will push to new heights, while remaining below the start of Minuette wave 1. The end of Minuette wave 2 will mark the start of Minuette wave 3, which will carry the price down to the 3100s.

This is a simpler structure than the one I suggested in Thursday’s analysis. Given a choice, I tend to select the simpler solution, and so this analysis will be my principle analysis going forward.

My trading strategy. For my bear call options spread position, I’m counting on that wave B to give me a perhaps profitable exit opportunity. The options are 42 days away from from expiration, so there’s time for Subminuette A to complete its work.

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 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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