Wednesday, October 21, 2020

9:35 a.m. New York time

What’s happening now? The S&P 500 index continues to wind through the ambiguities I discussed in detail in yesterday’s post, climbing either as the late stage of an upward correction, or as an early stage of a resumption of the downward trend.

What does it mean? My principle count continues to favor the continuing upward correction scenario, in part because it requires three waves to the upside, and I don’t see that yet with each wave having roughly the same magnitude as its siblings. So the peak of October 12, under this scenario, counts as the end of the first movement within the upward correction.

What is the alternative? The October 12 high marks the end of the upward correction, probably, although there is a third scenario that has the correction continuing in a more complex form.

The Chart. I show two scenarios on this chart: The principle scenario in black and the first alternative — upward correction complete — in red. The price channel assumes that the October 12 high is the end of the upward correction.

[S&P 500 index, 30-minute bars]

What does Elliott wave theory say? So, let’s put some waves to the various scenarios.

Principle: The October 12 high is the end of wave A of Minor degree within wave 2 of Intermediate degree.

Alternative: The October 12 high is the end of wave 2 of Intermediate degree, and the ensuing decline is the start of wave 3 of the same degree.

Another alternative: Same as the first alternative except the ensuing decline, rather than marking the start of Intermediate 3, is instead an X wave of Minor degree that separates the two portions of what will prove to be a compound structure within Intermediate wave 2.

My trading strategy. Happily, the two alternative scenarios work nicely with my short bear call options spreads, providing sufficient downside to allow for a profit. The principle analysis — not so much. It will probably result in a loss. In any case, having crossed the Rubicon, a trader has no choice but to march forward, adjusting strategy to match the market reality.

I shall continue to hold my shares of the inverse fund SDS, probably until Minor wave 5 within Intermediate wave 3, always keeping in mind the favorable tax treatment of long-term capital gains, on positions held for at least a year.

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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