Monday, November 2, 2020

10:25 a.m. New York time

What’s happening now? The S&P 500 index’s low on Friday, October 30, marked the end of the decline from October 23 and the beginning of an upward correction

What does it mean? The decline a bit more than a week, and the position of the correction suggests it will be more of a sideways movement than a quick rush to the higher ground, so probably it the correction will carry into mid-November. The timing is a best guess, so the correction could take a shorter or a longer time to complete. The end wave the correction will be followed by a resumption of the main downward trend that will carry back into the 3200s and below.

What is the alternative? It’s still possible that the decline from October 23 is not yet complete. Based on the look of the chart, it seems unlikely to me.

[S&P 500 index, 45-minute bars]

What does Elliott wave theory say? The October 30 low was the end of wave 3 of Minute degree, and the following wave in its early stage is wave 4 of Minute degree. The Minute 2nd wave was a Zigzag pattern, and Elliott’s rule of alternation says that the 4th wave will be either a Flat or a Triangle. Within Minute 4 the movement is tracing wave A of Minuette degree.

The Minute degree correction is a subwave of wave 3 of Minor degree, which in turn is a subwave of wave 3 of Intermediate degree. All of this is tracing the middle ground of wave 1 of Primary degree, which began on September 2.

My trading strategy. The time taken by the Minute 4th wave correction has implications for my next options play. I exited my short bear all options spread on IWM last Friday, 21 days before its November expiration.

If the chart allows it, the next options position, also a short bear call spreads, will have a December expiration. The optimal entry date will be Tuesday, November 3, with entry possible within a range running from October 27 of last week to November 10, next week.

I don’t trade 4th waves. They have too many variations for confident analysis. They tend to produce surprises. So my target entry is for the end of beginning of Minute wave 5.

I haven’t selected a vehicle yet. Like IWM in my prior trade, the vehicle must have an implied volatility rank of 30 and above. SPY at present meets that requirement, at 35.8%, as does IWM at 40.3% and QQQ at 40.7. All trace similar Elliott wave patterns. Those IV rank can change quickly, so it’s premature to focus on any single symbol at this point.

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, November 2, 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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