Friday, November 20, 2020

3:30 p.m. New York time

Half an hour before the closing bell, the S&P 500 index and investments based on it continue to work through the Subminuette wave 4 upsdice correction.

[S&P 500 E-mini futures, 26-minute bars]

9:55 a.m. New York time

What’s happening now? The S&P 500 index continues to work through the very early stages of a decline that will eventually carry it from present levels in the 3500s down to the 2100s or below.

What does it mean? The pattern unfolding since December 2018 has been an expanding Diagonal Triangle. The present decline will eventually carry down to the Triangle’s lower boundary, and that then climb back up to the upper boundary to complete the pattern, and indeed to complete all of the market’s rise since the mid-20th century. (The boundaries are shown on the chart as red lines.)

[S&P 500 index, 6-hour bars]

What does Elliott wave theory say? The present decline is Minor wave 4, a subwave of Intermediate wave 5 within 5th waves of Primary and Cycle degree. This chart, going back to the beginning of 2020, shows how small a movement there has been so far. Early days.

My trading strategy. I’m out of options at present. The analysis shows very limited prospects to the upside and significant likelihoods to the downside. A clear acceleration of Minor wave 4 to the downside will be my signal to start trading short bear call options spreads. Regarding shares in the bear-oriented exchange-traded fund SDS: The end of Minor wave 4 could be a selling opportunity. The idea would be to ride Minor 4 to the lower boundary, take profits, and switch to a bull-oriented fund to ride Minor 5 to the upper boundary.

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 20, 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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