Wednesday, December 16, 2020

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 E-mini futures have eased up to a higher high this afternoon, so wave C of Micro degree still had a bit more rise in it. I’ve updated the chart below.

10:15 a.m. New York time

What’s happening now? The S&P 500 index and its derivatives completed the upward correction that began December 12, or at least the first pattern within it if the correction should prove to be a compound structure. The peak, attained in overnight trading, was 3701.75 on the E-mini futures, and 3698.97 on the index.

What does it mean? Completion of the correction in the Subminuette degree means the beginning of the final Subminuette wave down to below the 3620 mark, and perhaps significantly below.

What is the alternative? If the overnight high is only the end of the first pattern within a compound correction, then the price will fall in an X wave that separates patterns, and will be followed by either a another corrective pattern. An X wave has three subwaves.

[S&P 500 E-mini futures at 3:30 p.m., 20-minute bars, with volume]

What does Elliott wave theory say? The correction that may have peaked overnight, close to 8 a.m. New York time, is the Subminuette 4th wave, a variety of corrective wave that is prone to compounding. If the decline that began this morning is the beginning of the next Subminuette wave — wave 5 — then it will have five subwaves of Micro degree. If the decline is an X wave, it will have three subwaves.

All of this is happening within wave 4 of Minor degree, a downtrending corrective wave, which in turn is within uptrending wave 5 of Intermediate degree.

My trading strategy. Here’s how I approach the complex nested waves structures in Elliott wave analysis: If it’s a short-term play, such as options, I’m paying attention to the Subminuette degree in order to profit from the Minuette degree. If its a longer-term play, such as shares, I’m paying attention to the Minute degree in order to profit from the Minor degree.

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, December 16, 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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