Monday, December 21, 2020

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 recovered about three-fourths of its early morning decline, and then faltered a bit. Impossible to say yet whether the rising wave 4 of Micro degree is complete or not. I’ve updated the chart below.

9:40 a.m. New York time

What’s happening now? The S&P 500 E-mini futures fell sharply overnight, from a high of 3724 down to 3596, and then turned a rose to the 3660s.

What does it mean? The speed and scope of the decline suggests that a significant decline has begun that will carry the S&P 500 away from the sideways pattern it has traced all month.

What is the alternative? As before, it’s possible that the S&P 500 still has some upside left. The overnight decline may prove to be yet another false start on the downward track.

[S&P 500 E-mini futures at 3:30 p.m., 25-minute bars, with volume]

What does Elliott wave theory say? By my principal count, wave 4 of the Subminuette degree ended this morning at 3724, and from that point Subminuette wave 5 began.

My trading strategy. IWM, the stock backing my short bear call options spreads, dropped back close to the profit zone for the first time since December 15. I’ll manage the position on December 24 or 26 if it is profitable to any extent, and shall exit earlier if it attains 50% of maximum potential profit.

The S&P 500 has changed. Tesla (TSLA) this morning was added to the S&P 500, replacing Apartment Investment and Management Co. (AIV), a company now trading at $4 plus change.

TSLA’s weight in the index will be far greater than AIV’s, thanks to the automaker’s market cap of $658.79 billion, compared to $703.37 million for AIV. TSLA will rank #7 in the index ranking by market cap, below Facebook (FB) and above the former #7, Berkshire Hathaway (BRK.A and BRK.B).

TSLA is a high beta stock, at 2.25, more than double AIV’s beta of 0.9. So my best guess is that TSLA, because of its greater size and beta, will produce an index that will be more volatile than than it was before.

One thing to watch will be implied volatility and implied volatility rank. The exchange-traded fund SPY tracks the S&P 500. SPY’S at-the-money call options expiring January 15 had an IV of 19.55% on Sunday, before TSLA became part of the index. SPY’s IV rank, which compares the IV to its historical performance, was 13.4% on Sunday.

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 21, 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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