Tuesday, December 29, 2020

3:30 p.m. New York time

Half an hour before the closing bell. The overnight high of 3747.35 on the S&P 500 E-mini futures was unequalled during the trading session. The price dropped during the day by 20 points plus a little. A quick look at the rise today appears to be a 3rd wave of Micro degree within a 5th wave of Subminuette degree. Here’s a near-term chart of the futures.

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

10 a.m. New York time

What’s happening now? The S&P 500 index continues to rattle along the rising upper boundary of the Diagonal Triangle that began two years ago, rising above it in overnight trading by less than 20 points.

What does it mean? The index has been on the rise since October 30 in what is the concluding movement of the larger-scale uptrend that began February 23 from 2191.86. Once uptrend is complete, the next move will be a decline into the lower 2000s, or perhaps lower.

[S&P 500 index at 9:56 a.m., daily bars]

What does Elliott wave theory say? I re-analyzed the chart using a smoothing technique and have concluded that the S&P 500 is on wave 5 of Minuette degree. Its completion will end the first leg of the Diagonal Triangle, the 5th wave of Intermediate degree that began on December 26 from 2346.58.

To smooth the chart and make the subwaves clearer, I super-imposed a six-day simple moving average (the purple line), which bring clarity to the often random-looking fluctuations of the market. That smoothing made it clear that the index is now in its 5th wave rather than its 3rd.

The Diagonal Triangle, remote in time though its beginning might seem, is important because it defines the boundaries of the S&P 500’s movement for some time to come, perhaps years. The Triangle became a necessity under the rules of Elliott wave analysis in late February when the low point of the brief pandemic crash, Minuette wave 2, fell below the starting point of the preceding Minuette wave 1. This is normally not seen under the rules of Elliott wave analysis, but it can occur in an expanding Diagonal Triangle.

The Triangle will have 5 waves ultimately, bouncing from boundary to boundary in an expanding field. The completion of the rise from February 23 will be the end of wave 1 of Minuette degree within wave 5 of Minor degree within wave 5 of Intermediate degree. The next wave will be wave 2 of Minuette degree, which will carry down to the lower boundary, which is presently around 2106. Most likely it will take the form of a three-wave Zigzag, as is typical of 2nd waves.

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 29, 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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Based on a work at www.timbovee.com.