Monday, January 4, 2021

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 and derivatives reversed from its peak and dropped 20 points. The E-mini futures peaked at 3773.53 early in the day and then fell to a daily low, so far, of 3652.50. The chart includes the Minor-degree Fibonacci retracement levels for the futures; the Fib’s use in setting targets was discussed below as it applies to the index.

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

9:45 a.m. New York time

What’s happening now? On the first trading day of 2021, S&P 500 index and E-mini futures continued their rise. The index hit an early high of 3769.99 and the futures, of 3773.25.

What does it mean? The index and its derivatives are on the final leg of a near-term rise that began on December 21, and over the longer term, of a rise that began on February 23.

[S&P 500 index at 9:40 a.m., 3-hour bars]

What does Elliott wave theory say? As the price keeps bouncing up the mountain, let’s make an attempt to establish the peak. One method that’s part of Elliott wave analysis is the Fibonacci level. Often, a third wave will be longer than the preceding third wave by a number in the Fibonacci sequence, with 38.2%, 50% and 61.8% being the most common peaks beyond the length of wave 2.

Looking at the Minor level on the index chart, wave 2 was 1,201.66 points long. That gives us three possible peaks if one of them matches a common Fibonacci level:

  • 3,852.55 at 31.8% beyond the length of wave 2.
  • 3,994.35 at 50% beyond.
  • 4136.15 at 68.2% beyond.

I’ve marked the three levels on the chart, above. Now, the reality of Fibonacci levels is that they are rarely exact. There’s always a bit of fudge regarding where the price will land. So I’ll think of the target as being somewhere between 3,850 and 4,150.

My trading strategy. My short bear call options spreads on IWM expire on January 15, which by my rules means, win or lose, I’ll exit the position on Monday of next week, on January 11. IWM at present is trading at 196 plus change. The top of the profit zone is 192, so the position is a losing one 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, January 4, 2021


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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