3:30 p.m. New York time

The S&P 500 E-mini futures are about eight points below their high of the day. I’ve updated the futures chart from this morning.

2:25 p.m. New York time

I mentioned this morning that I would make a decide whether to exit my short bear call options spreads on IWM today. The position expires on January 15, so by my rules I need to be out today or Monday.

Here are some numbers that frame the decision. The maximum loss calculated at entry was $1.08 per contract at expiration. The profit zone is a share price of $192 or below, marked on the chart with an alert. The present cost of exiting is $4.58 per contract.

(Apologies for the size of the chart. WordPress has gone into one of its recurring spells of graphs madness and won’t let me resize the image for a more normal presentation.)

If I exit now, the loss will be more than four times what I would pay at expiration. So — no brainer — I should continue to hold the position. The risk to holding is that the position could be assigned, leaving me with 100 short shares of IWM in my account. Not a tragedy but an inconvenience.

As IWM falls off from today’s high, 209.77, it could very well mean that wave 5 of Subminuette degree and its parent, wave 3 of Minuette degree have ended, and we have begun a Minuette wave 4 downward correction, which would benefit my position.

So, decision time. I shall continue to hold position until Monday, and decide then whether to exit or hold longer.

9:45 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continued to rise overnight, to a high of 3817.75.

What does it mean? The rise is part of the end game of the upward movement that began October 30 from 3225. The current high is about 50 points below the lowest of three Fibonacci retracement levels that provide price targets. After the uptrend is complete, I expect a shallow correction and then another upward movement.

What does Elliott wave theory say? The rise that began October 30 is wave 5 of Minute degree. Internally, it is on wave 3 of Minuette degree, which in turn in wave 5 — the final wave — of Subminuette degree. Minuette 3 will be followed by a 4th wave correction, probably shallow and possibly time-consuming, if it turns into a compound structure.

My trading strategy. My short bear call spread options on IWM are in a losing position, with expiration only a week away. The question is, do I exit now or do I wait until Monday. I’ll make a decision on the question before the closing bell.

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.

• Elliott wave analysis
• Fibonacci level

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 8, 2021

Disclaimer

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.

License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.