Thursday, January 14, 2021

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 E-mini futures dropped in trading today. The price of wave B of Submicro degree never retraced 90% of the preceding wave A, and that retracement is a firm necessity under the Elliott wave rules. So, we’re left with two choices: Either wave B is not yet complete, or the pattern we’re seeing isn’t a Flat structure. I’ve updated the chart below, marked on the assumption that wave B is still underway.

9:55 a.m. New York time

My position on IWM, which I exited on Tuesday, was a big loser. I’ve added a “lessons learned” section to the analysis, which says:

The loss on this trade was compounded by my rule that requires an exit 21 days before expiration for profitable positions. This position was unprofitable at 21 days, and grew even more unprofitable in the last weeks of its life. A better rule would be to exit 21 days before expiration whether a position is profitable or not.

The position would have lost under either version of the 21-day rule, but the loss would have been less had I exited earlier rather than later.

9:40 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continue the middle wave of a Flat correction of the rise since January 4, having so far failed to reach a minimum retracement under the rules of Elliott wave analysis.

What does it mean? Once the correction is complete, I’m expecting a final rise to the upside, and then a downtrend.

What is the alternative? The form of the correction is ambiguous. If it’s not a Flat pattern, then the minimum retracement rule may not apply.

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

What does Elliott wave theory say? The middle wave in question is wave B of Submicro degree within wave 4 of Micro degree. The 4th wave is a downward correction, and the internal wave B is an upward correction within the downward correction. The beauty of Elliott wave analysis is that it recognizes that a chart contains trends within trends, in a fractal universe where patterns are built from smaller self-same patterns.

A B wave must retrace 90% of the preceding A wave. On this chart, that would be 3819.55 (blue line). Submicro B yesterday hit a high of 3817.75, leaving it 1.8 points below the mandatory retracement level.

My trading strategy. The next options I can trade under my rules will be the monthlies expiring March 21. The ideal entry date would be February 2, but I’ll settle for a date between January 26 and February 9. At this point my list of liquid ETFS are showing low implied volatility ranks; only a metal, SLV, has an IVR high enough to meet my standards.

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 14, 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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