Wednesday, February 3, 2021

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 dropped quickly by 27 points to 3804 in the first hours after the opening bell, and then returned to its overnight range. A small whiff of storm and fury, signifying nothing. I’ve updated the chart below.

10:55 a.m. New York time

I’ve entered a short iron condor position on IWM, with the options expiring March 19, and posted an analysis, IWM Trade.

Note the new titling convention. Going forward I’ll be using “Analysis” in the title when I analyze but don’t trade, as with the recent GME analyses I’ve posted. I’ll be using “Trade” in the title when I enter a position.

9:35 a.m. New York time

What’s happening now? The S&P 500 E-mini futures barely budged overnight, trading within a 20-point range around 3830. The price declined slightly with the opening bell.

What does it mean? The pause suggests that the upward correction that began on January 27 has reached an end, and the next move will be an enthusiastic decline that will carry the price below 3656.

What are the alternatives? A pause is a balance between buy and sell orders. If the buy side strengthens, then the correction will continue its upward course. A move above 3862.25 on the E-mini futures (3870.90 on the index) would force a re-analysis of the chart.

[S&P 500 E-mini futures at 3:30 p.m., 2-hour bars, with volume]

What does Elliott wave theory say? The present wave is C of Minuscule degree, the final subwave of wave 2 of Submicro degree. If the correction is indeed over, the next move will be wave 3 of Submicro degree, a declining wave in the direction of the trend. Third waves typically are the most powerful of the waves that make up a trending move.

My trading strategy. I choose my options trades from among liquid exchange-traded funds having implied volatility ranks of 25 or above. It’s a lower volatility period in the markets, so I have only one choice: SLV with a rank of 41. There has been a sudden upward gap in SLV that has introduced directional uncertainty for the near term, so I’ll focus on the next lower acceptable symbol, IWM, at 24.1 and attempt to build a trade with sufficient potential for profit.

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
  • {-4} Subminuette
  • {-5} Micro
  • {-6} Submicro
  • {-7} Minuscule

By Tim Bovee, Portland, Oregon, February 3, 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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