Thursday, February 25, 2021

3:30 p.m. New York time

Half an hour before the closing bell. The S&P 500 fell to a low of 3820.25 during trading today, 15.5 points above the low of 3804.25 on February 23. A cross below that level will confirm that wave 3 of Subminuscule degree is underway. The updated chart below includes an alert showing the location of the 3804.25 mark. (Note that WordPress’ resizing function for the chart is, once again, not working on the update. So we all get to enjoy a supersized chart this afternoon.)

10:20 a.m. New York time

What’s happening now? The S&P 500 E-mini futures reached a high of 3934.50 in overnight trading and then reversed to the downside.

What does it mean? That high is above the previous high of 3931, attained on February 19. This has implications for the Elliott wave count.

What are the alternatives? See the Elliott wave theory section below.

[S&P 500 E-mini futures at 3:30 p.m., 35-minute bars, with volume]

What does Elliott wave theory say? A firm rule of Elliott wave analysis is that a 4th wave can’t exceed the end of wave 1. The end of the 1st wave in my count is 3931, and the end of the “4th wave” is 3934.50, which is 3.5 points higher. That means that the “4th wave” is no such thing. So what could it be?

In doing the recount, I have two requirements that must be met. I must ensure that no 4th wave moves beyond the end of wave 1. And in the the downtrend from the 3959.25 peak, reached on February 15, I must ensure that the 3rd wave isn’t the short of the three descending waves in the five-wave pattern. And as it turns out, it can be done, as the chart above shows.

I reanalyzed the internals of the decline from 3959.25 to the low of 3804.75 reached on February 23 so that the low marks the end of wave 1 of Subminuette degree, and the rise that followed becomes Subminuette wave 2. (See my chart in yesterday’s post to compare the new count with the old one.) That eliminates the problematic 4th wave and provides a 3rd wave that is longer than the 1st wave, fulfilling the requirement that wave 3 can’t be runt of the litter.

Second waves tend to take back much of the preceding 1st wave, and I had remarked in an earlier post that the rise seemed far too steep for a 4th wave. The recount takes care of that difficulty with the form.

So what happens next? If the overnight high, 3934.50, is wave C within wave 2 of Subminuette degree, then the upward correction is over, and the price will fall below 3804.75, perhaps quite a bit below. However, I count only one wave so far within wave 2, and there should be three waves. So I would expect a wave B to the downside followed by wave C to the upside, which will complete wave 2.

And that points to a requirement that must be fulfilled by this new wave 2: A second wave cannot move beyond the start of wave 1. It must remain below the February 15 high of 3959.25, where wave 1 begins. And that’s OK. The structure has 24.75 points to work with before reaching that level. Plenty of room.

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 25, 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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