10:15 a.m. New York time, chart updated 3:15 p.m.

What’s happening now? The S&P 500 index rose to more than 25 points above Friday’s close, to a high so far of 3549.41 shortly after the opening bell.

What does it mean? The upward correction that began September 24, from 3209.45, continues, part of a larger downtrend that began in September 2 from 3588.11

What is the alternative? It’s possible that what my principle count labels as an upward correction is in fact a component of of the massive rise that began in 1974. If the price exceeds 3588.11, the the alternative count is correct. I’ve marked the 3588.11 level with a golden line on the chart.

What does Elliott wave theory say? Today’s chart takes a closer look at the index, focusing on the present wave 2 of Minuette degree, that began September 24. For a broader view, see Friday’s post. Within Minuette 2, I count the present position as wave 3 of Micro degree within wave C of Subminuette degree.

I had initially counted the rise from October 1 as part of an A wave, but the price is so close to the 3588.11 limit that I’ve relabelled that position as the end of wave B and the beginning of our present wave C.

My trading strategy. Wave C will be followed by a decline, and I’m counting on that to create an exit point for my short bear call options spreads. The management day for the position is October 30, and expiration is November 20. If the price pushes above the 3588.11 limit, then I exit immediately. I shall continue to hold my bear-oriented shares of the inverse S&P 500 fund SDS.

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10:45 a.m. New York time

What’s happening now? The S&P 500 index continued to rise overnight, carrying with it an unusually heavy load of ambiguity.

What does it mean? I’m reworking my analysis today, using a simple moving average technique to separate the signal from the noise.

What does Elliott wave theory say? On the S&P 500 E-mini futures chart I’ve overlaid the price with a six-bar simple moving average, in garish purple, which aggregates the fluctuates and highlights the broader trend at any given point.

Starting with the September 2 peak, by this measure the futures traced five waves down in a movement that ended September 24, a 389-point decline. It then reversed and has reached a high so far today of 3474. That’s a 68% retracement. A 2nd wave tends to retrace heavily, sometimes taking back nearly all of the preceding 1st wave.

However — firm rule — a 2nd wave cannot move above the start of the 1st wave. If it doesn’t, then it’s not a 2nd wave and the chart must be recounted. The 1st wave on the S&P 500 index chart began, on September 2, at 3588.11. The corresponding point on the S&P 500 E-mini futures chart is 3587.

And so, the count. By this analysis, the five-wave decline from September 2 is wave 1 of Minuette degree, and the single-wave rise from September 24 is the Subminuette A wave — the initial subwave — of Minuette wave 2. Subminuette B will retrace somewhere between 38% and 70% of the preceding wave A, and then will come a C wave that, on this chart, will push to new heights, while remaining below the start of Minuette wave 1. The end of Minuette wave 2 will mark the start of Minuette wave 3, which will carry the price down to the 3100s.

This is a simpler structure than the one I suggested in Thursday’s analysis. Given a choice, I tend to select the simpler solution, and so this analysis will be my principle analysis going forward.

My trading strategy. For my bear call options spread position, I’m counting on that wave B to give me a perhaps profitable exit opportunity. The options are 42 days away from from expiration, so there’s time for Subminuette A to complete its work.

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10:50 p.m. New York time

What’s happening now? The S&P 500 index rose after yesterday’s sharp decline and has exceeded the high point from which the decline began

What does it mean? My alternative analysis appears to better reflect what’s happening; the decline marks the boundary between two parts of a compound correction pattern.

What is the alternative? The whole 4th wave could be a triangular formation.

What does Elliott wave theory say? Under what is now my principle analysis, the high yesterday marks the end of Subminuette wave C within Minuette wave 4, which in turn is a subwave of Minute wave 1, the first part of the dominant downward trend. The subsequent decline is Subminuette wave X, a separator, as Minuette wave 4 continues with Subminuette wave A of the second part of a compound correction.

My trading strategy. My short bear call options spread on IWM is in losing territory under the new analysis. I’ll exit on the dip, for either a small profit or a loss. I shall continue to hold my shares in SDS, an ETF that runs to the inverse of the S&P 500.

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10:50 a.m. New York time

What’s happening now? The S&P 500 index his a low 3354.54 on Tuesday after falling from its a peak of 3431.56 set earlier in the day. At the end the day it reversed and so far has retraced about two-thirds of the decline.

What does it mean? I interpret the decline to be the end of the correction that began on September 24 and the beginning of a resumption of the downward trend that will carry the price to the 3100s or below.

What is the alternative? The decline could instead be a continuation of what would prove to be a more complex correction pattern.

What does Elliott wave theory say? The correction that ended on Tuesday is Minuette wave 4, and has been followed by the beginning of Minuette wave 5 to the downside. Within that downward movement it appears that Subminuette wave 1 may be complete, and the rise today is a Subminuette wave 2 correction. All of this is happening within downtrending Minor wave 1, which began on September 2 from 3588.11. A 2nd wave, such as the one we’re in presently at the Subminuette degree, often retraces a substantial portion of the 1st wave decline. It will be followed by a 3rd wave decline to lower lows.

If, instead, the wave 4 correction is tracing a more complex pattern, then wave 5 has not yet begun, and we’re seeing either an X-wave separator to the downside or a wave within a developing triangle.

My trading strategy. I continue to hold my bear call spread options position on IWM, an ETF that tracks the Russell 2000 and has a chart that closely resembles that of the S&P 500. Management day, when I exit if the position is profitable, is October 30. Before that, if the position reaches 50% of maximum potential profit, then I’ll exit immediately. If it’s unprofitable on management day, then I’ll assess the risks and either hold it a bit longer or exit for a loss.

I hold stock positions on SDS, and ETF that moves inversely to the S&P 500. When the index falls, SDS makes money.

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iShares Russell 2000 ETF (IWM)

Lot 2020-1

Update 10/30/2020: I exited my bear call spread position on IWM 21 days before expiration, for a $0.98 credit per contract/share, a profit before fees of $0.64 per contract. Shares were trading at $155.08, down $2.30 from the entry level.

My decision to exit was based on prospects derived from Elliott wave analysis. By my count, the market at exit was in a B wave of Subminuette degree within a 4th wave of Minuette degree, all within a larger 3rd wave of Minute degree. The 21-day to expiration mark signals that profitable positions be sold, although the rules can be bent if the Elliott wave analysis is strong enough. The analysis pattern, suggesting a likelihood of a near-term rise. Rather than accept that risk, I took my profit.

Shares declined by 1.4% over  days for a -15% annual rate. The options position produced a 65.3% return for a 993% annual rate.

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I have entered a short bear call spread on SPY, using options that trade for the last time 45 days hence, on November 20. The premium is a $1.62 credit per contract share and the stock at the time of entry was priced at $157.36.

The implied volatility rank (IVR) stands at 32.

Premium:	$1.62	Expire OTM
IWM-bear call spread	Strike	Odds	Delta
Calls
Long	172.00	86.0%	18
Break-even	164.38	84.0%	20
Short	166.00	82.0%	22

The premium is 54% of the width of the position’s wing.
The profit zone covers a 4.5% move to the upside and unlimited to the downside.

The risk/reward ratio is 2.7:1, with maximum risk of $438 and maximum reward of $162 per contract.

Elliott wave analysis: At the time entry IWM appeared to have completed a  Minuette wave 4 upward correction within downtrending Minute wave 1. If in fact wave 4 is complete, the price is in for a drop down to the vicinity of the $130s. If it is instead embarking on an extension of wave 4, then the trade’s structure provides ample upside protection to allow for a minimally profitable exit.

By Tim Bovee, Portland, Oregon, October 6, 2020

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3:35 p.m. New York time

I’ve added a graf to the bottom of the IWM analysis giving the Elliott wave situation at entry.

3 p.m. New York time

I’ve entered a bear call options spread position on IWM and have posted an analysis.

10:10 a.m. New York time

What’s happening now? The S&P 500 index continues to rise, as it nears completion of an upward correction within a larger downward trend.

What does it mean? After the correction is complete, the downtrend will resume, perhaps reaching 3100.

What is the alternative? The correction could continue, forming a complex pattern. More on that in the Elliott wave section, below.

What does Elliott wave theory say? I’ve redone my count and now place the present moment in Subminuette wave C (it was A), which is in its 5th wave in the Micro degree. That’s a long way of saying it’s almost over. The end of Subminuette C may also ends Minuette wave 4, which began September 24. I used the hedge word, “may” because 4th waves often tend to form complex combinations, such as a Zigzag followed by a Flat. Or perhaps, a triangle, with its widening swings. This guarantees some ambiguity when the present wave C reaches its end.

In any case, once Minuette wave 4 is complete, what follows is Minuette wave 5, whose downward course could reach the lower boundary of the price channel, presently around 3113. The end of Minuette 5 also marks the end of Minute wave 1 to the downside, which began on September 2.

My trading strategy. For people like me who are trading the bear side, the end of Minuette wave 4 creates an options trading opportunity. The ambiguity at the end of wave 4 also also creates the chance of a head fake, since maybe the end wave C is a 5th wave, or maybe its more of the 4th wave. I prefer to trade in the direction of the parent wave’s trend, and the parent of this Minuette wave 4 is Minute wave 1, decided to the downside. That’s what underlies my bearish preference.

For my shares in SDS, which profits from a declining S&P 500, I’m trading larger-scale trends, with a goal of getting a tax break by holding the positions for a year, making them long-term profits.

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3:05 a.m. New York time

The S&P 500 index has pushed up to a new high in the rise that began September 24, to 3401.99 about an hour before the closing bell. Otherwise, no change to the analysis.

10:15 a.m. New York time

What’s happening now? The S&P 500 index continues to work through the early stages of a downward move.

What does it mean? The decline follows a rise from September 24 to October 1, and will be followed by another upward movement.

What does Elliott wave theory say? The decline that began October 1 is Subminuette wave B within Minuette wave 4. So far, the 4th wave has retraced 86% of the preceding 3rd wave of the same degree, a few points greater than the usual range.

My trading strategy. The optimal date for entering the November monthly options is October 6, tomorrow. So, sometime, today through Wednesday, I’d to place trade, if the analysis supports it. As my vehicle, I’m looking at the exchange-traded fund IWM, which tracks the Russell 2000 index. It has a higher implied volatility rank, above 30, and that gives a better return than something lower, such as SPY, which tracks the S&P 500. I’ll most likely structure any position as a short bear call spread, and I’ll post a full analysis when I make the trade.

Equities: I continue to hold my shares in the exchange-traded fund SDS, which profits when the S&P 500 falls.

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9:55 a.m. New York time

What’s happening now? The S&P 500 index opened with a 25-point descent below the October 1 high of 3397.18.

What does it mean? The magnitude of the fall gives greater certainty to my conclusion that yesterday’s high marks the start of the second, downward leg of the upward correction that began September 24.

What does Elliott wave theory say? Subminuette wave A rose 187.73 in 7 days, or 5.8%. What follows is Subminuette B, the second wave of the Minuette wave 4 correction within downtrending Minute wave 1.

B waves, by their nature, can be shallow or deep, and in fact can move beyond the starting point of the preceding wave A, which in this case was 3209.45. Elliott’s rules give very little guidance as to the magnitude of the fall.

My trading strategy. I won’t trade options on a B wave. There’s way too much uncertainty. I shall continue to hold my positions in SDS, an inverse fund based on the S&P 500.

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10:15 a.m. New York time

What’s happening now? The S&P 500 index moved a bit higher in overnight trading, to a high so far today of 3397.18. The upward correction that began September 24 has so far covered 187.73 points, or 5.8%.

What does it mean? The correction continues to trade above the upper boundary of the price channel and has met the formal requirements of completion. However, there is nothing that stops it from rising further.

What is the alternative? The correction could also take on a more complex form. See the Elliott wave discussion, below.

What does Elliott wave theory say? Fourth waves tend to be the most varied of the subcomponents of motive waves, and the most likely to extend into compound patterns. What we’ve seen so far with this 4th wave of Subminuette degree is a Zigzag, which in itself is unusual in that it is the same pattern as wave 4. Almost always the 2nd and 4th waves have different patterns. It’s possible that Subminuette 4 will continue with an X-wave separator, and then trace out another pattern, such as a Flat or another Zigzag. It’s also possible that what we’re seeing is a Horizontal Triangle in the making.

All of this is happening within a corrective subwave within Minuette wave 3, which in turn is a component of Minor wave 1.

My trading strategy. Given the ambiguities, I’ll be cautious about entering new options positions and will continue to hold my shares in the bearish exchange-traded fund SDS.

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3:40 p.m. New York time

The S&P 500 index peaked at 3393.56 and reversed to the downside, potentially completing wave A of Subminuette degree to the upside and beginning the Subminuette B decline. We’ll see what happens overnight.

10:25 a.m. New York time

What’s happening now? The S&P 500 index has continued to rise in an upward correction within a larger-scale downtrend, remaining above the upper boundary of the price channel. The high so far is 3373.41.

What does it mean? My alternative count of yesterday turns out to be where the index is going. The move above the channel continues to suggest that the present rise is nearing its end.

What is the alternative? Yesterday’s principle count becomes today’s alternative: Today’s high could mark the end of the upward correction.

What does Elliott wave theory say? The rise since September 24, from 3,209.45, is wave A of Subminuette degree within wave 4 of the Minute degree, which is within wave 1 of the minute degree.

Internally, wave A now breaks into five subwaves of the Micro degree, with today’s rise being the 5th wave. The five-wave breakdown of wave A means that the parent wave 4 correction is tracing out a Zigzag pattern, a Combination, or a Triangle. If it were a Flat, then wave A would have broken down into three subwaves.

My trading strategy. A combination or a triangle will stretch out the time wave 4 will take to do its work, and that will make it difficult to catch the current entry window for an options position, which began yesterday and ends October 13. I’ll continue to hold my shares of SDS, which gain value as the S&P 500 loses value.

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