3:35 a.m. New York time

I’ve updated the map with the view within half an hour of the closing bell.

8 a.m. New York time

What’s happening now? The S&P 500 index fell to 3419.93 from the peak of September 12 and reversed to the upside.

What does it mean? My principle count interprets the rise from yesterday (October 19) as a continuation of an upward correction within a larger downtrend.

What is the alternative? One alternative counts the September 12 peak as the end of the upward correction, and the subsequent fall and then the rise that began yesterday as downward steps within the larger down trend.

A second, less likely, alternative counts the decline from September 12 as a divider in a compound correction composed of two corrective patterns, back to back, with the rise from yesterday being the first wave up of the second pattern.

The Chart. On the chart below I’ve labeled the principle count in black and the first alternative count in red. I’ve used the S&P 500 E-mini futures, which never stop trading except on weekends, in order to have a more complete picture of the relative small movements we’re examining.

What does Elliott wave theory say? By the principle count (black on the futures chart), the fall from September 12 was Minor wave B to the downside, and the rise that began yesterday is the beginning of Minor wave C, all within the Intermediate wave 2 upward correction within Primary wave 1, which began its downward course on September 2

By the first alternative count (red on the futures chart), the peak on September 12 was the end of Intermediate wave 2 and the beginning of Intermediate 3, with yesterday’s low being the end of wave 3 of, probably, Minute degree. I say “probably” because this early in a parent wave the subwaves lack context and their degree is at best a guess.

If the principle (black) count is correct, then the present upward movement, the Minor wave C will almost certainly move beyond the end of wave A, to an extent that C will be about the same length as A, which would bring the price up to the 3700s. However, a second wave can’t move beyond the start of the preceding first wave, so 3588.11 — the September 2 high on the index chart — is as high as the Intermediate wave 2 correction and the Minor C wave within it can go. If that barrier should be breached, then the entire count from September 2 will need to be redone.

If the first alternative (red) count is correct, then Minute wave 4, an upward correction, will tend toward a sideways move, reaching a bit higher but not dramatically so. It will be followed by Minute wave 5, which will carry the price below 3209.45 on the index chart, the start of Intermediate wave 2.

My trading strategy. If the principle count is correct, then my bear call options spread positions may be in trouble. If the first alternative is correct, then I may be able to exit profitably. I’m holding my shares of SDS, the inverse fund based on the S&P 500, in the confidence that Intermediate wave 3 and its parent will eventually bring those shares to profitability.

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3:25 p.m. New York time

Regarding the decline that resumed about a half hour or so into trading. By my principal count, wave B of Minor degree is continuing its fall. Internally, it has completed waves A and B of Minute degree, and is now tracing wave C. The form of the decline is consistent not only with my principle count, but also with the two alternatives I discussed earlier today.

9:45 a.m. New York time

What’s happening now? The S&P 500 index continues its upward correction that began September 24 at 3209.45.

What does it mean? The correction will likely move above 3549.85, the highest high of the correction so far, set on October 12. Once the correction is complete, it will either extend by connecting to forms together. Otherwise, it will resume the principle down trend, moving below 3209.45, where the upward correction began.

What is the alternative? The October 12 high at 3549.85 can be analyzed as the end of the upward correction. If that is what market is doing, then the subsequent decline is either begins the resumption of the principle downtrend, or it is a connecting movement that will be followed by another corrective pattern.

What does Elliott wave theory say? By my count, the October 12 high is the end of Minor wave A and the decline that followed is Minor wave B, all happening within Intermediate wave 2, which in turn is a subwave of Primary wave 1. Minor C, an uptrending wave within the correction, will carry the price above 3549.85.

First alternative: The peak at 3549.85 is the end of Minor wave C, and the decline is Minor wave X, a connecting wave that will lead to another corrective pattern: A Zigzag, a Flat or a Triangle.

Second alternative: The peak at 3549.85 completes Minor C and Intermediate 2, and the decline that followed is tracing the first baby steps of what will be a major decline, Intermediate wave 3.

My trading strategy. My best strategy for exiting my short bear call options spreads positions will be to Intermediate wave 3, which should be possible under two scenarios: The principle analysis and the second alternative.

The first alternative will likely take a longer amount of time, approaching the November 20 expiration, 32 days from now. That will force an exit for a loss or a smaller profit.

My shares of SDS, which make money on the downtrends, have no deadline, so I’ll continue to hold them, waiting for Primary wave 1 to near its end, and always mindful that if I hold them for a year, into next spring, I get a better tax rate on any profits. The market trend trumps taxes, always.

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9:55 a.m. New York time

What’s happening now? The S&P 500 E-mini futures continued to climb overnight, tracing the first part of the final upward push within an upward correction in a major downtrend

What does it mean? The index and the futures and other related products will exceed the high high of October 12 — 3549.85 on the index chart, 3541 on the futures chart, most likely completing the upward correction within the decline that began September 2. The downtrend will resume, carrying the price back to the 3400s and well below.

What is the alternative? The low yesterday, October 15, and the subsequent rise can be analyzed as a continuation of the correction that began October 12. That was my principle count, but I’ve demoted it.

What does Elliott wave theory say? I have noted before that I find the degree of waves to be something of a guessing game, especially early in a trend. With that in mind, I’ve revised my degree leveling by bumping it up several degrees to what I think is a more reasonable rendition. Although, in truth, there is no objective criteria that we can use at this point to ensure that the degrees are correct.

The rise that began October 15 is wave C of Minor degree, the final wave in wave 2 of Intermediate degree. The reversal at the end of Intermediate wave 2 will mark the beginning of wave 3, an energetic decline that will push well below the end of wave 1, into the 3100s and below.

My trading strategy. I’m holding my short iron condor options spreads on IWM in the hopes of catching the Intermediate 3rd wave decline before the options expire, 31 days from now. I’m continuing to hold my shares of the inverse fund SDS, which rises when the S&P 500 falls.

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2:50 p.m. New York time

I’ve updated the chart for late in the session, showing that wave 5 of Micro degree has begun its rise.

10:20 a.m. New York time

What’s happening now? The S&P 500 index and E-mini futures declined in overnight trading by 109 points, a downward correction within an upward movement that will end with a final upward push.

Since the move occurred during futures trading — the index doesn’t capture trades outside of the normal stock-exchange hours — my discussion and the chart will focus on the futures.

What does it mean? The decline since yesterday, October 14, is in the next-to-the-last portion of the larger upward correction. The coming upward move will likely mark the end of the correction, although it is possible that the corrective move will extend in a compound pattern that will stretch it out in time.

What is the alternative? It’s possible, although I don’t consider it likely, that the October 12 high was in fact the end of the upward correction, and the movement we’ve seen since are the early stages of a resumption of the major downward trend that began on September 2.

What does Elliott wave theory say? The present downward movement is wave 5 of Submicro degree, the final wave of the movement, within wave 4 of Micro degree within wave C of Subminuette degree. All of that is happening within a 2nd wave upward correction at the Minuette degree within a main downtrend that began on September 2 that follows a rise dating back to at least 1974.

The end of Submicro 5 also marks the end of Micro 4. The uptrending Micro 5 will most likely carry the price above the September 2 high of 3588.11 on the index chart.

A small technical point: In the decline from October 12 wave 3 of Submicro degree seems quite short compared to the large Submicro 5 wave. The rule I have to account for in my count is that a 3rd wave can’t be shorter than both the 1st and 5th waves of the movement. In this instance, Submicro wave 1 on the futures chart 29.75 points in length, and wave 3 is 40.75 points. So the count is compliant with the rule.

My trading strategy. My short bear call spread options positions on IWM are closer to the profitability than before the drop, but are not yet profitable. My question: Do I exit for a small loss or do I hold until closer to expiration, which is 37 days away. The entirety of Minuette wave 1 took 14 days, so my inclination is to hold in the expectation that the main downtrend will resume significantly before the options expire.

I continue to hold my shares of SDS, an inverse ETF that profits when the S&P 500 index loses.

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9:45 a.m. New York time

What’s happening now? The S&P 500 index continued to decline from its peak of October 12.

What does it mean? The decline lends further credibility to the notion that a downward correction within a larger upward correction has begun.

What is the alternative? If the decline ends without tracing out the full three waves that are expected of a correction, then the downward correction within a larger upward correction has not yet begun.

What does Elliott wave theory say? The upward correction is wave 3 of Subminuette degree, and by my count it has completed its 3rd subwave, of Micro degree. The decline from October 12 is the Micro 4th subwave. All of it is happening with an uptrending corrective wave, Minuette 2, which in turn is within downtrending wave 1 of Minute degree.

Within Micro 4, wave A of Submicro degree appears have three subwaves, and if the subsequent movement proves that appearance to be accurate, then Micro 4 will most likely prove to be a Flat pattern. A waves in Flats have three internal waves, and in Zigzags, five internal waves.

My trading strategy. I’m counting on Micro wave 4 to decline enough to return my short bear call options spread positions to profitability. If it doesn’t, then I’ll be looking at a loss. I’m continuing to hold my shares of SDS, an inverse fund that profits when the S&P 500 declines.

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10:50 a.m. New York time

What’s happening now? The S&P 500 index fell off slightly from its peak in the present upward correction, 3549.85, attained yesterday, October 12.

What does it mean? The fall is the deepest since the decline of October 6, whose end marks the beginning of the present rise, suggesting at least the possibility that the present rise is complete. However, as the Elliott wave theory section will discuss, the end of the present rise is not the end of the larger-scale rise that began September 24, and that constrains the index’s price movement in two ways: It must eventually move above 3549.85, and yet it must not move above the high set on September 2, 3588.11, the starting point of a major decline that, history suggests, could last for years.

What is the alternative? There are two: 1) I might have misinterpreted the decline from September 2 has been misinterpreted; rather than a major decline, it is a lower-level decline within the uptrend that began in 1974, or 2) I might have misinterpreted the rise since September 6; rather than an upward movement in the middle of a larger upward movement, it is instead the final portion that completes the upward movement. If 2) is the case, then 3588.11 is the end of the upward correction and the higher-level downtrend will continue its decline.

What does Elliott wave theory say? The present wave is Subminuette wave C, part of a Zigzag pattern, within Minuette wave 2, an upward correction. The entire structure is part of Minute wave 1, which began September 2 from 3588.11 and marks the end of a rise that moves at the least up to Cycle degree. The S&P 500 is presently in Cycle wave 1 to the downside. The preceding Cycle wave, 5, took 45 years to complete its work: 1974 to 2020.

Zigzag C waves have five subwaves, and by my principle count Subminuette wave C has been in Micro 3 since October 6. Once Micro 3 is complete, it triggers the constraints mentioned in the Alternative section.

By my principle count, Subminuette C of Minuette 2 must have a downward correction, or more likely, a sideways movement, and then end with a Micro 5 wave to the upside.

If Micro 5, and therefore Minuette 2, moves above the start of Minuette wave 1, which is 3588.11, it violates a fundamental rule of Elliott wave analysis: A 2nd wave cannot exceed the start of the preceding 1st wave of identical degree.

That leaves very little room for the 5th wave of Micro degree to do its work, a mere 38 points from yesterday’s peak. If yesterday’s high actually marked the end of wave 5 of Micro degree, then the price will fall and will never face the constraint.

On the chart I have superimposed a six-bar simple moving average, in garish purple, which smooths the price movements and makes the larger-degree waves more clear. I think it shows that to movement from September 24 to at least yesterday is wave 3 at the Micro level.

The other constraint is marked on the chart by a golden line at the 3588.11 level. If the price goes above that level, then the movement since September 2 has been misinterpreted and I’ll be revising my count.

My trading strategy. My bear call options spreads remain unprofitable for now but less so since the decline from yesterday’s high began. I shall hold the positions in the expectation of Subminuette wave 3 to the downside, which will restore the positions to profitability. I continue to hold my shares in the inverse fund SDS, which gains in value as the S&P 500 increases in value.

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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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