Live: Friday, June 8, 2018

3:15 p.m. New York time

Given the fact that SPY remains below the peak of the rise from May 29, I’ve decided to wait until Monday to roll out of my options positions on SPY in hopes of a further decline. As long as SPY remains below $278.28 — the Aug. 7 high — that level can be interpreted, using Elliott wave analysis, as the peak of wave 3 to the upside at the Submicro level {-3}.

10:10 a.m. New York time

SPY has opened the morning lower while remaining within yesterday’s range. I anticipate no trades today.

By Tim Bovee, Portland, Oregon, June 8, 2018

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Live: Thursday, June 7, 2018

3:15 p.m. New York time

No trades today.

I have an error on the chart below. The listings in the box of wave labels in the upper right-hand corner were incorrect.

In looking at the chart, if the start of wave 1 in the Minor degree is exceeded, then the next count will be to consider wave 2 {+3} to still be underway, with the 1 {+3} labeled replaced by an A {+2} and the subsequent move forming a zig-zag to the upside. Maybe. We shall see, and maybe a recount won’t be needed.

10:55 a.m. New York time

This morning’s lede is identical to yesterday’s: “SPY opened a bit higher this morning compared to the prior day’s range, and then began declining. At this point there has been no change in the  Elliott wave analysis or the Fisher Transform signals.”

My two options positions (here and here) expire in eight days. Typically in such cases I will roll out, taking the loss if needed, on Friday or Monday. I shall decide which on Friday.

This morning I stepped back to look at the big picture. Normally I’m more short-term oriented in my trading, but the longer term has become relevant, as the chart below shows.

The reason is wave 2 {+3} that has been underway since April 2. The textbook of the discipline, The Elliott Wave Principle by Robert Prechter and A.J. Frost, contains this rule: “Wave 2 never moves beyond the start of wave 1”. If a chart shows that happening, then the wave count on the chart has been shown, by the unfolding of events, to be incorrect.

That’s a long away of saying that Elliott wave analysis has a lot of ambiguity. I find it to be useful, and also very, very frustrating.

The chart shows wave 1 of the Minor degree ({+3}) beginning at $280.41 on March 13. The price presently stands at $277.32 , a retracement exceeding the 78.6% Fibonacci level.  That means that the present count can allow only an additional rise of $3.09 before the price must reverse into a B wave to the downside in the Minor degree ({+2}). If that fails to occur, then it’s time for a recount.

The chart covers nine months with daily bars.

spy20160607a

By Tim Bovee, Portland, Oregon, June 7, 2018

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Live: Wednesday, June 6, 2018

3 p.m. New York time

No trades today.

10:40 a.m. New York time

SPY opened a bit higher this morning compared to the prior day’s range, and then began declining. At this point there has been no change in the  Elliott wave analysis or the Fisher Transform signals. The price continues to work its way through the 3rd wave up at the Micro degree, and the Fisher remains mixed, signaling an uptrend on the daily chart and a downtrend on the monthly.

Unless either of those analyses changes, I plan no trades today.

I have updated the entry analyses for my two SPY positions (here and here) to include risk and reward as dollars per contract, in line with yesterday’s discussion of calculating share equivalent returns.. Those numbers are also used in calculating the risk/reward ratio.

By Tim Bovee, Portland, Oregon, June 6, 2018

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Live: Tuesday, June 5, 2018

3:05 p.m. New York time

I placed no trades today.

11:45 a.m. New York time

No change in the chart.No immediate trades in sight.

SPY has dropped off a little from yesterday’s peak. Elliott wave analysis shows that peak might have been the end of the 3rd wave of the Submicro degree, but not necessarily. It could have further to go.

The daily and monthly Fisher Transform signals on SPY remain at odds, uptrending for the daily and downtrending for the monthly. The 20-minute chart and 3-hour chart have both moved to downtrending, although I don’t use those in my decision-making

In other words, boring. So in the absence of anything interesting, let’s talk trading.

One thing I always remember about options is that they are a proxy for the underlying stock or ETF shares. They’re a leveraged trade, each contract allowing me to control a 100 shares of stock for a fraction of cost.

That’s important when it comes to assessing a position. If I were trading the shares themselves, I would have far more money at risk. By trading options, I am able to take most of that money, put it safely in Treasury notes and only put a portion at risk. By that way of thinking, though, the true profit and loss are the options result as a percentage of the share price at the time of entry. I call it it “share-equivalent result”.

Some traders have set exit points that limit their losses to a certain percent, 3% being a commonly used one. Losses in an options positions, compared to the options entry, very quickly exceed that. I would argue, however, that my share-equivalent position is the proper basis to use, by taking the dollar profit or loss on the options and calculating their percentage of the stock buy-price at the time I entered or exited the options position (entry or exit depending upon whether the position is long or short).

I have two options positions, both on SPY ((here and here). Both positions are in abysmal shape. Take the first one, a bear call spread short the June $264 strike and long the $271 strike.

It’s a short position, so the options premium when I opened it is my sales price and what I get for it when I exit is my purchase price; at present that would be bought for $659 per 100-share contract and sold for $292 per contract, a loss of 126%. The share price itself is $274.57 at the time of this calculation and at entry it was $262.50.

The shares themselves have gained 4.4% since I entered the position, the equivalent in a short sale of a 4.4% loss.

Had I sold short 100 shares of SPY, I would have bought at $27,457. My present options dollar loss on the position is $366. And the bottom line, my share-equivalent loss is $366 / $27,457 = 1.3%.

That’s what leverage gives us. And a thing of beauty it is.

Of course, when I trade options its always as a short/long pair, the long option putting a floor on my maximum loss. In the case of the trade under discussion, the maximum loss is $408, or a share-equivalent loss of 1.5%.

My goal in trading is to limit my maximum loss to $500 per position. In this case, a $500 loss would be a share-equivalent loss of 1.8%.

By trading options positions the way I do, my maximum loss is far more conservative than it is with share traders who set a 3% stop/loss. And note that while the share controlled by the positionI had a $27.457 value, only $408 would be at risk. The remaining $27,049 would be safely parked in other, less risky assets.

Options, if properly hedged, are among the most conservative trading vehicles in existence.

Nassim Nicholas Taleb, in my view the most useful thinker of our age on the subject of risk, in his book Fooled by Randomness: The Hidden Role of Chance in Life and the Markets quotes his avatar Nero Tulip: “I love taking small losses. I just need my winners to be large.”

In practical terms, the low share-equivalent losses on my positions mean that the pressure to exit is really quite low. I can afford to wait, and shall.

By Tim Bovee, Portland, Oregon, June 5, 2018

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Live: Monday, June 4, 2018

3:10 a.m. New York time

No significant change from this morning, and I placed no trades.

11 a.m. New York time

The chart is in its Elliott wave essence unchanged from Friday. It’s higher, but the count is entirely consistent with the chart posted before the weekend: SPY, tracking the S&P 500, rising a C wave to the upside at the Micro and Minuette levels. Dropping down to the Submicro level, I count it as a 3rd wave within the Micro degree C wave.

The chart, taken at 10:30 a.m. New York time, encompasses 30 days with one-hour bars.

20180604

Under Elliott doctrine, once the Submicro 3rd is complete, thee will be a 4th wave correction, most likely sideways under the Rule of Alteration, and then a 5th wave to complete the movement.

The daily and monthly Fisher Transform signals remain at odds, uptrending for the daily and downtrending for the monthly.

With the options in my position expiring June 18, the over-riding consideration is rolling the position forward to later expiry. If the uptrend continues, then I want out by Wednesday, possibly Tuesday. If the uptrend reverses, then I can go as late as Friday, June 8, or even Monday, June 11.

And so it shall go. Decisions ahead.

By Tim Bovee, Portland, Oregon, June 4, 2018

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The Week Ahead: Global Trade

 

trade-wars

International trade statistics are the only potential market-moving report of the week, perhaps especially notable because they provide fresh numbers to feed into the analysis and politics of the trade dispute between the Trump administration and the U.S.’ North American and European trading partners. The report will be published Wednesday at 8:30 a.m. New York time.

Also, my favorite big-picture report: The Federal Reserve will publish the 1st quarter Financial Accounts of the United States (Z.1) on Thursday at noon. As a quarterly report it’s not a leader, nor is it a market-mover, but the sheer breadth of information it contains makes it a read for traders who bring longer-term thinking to their analysis.

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Live: Friday, June 1, 2018

3:15 p.m. New York time

The Elliott wave count allows for today’s high to be the peak of the C wave of Micro degree, although it doesn’t guarantee that it won’t go higher. I am holding my positions and shall see what happens on Monday.

As of the time of this update, the Fisher Transform remains in uptrend mode on both the daily and monthly charts.

2:40 p.m. New York time

Here’s an updated chart of SPY with revised Elliott wave analysis. I place wave C of the Micro degree as still unfolding in a 4th wave correctIon.

The chart spans from May 2 to the present with 30-minute bars.

spy20180601

10:55 a.m. New York time

As it did yesterday, the Fisher Transform on the SPY daily chart (left) crossed over to uptrending. Yesterday, it reversed back to downtrending before the market close. The price today has withdrawn from its peak; whether that will be enough to reverse the signal is anyone’s guess at this point.

The important point on the chart is that the high so far today has exceeded the $273.38 peak of wave 2 at the Miniscule degree (2 {-4}), which tells me that the wave count may need to be revised. I shall post a revised version later today.

For now, I’m staying my options positions (here and here) and the shares posution (the inverse S&P 500 fund SPXU) until the chart gains some clarity.

By Tim Bovee, Portland, Oregon, June 1, 2018

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Live: Thursday, May 31, 2018

3:10 p.m. New York time

SPY’s price fell a bit during the day and the Fisher Transform flipped back to downtrending, negating the need to make any trading decision today. I placed no trades.

10:15 a.m. New York time

The Fisher Transform on the daily chart (left) crossed over to uptrending this morning, although the indicator remains downtrending on the monthly chart (right).

spy20180531a

My method is to let the Fisher signal when it’s time for a decision, although the decision itself is based on Elliott wave analysis. My options positions on SPY  (here and here) expire June 15, so the more sensitive daily chart signal must be taken very seriously indeed.

Having said that, the Elliott wave analysis shows impulse wave 3 at the Subminuette level remains in progress. An alternate count would interpret the chart as an ongoing 2nd wave correction at that level — perhaps a C wave. In either case, Elliott shows the direction is down.

I have labelled the count after the May 22 peak as {-4}, which is one degree below the Submicro level. Since the recent high, of $273.11, is below the wave 2 {-4} high of $273.13, both the impulse wave and corrective wave counts remain valid possibilities. Time will resolve the ambiguity.

My shares in the inverse S&P 500 fund SPXU have no expiration, and I am playing them at the Minuette level, which remains in the 3rd wave down.

The chart covers 20 days with 30-minute bars.

spy20180531b

At this point I plan to hold on to the options positions in the expectation that the downtrend will continue. That resolve will change with a significant reversal to the upside, and most certainly if the monthly-chart Fisher Transform should move to uptrending.

By Tim Bovee, Portland, Oregon, May 31, 2018

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Live: Wednesday, May 30, 2018

3:20 p.m. New York time

I placed no trades today.

10:05 a.m. New York time

In Elliott wave terms, SPY continues its 3rd wave down at the Subminuette level. Within that movement I see Tuesday’s low as being the 3rd wave a lesser degree, perhaps Micro, perhaps a degree below that. Today’s bump back to the upside at the opening would be an A wave within a 4th wave correction within that lower degree.

As one of my favorite sci-fi writers puts it,

“Wait a bit, Tyek,” Farad’n said. “There are wheels within wheels here.”

 —Children of Dune, by Frank Herbert.

The continuation of the Subminuette 3rd wave counsels holding on to my positions: SPY options (here and here) and shares in the inverse S&P 500 fund SPXU,

The continuation of the Fisher Transform in downtrending mode on both the daily and monthly charts buttresses that counsel.

By Tim Bovee, Portland, Oregon, May 30, 2018

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Live: Tuesday, May 29, 2018

3:30 p.m. New York time

SPY has declined below the May 15 low, breaking past the sideways patten set the day before.

I placed no trades today.

9:55 a.m. New York time

SPY has been tracing low-degree sideways corrective pattern since May 14, and this morning’s opening decline remains within the range of that pattern.

The low as of this writing is $269.90, from which it has retreated to $270.34. The prior low in the pattern, on May 15, was $270.03. Basically, our three-day weekend has changed nothing.

I see no trades today. Here are links to the opening analyses for my positions: SPY options (here and here) and shares in the inverse S&P 500 fund SPXU,

Here’s a fresh the Elliott wave chart. The only change is that I have returned the composite labeling to that proposed by R.N. Elliott — a-b-c-x-a-b-c — all of the same degree, rather than using the a-b-c-W-a-b-c nomenclature of Robert Prechter, which puts the W one degree higher.

The chart spans 20 days with 30-minute bars.

spy20180529

By Tim Bovee, Portland, Oregon, May 29, 2018

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