Are We Ready To Rally To 4800?

Elliot Wave Technical Analyst & author @ Elliott Wave Trader
October 17, 2023

Inflation, the Fed, interest rates, Russia/Ukraine war, Israeli/Hamas/Hezbollah war, Iran, China, North Korea, housing, earnings, oil, politics, bank instability, unemployment, US Dollar, etc. Did I forget anything? Well, I am quite sure there are other issues that many are focused upon which I did not enumerate. But, the point is that almost every single article written about the stock market focuses upon at least one of these issues as being of utmost importance to the next move in the stock market.

Now, take a step back, and ask yourself how many of these authors focusing upon all these factors have been able to accurately and consistently outline to you where the market is headed? Have you ever considered why they can't?

Well, the simple answer is that none of these factors drive the market, so they are looking in the wrong places for market directional cues. Let's look at some of the recent market studies that can explain why.

In a 1988 study conducted by Cutler, Poterba, and Summers entitled "What Moves Stock Prices," they reviewed stock market price action after major economic or other type of news (including major political events) in order to develop a model through which one would be able to predict market moves RETROSPECTIVELY. Yes, you heard me right. They were not even at the stage yet of developing a prospective prediction model.

However, the study concluded that "[m]acroeconomic news . . . explains only about one fifth of the movements in stock market prices." In fact, they even noted that "many of the largest market movements in recent years have occurred on days when there were no major news events." They also concluded that "[t]here is surprisingly small effect [from] big news [of] political developments . . . and international events." They also suggest that:

"The relatively small market responses to such news, along with evidence that large market moves often occur on days without any identifiable major news releases casts doubt on the view that stock price movements are fully explicable by news. . . "

So, rather than focusing on economics and geopolitics, there must be a better way to forecast the stock market? There is and it is based upon a view of market sentiment.

When I have made this claim in the past, many question me as to how sentiment drives the market and simply turns on its own without any exogenous drivers? My answer is simply 'biology.'

Intuitive and knowledgeable investors and analysts recognize that market participants move in "herds" in the same way as many animals. You see, humans are hard wired for herding within their basal ganglia and limbic system within their brain, which is a biological response they share with all animals. And, this is driven by emotion and not by "reason."

There have been many recent studies that support this perspective. For example, in a study performed by Dr. Joseph Ledoux, a psychologist at the Center for Neural Science at NYU, he noted that emotion and the reaction caused by such emotion occurs independent and prior to, the ability of the brain to reason.

In a paper entitled "Large Financial Crashes," published in 1997 in Physics A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation for the overall herding phenomena within financial markets:

"Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an "emergent" behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness."

So, while almost all authors attempt to reason with the market based upon all the factors outlined above, we have to finally come to the realization that it really is useless if our goal is to determine which way the market is going to move based upon societal sentiment. As I have said before, attempting to reason with the stock market (an emotional environment) is akin to attempting to use logic to reason with your spouse when they are emotional. How well does that work for you?

The definition of insanity, as attributed to Albert Einstein, is doing the same thing over and over while expecting a different result. Based upon this definition, it would suggest that most of those who base their analysis on the factors noted above are insane. And, while what I am saying here is clearly not going to stop the insanity, I am hoping to at least open the minds of some of you to the truth of what I have been presenting for many years.

The fact that I engage in an esoteric form of analysis and still have 75,000 followers on a fundamental analysis website, have the 3rd largest paid service on a fundamental analysis website, and have 8000 subscribers and almost 1000 money manager clients suggests that I have been somewhat successful in opening the eyes of many investors as to what truly drives the market, rather than generally accepted fallacies.

Now, consider how I was able to tell you that the market was likely going to rally to 4300+ from the 3500SPX region as we were bottoming in October of 2022. In fact, consider how I was looking for a bottom at 3500SPX when most of the market was expecting a further decline due to the worse than expected CPI report. And, none of that was based upon considerations of any of the factors outlined at the start of this article.

Now, consider how I was also recently suggesting that we will likely head down to the 4230-4274SPX region when the market was in the 4500SPX region. Did any of those expectations include an assessment of ANY of the factors noted above? Did any of that matter to my view? Yet, I was able to prognosticate the market quite accurately without those considerations. How is that even possible? Does that not suggest that all of those factors noted above do not really even matter for accurate market prognostication?

When you finally come to the realization of what truly drives the market, you can tune out all the noise and then focus on what is important to your investment account and bottom line. I know that this seems so hard to believe and so counter-intuitive to what you have thought for many years, yet when you are able to come to this realization, it makes your life so much easier and much more profitable. Along those lines, this comment is an example of what our members have told us:

[Avi] has shown me again and again, in real time, how news doesn’t drive the markets. Investor sentiment drives the markets, and even if you get the news right, you can get the reaction wrong. My returns have been significantly higher since I joined and discovered sentiment is the important piece of the puzzle, not the news itself.

Let's move to our market view.

As I outlined several weeks ago, as long as the market holds the 4165-4220SPX region, I am still going to be looking to the next higher target in the 4800SPX region. I also outlined that the 4375-4401SPX region is going to be an important resistance region. Thus far, we struck a low just over the 4219SPX level, and rallied to our next resistance region. While the market struck a high of 4385SPX in the regular market hours, the futures struck a high in the 4400SPX region.

While I just posted a 3-page detailed analysis of my view to members, I will give you a very simplified perspective. As long as we hold the 4280-4302SPX region of support and then break out through 4401SPX, it would make it likely we are on our way to our next higher target in the 4800SPX region. However, a sustained break of that support would concern me that a major top may already be in place. I do apologize, as I have to leave the detail of the analysis to our members.

Lastly, I want to thank you all for your messages of support for my family during this horrible situation in Israel. My son, Sammy, actually wanted to stay in Israel and go back into the army, even though he was not called up yet. But, my youngest son, Yoni, Facetimed him and cried to him that he already lost his mother, and did not want to lose his brother too. So, Tuesday morning, my late wife Becky's brother and his whole family, Becky's father and wife, and our son Sammy - who were all in Israel for the Sukkot holiday - all landed safely back in the United States.

Again, thank you all for your support and prayers. Now, we have to keep praying for the rest of Israel (including for the Seeking Alpha staff living in Israel), as this is likely going to get much worse before it gets better. Sadly, too many innocent lives have been lost.

********

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education. You can contact Avi at: [email protected].


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