Market Watchers Never Learn Their Lesson…Maybe You Should

Elliot Wave Technical Analyst & author @ Elliott Wave Trader
March 22, 2015

Most market watchers are foolish.  Yes, you heard me right.  I was beside myself all week, as market participants and pundits blathered on and on about the word “patience.”  Yes, the use of this single, eight letter word was supposed to determine the major direction of the equity markets, according to most.  And, you don’t think this is “foolish?” Grown men and women, supposedly educated and experienced in the market, sitting on the edge of their seats believing that one word will control the next major directional move in the market.  And, all were so certain of the outcome based upon the word “patience.”

The assumption was that if the word did not appear in the Fed statement, the market would simply tank.  Yet, if the Fed retained the word, the market would rally. Well, this is yet another situation where, even if you knew the news beforehand, you would have wound up on the wrong side of the market – that is, if you trade on “news.”

In fact, one of the critical commenters to a recent article at Gold-Eagle confidently noted the following:    

“Another example of a 'fundamental' in action will be this Wednesday. If Yellen drops the word Patience gold will fall sharply, but if she leaves it in it will probably go up. This seems very silly, but it will happen so, because people BELIEVE still in the power of the Fed, whether justified or not. The ensuing move in the market, whether temporary or otherwise, is nothing to do with Elliot Wave, but because of a fundamental fact taking place.”

But, the Fed did exactly what they said they would do - they took out “patience.” So, of course, the markets and metals must have tanked?  Right?   But, wait a second.  Unless my charts are upside down, it seems as though the markets and metals rallied?  That was not supposed to happen after they took out “patience.”

I am sure those that were wrong about the market reaction to the Fed’s dropping “patience” will still claim that the Fed was just as dovish without the word “patience” and that is why the market rallied.  But, for those of us who were actually trading on Wednesday, we saw the market begin the rally even BEFORE the Fed announcement.    

In fact, I posted early that morning in my trading room at Elliottwavetrader.net (hours before the Fed announcement) that if the futures market held the low 2050’s, we have a sentiment pattern in place that can take us directly to 2098ES.   For those that were not trading that day, the futures bottomed around 2052ES, and topped at 2099ES.  So, I ask you – was it the Fed or market sentiment that controlled the day?

You see, the critical commenter from last week said one thing that was an accurate depiction of the market, and it had nothing to do with the word “patience.” His one correct statement was that “people BELIEVE still in the power of the Fed, whether justified or not.”  That is exactly the point.  People did not care what the Fed actually said, rather, they were going to spin it in the manner which supported market sentiment at the time, which was calling for a rally.

External events affect the markets only insofar as they are interpreted by the market participants.  Yet, such interpretation is guided by the prevalent social mood or sentiment of market participants.  Therefore, the important factor to understand is not the event itself (ie. whether the Fed used the word “patience”), but, rather, the underlying social mood which provided the “spin” to an understanding of that external event.  So, even though the Fed did not use the word “patience,” the market was going to perceive the Fed as dovish anyway so that they have an “excuse” as to why the market went up anyway.

Moreover, I still hear people talk about how masterful the Fed is in controlling the markets.  That just simply makes me scratch my head.  The Fed did what most thought would have tanked the market, nevertheless, the markets went up, and people still proclaim how masterful the Fed controls the markets.  My question to all those who read these articles is if you have seen one person go back and note how they were wrong about their “patience” expectation?  The answer is most likely “no.”  In truth, all the hours and hours of market babble and debate you hear ultimately means nothing and is never re-examined after the fact.

But, as Ben Franklin said: “Geese are but Geese tho’ we may think ‘em Swans; and Truth will be Truth tho’ it sometimes prove mortifying and distasteful.”  What this means is that it is hard for people to abandon that which they have believed for so long to be a swan, even though it really is a goose.  But, for those that truly seek intellectual honesty, rather than after-the-fact excuses, situations like these should be eye opening and instructive.

As another example of this kind of wrong market expectation is how the mainstream viewed the US Dollar over the last several years.  There was not a single person I had spoken with back in May of 2014 who did not think the dollar was about to simply tank.  But, at the time, I was calling for a strong rally in the dollar.  So, please allow me to quote what I wrote last week in a MarketWatch article:

I remember having a conversation a little over a year ago with a friend of mine who is a large art collector.  He was lamenting how expensive it was for him to buy art in Europe due to the strength in the Euro relative to the dollar.  At that time, I told him that this would not remain the case for long. I told him that within several years, we would see parity between the two currencies, and the dollar would likely even surpass the Euro.  And, even though he had learned to trust me over the years, he did have a very strange look on his face when I made such a bold, and seemingly unrealistic, statement to him. Well, here we are about a year later, and we are just about at parity. . .

I would like to digress a moment, and make a comment about the dollar vis-à-vis the expectations of the masses as it relates to quantitative easing.  You see, most market participants are wrong about how a market will react to a specific event.  That is why most traders who attempt to trade a news story based upon the content of the story will often find themselves on the wrong side of a market move, while those who take note of the market reaction to that event are usually the more savvy of traders.  Markets do not often react to news as the great majority would expect, and this is exactly the story of the dollar and quantitative easing.  

The entire market “reasonably” assumed that the quantitative easing programs would be the death knell to the US dollar.  Everyone assumed that the flood of liquidity would devalue the dollar to levels never seen before.  And, as usual, everyone was wrong.  

Back in July of 2011, I wrote one of my very first financial analysis articles.  In that article, I called for a long term wave 2 bottom in the dollar, which would set off a multi-year 3rd wave rally.  While I also called for the 2011 drop in the equity markets at the same time, I did assume that the drop would have been worse than we actually experienced.  And, within 6 months, I had to shift perspectives and become quite bullish in the equity market, looking for new all-time highs.  However, I remained quite steadfast on my long term dollar bottom call.  And, yes, everyone thought me to be quite crazy making such a call in July of 2011.

Now, after many QE programs, in addition to Operation Twist, the dollar has clearly not rolled over and died, as everyone thought would happen.  Rather, we are simply following through in what the market told me it was going to do back in July of 2011.  And, yes, most market participants who expected the “obvious” death to the dollar have been proven wrong.

This brings me to a quote from Ralph Nelson Elliott, which he penned in 1941, that really explains the effect of exogenous events upon a market trend, despite the “common-think” to the contrary:

“The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle.  This fundamental law cannot be subverted or set aside by statutes or restrictions.  Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.” 

So, as the dollar climbs higher and higher, we now hear some people ridiculously whispering about the Fed having to engage in further QE to bring the dollar back down.  However, it is clear that these people are not burdened by the facts.  Further QE will not impact the dollar, and the dollar is destined to higher levels later this year no matter what the Fed does or does not do.

Now, how many of you believe that the dollar is being controlled by the Fed?  How many of you believe the dollar is dead?  At some point, you will have to start thinking for yourself, and stop believing the market “common-speak,” as it is almost always wrong. 

There is an old saying that I learned when I was in 3rd grade, which unfortunately, is not adhered to by most adults:

“Put brain in gear before engaging mouth.” 

But, I think those of us who put our hard earned money to work would be best served to put our brain in gear before deploying funds. Do not believe something just because someone says it.  Test its truth, and then re-test it.  Most pundits fail when you place their “perspective” through a rigorous analysis.  And, this is why most are looking the wrong way when a market turns. 

So, for those of you that are now opening your eyes, I welcome you with open arms to the investment world of intellectual honesty, and wish you luck in your new and, most likely, quite profitable journey.

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Courtesy of ElliottWaveTrader.net

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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].

Gold is impervious to rust.

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