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Sentiment Speaks: Have You Learned Your Lesson From The Market Yet?

Elliot Wave Technical Analyst & author @ Elliott Wave Trader
December 13, 2022

Some people never learn. And, when it comes to the market, I would venture to say that most people never learn.

On Friday morning, the most recent PPI report was published, and it came in a lot hotter than most expected. So, what did everyone think the market was going to do on Friday? Yup, everyone believed that the market was going to tank and end up deep in the red. Well, if we look closely, that is not exactly what happened.

While the initial reaction was to the downside, the market took back all those losses through the day, and even spent a substantial amount of the time during the day in the green. That was not expected by most after the morning report.

But, as Ralph Nelson Elliott once noted:

“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.”

And, as I have cited in the past, many recent studies support Elliott’s perspective noted decades ago. In a paper entitled “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society, the authors outlined their views of how the markets work:

“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.”

Yet, most market participants are so certain that news and various reports are what moves the market. Most of the time, they do so wearing blinders. While they will look at the market quite assured of their perspective when the market reacts as they expect, they simply ignore those times that the market acts opposite to their expectation. They then just move on to the next report with the same expectations, never having questioned their perspective when the market reacts opposite to their expectations. And, Robert Prechter, in his seminal book The Socionomic Theory of Finance (which I strongly urge every investor to read), outlined this phenomena quite well:

“Observers’ job, as they see it, is simply to identify which external events caused whatever price changes occur. When news seems to coincide sensibly with market movement, they presume a causal relationship. When news doesn’t fit, they attempt to devise a cause-and-effect structure to make it fit. When they cannot even devise a plausible way to twist the news into justifying market action, they chalk up the market moves to “psychology,” which means that, despite a plethora of news and numerous inventive ways to interpret it, their imaginations aren’t prodigious enough to concoct a credible causal story.

Most of the time it is easy for observers to believe in news causality. Financial markets fluctuate constantly, and news comes out constantly, and sometimes the two elements coincide well enough to reinforce commentators’ mental bias towards mechanical cause and effect. When news and the market fail to coincide, they shrug and disregard the inconsistency. Those operating under the mechanics paradigm in finance never seem to see or care that these glaring anomalies exist.”

The best recent example of this occurred on October 13 when the market rallied strongly off a morning low after a hotter than expected CPI report was published. And, the move shocked market participants at the time. Well, that is, most market participants, as we were quite prepared for that rally to begin. Let’s just again review the action around that time to remind you of the perfect example of which I speak.

On October 11, just two days before the CPI number was announced, Bloomberg ran an article entitled, “JPMorgan Says Too-Hot CPI Would Put Stocks at Risk of 5% Tumble.” And, they were not the only one.

Then, on Thursday morning, the CPI report outlined that inflation was hotter than expectations. And, while the market did drop pre-market, the day ended quite differently. In fact, by the time we closed, the market rallied almost 6% off the lows, and ended up green by over 2.6%.

And, boy, did it leave people scratching their heads. I saw quite a few comments on Seeking Alpha which mirrored this sentiment:

“Am I the only one wondering what the heck is going on with this market? I feel like it makes no sense anymore.. Today made NO sense.”

In fact, in a Barron’s article later that day, the author outlined the common feeling in the market that day:

“It was a massive rally, and one that came out of nowhere. And it’s left market observers like yours truly wondering what the heck just happened. There wasn’t any new data, no headline-making speeches, no event that occurred just after the open to spur such a move. It literally came out of nowhere—and left us grasping for possible reasons. “Today’s market reversal was a head-scratcher,” writes Oanda’s Edward Moya. And he’s not wrong.”

Within my update on Wednesday evening (before the CPI report was published) to the members of ElliottWaveTrader.net, I outlined my views regarding the rally I expected to begin shortly:

“Thus far, the market has made several attempts at hitting the blue box support region on the 60-minute SPX chart. And, each time, divergences continue to grow. And, if you look at the 5-minute SPX chart, there is still opportunity to actually strike that support below as long as we remain below the smaller degree resistance noted. . . But, I think we will likely be much higher than where we stand today as we look out towards the end of October, or even into early November, depending on how long it takes the market to bottom out, and how fast the rally I expect takes hold.”

Before the market opened Thursday morning of October 13, as it was hovering near the recent lows, I sent out an alert to our members at 8:56AM, noting my expectations for a bottom being struck and noting that “[t]his should now be the selling climax that completes the downside structure.” The market bottomed within half hour of my alert and began a 17.5% rally.

And, while that action shocked those outside my service, as outlined by the Barron’s article cited above, our members were quite prepared for a potential rally to begin:

“...today was like EW proof on steroids. Had an up 8% portfolio run - including selling shorts at the bottom and immediately loading up on the turn. Without this service I would never have been poised to jump that quick. The confidence of recent updates was pretty overwhelming.”

“Just want to say that was an amazing call this morning... I have been a member for about 8 months. Definitely an elliot wave neophyte, but lots of trading experience. Just amazed. I be 62, old dawg. great, great service.”

Of late, I had been warning of a pullback that was likely to take hold before the market attempted its next rally to 4300SPX. And, I can say that the market is acting relatively within expectations that we have laid out over the last several months.

In very simple terms, as long as this pullback holds the 3700-3870SPX support region below us, we should be setting up to rally to the 4300SPX region, with potential to even exceed it, depending upon the structure the market takes over the next two weeks.

In the coming week, I am expecting the market to feel out for a bottom, and begin a rally. Should that rally respect immediate overhead resistance between 3987-4056SPX, then I think we see another leg down to the support region noted above. And, depending upon where the market bottoms early in the coming week, we can even see a rally and another topping structure all within the coming week, leading to the next leg down.

However, if that rally is a clearly an impulsive 5-wave structure that takes us through the resistance region noted above, then it is likely that the market has found its local bottom, and the rally to 4300+ has indeed begun.

*******

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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