Sentiment Speaks: The Market Fooled You Twice. Shame On You

Elliot Wave Technical Analyst & author @ Elliott Wave Trader
December 20, 2022

Yet another week of head scratching was seen in the market this past week. The CPI came in lower than the prior report, and the market rallied strongly through the lower resistance region I outlined last weekend. And, it made most people uber-bullish, believing we were heading directly to the 4300SPX region.

Yet, if you recall what I had said in my update last week, I was quite specific that any rally through resistance had to have been a 5-wave structure to tell us we were ready to attack 4300SPX. As I outlined to our members of ElliottWaveTrader.net in real time, the rally only took shape as a 3-wave structure. And, as you can see from the attached chart, I maintained an expectation that the rally was a b-wave (corrective rally), with a c-wave decline yet to follow.

Elliottwavetrader.net

Within the following 15 minutes after the chart above was posted, I then provided another update to our members, noting that should we break back below 4034SPX, it makes it likely that we are heading down towards the larger degree support region I have been outlining for weeks.

Moreover, two weeks ago I outlined to our members the potential that we can again test the 4118-4154SPX region (as the futures did before the market opened this past Tuesday), and still drop down to the larger degree support region I was outlining. You see, when a bullish move fails to strike the ideal target zone (which was the 4118-4154SPX region of which we came up short in the prior rally), we often see the b-wave of the ensuing correction come back to strike it. This is exactly what we experienced this past week. And, this is why I made it quite clear that only if the rally through our lower resistance completed 5-waves up would the market tell us that we were going to rally to 4300SPX sooner than I had expected. Yet, 3-waves up is all we got, and that was confirmed by the break down below 4034SPX, as I also explained in real-time to our members.

Now, I want you to take a moment and think about the main highs and lows we have struck over the last two months. The low struck on October 13 was a spike down and strong reversal which began a two-month rally after the publishing of a CPI report that was lower than expected, which took everyone by surprise when we ended that day hugely positive. Herein the market fooled you once.

And then we struck a high and reversed strongly on a day when the CPI was lower than expected, which took everyone by surprise when we ended that day with a huge reversal, which kick-started the decline I wanted to see to our support region below. Herein the market fooled you twice. So, as the saying goes, shame on you.

Week after week, I try to outline to investors and traders that, while the substance of a news event can certainly act as a catalyst for a market move, the substance of that report will not always provide you with the correct directional cue for the eventual move in the market. The highs and lows struck in the last two months are perfect examples of this phenomena - we bottomed on a bearish report and topped on a bullish one. Yet, most will simply ignore what just happened and move on to the next set of data which they believe will move the market. But, if you are being honest with yourself, I think it’s time to consider that maybe what you are doing is not really going to help you going forward.

As one of my members commented this past week:

"I mean, bottoming on the worst inflation print and topping on the best... takes a lot of mental gymnastic to make that square without EWT"

I do love quoting these two paragraphs from Robert Prechter’s book The Socionomic Theory of Finance (which, in my humble opinion, is a must read for every single investor and trader if you want to understand how the market really works), as it quite succinctly and accurately explains how the masses approach the market so wrongly:

“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.”

As far as the market is concerned, even when we were near the highs, I outlined in my articles that I was looking for the market to retrace back to the 3723-3867SPX region. Now, many of you are going to again brush aside my view and claim that the only reason we are here is because of what Powell said during the last Fed meeting. Yet, you completely ignore the fact that the market reversed the day before Powell spoke and began the expected decline we outlined to our members. Moreover, you also ignore that the fact that the market was even positive after Mr. Powell spoke and only went negative well after he finished speaking. Therefore, if you continue to maintain your belief, then you must assume that the market is omniscient, clairvoyant or crazy. So, not only were you fooled twice, you are allowing yourself to continue to be fooled. Maybe it’s time to take off the blinders?

Many of you have commented to me in the past that you simply do not appreciate the manner in which I write my missives, as you feel it comes across as arrogant or too “all-knowing.” Well, to be honest, it really is the only way to get people to consider the truth of what I am trying to teach. Believe it or not, sometimes you have to smack people across the face in order for them to accept reality.

Since my goal has been and always will be to teach people how to do better in the market, this is the approach I take whether you like it or not. And, based upon the thousands of notes and comments I get from our members over the years about how we have changed their lives, I will continue to do what works. In fact, this was posted to me by one of our approximately 1000 money manager clients this past week:

“You have no idea what your guidance has done to change lives of some who do not even know your name.”

In the meantime, we are now well within the support region I have outlined weeks ago. And, I will be watching the market quite intently over the coming week to see if we develop the bottoming signals that I want to see. For those interested, I have outlined what I am looking for in my weekend update to the members of ElliottWaveTrader.net. And, if the market provides us with those cues, then we will have a low-risk buying opportunity over the coming week or two, which we can ride to the 4300+ region in the coming months. And, the reason I say it is a low-risk buying opportunity is because the market also provides us with our stop-out point as well.

So, in summary, depending on how the market reacts over the coming week within our support region will tell us quite clearly if we are going to set up to rally to 4300+ as we move into 2023. For now, this remains my expectation. But, clearly, I will be listening to the cues offered by the market before I will act on my expectation.

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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].


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