Why Do We Continue To Fool Ourselves?

Elliot Wave Technical Analyst & author @ Elliott Wave Trader
October 12, 2021

For those of you that don’t already know my position about the general market, allow me to state it once again: I do not believe that fundamentals of the economy or the market are the driver of the stock market. Rather, I believe that market sentiment is the main driver of the market. And, I have explained my reasoning in this article if you want to learn a bit more about my perspective:

How To Analyze Market Sentiment Along With Market Fundamentals

This past week, we had a major economic report released with a really big miss on expectations. So, of course, those that believe the economy leads the market would expect the market to see a relatively large decline due to the size of the miss in expectation. Yet, there are those that believe that this big miss will cause the Fed to provide accommodation for longer than initially outlined, and the market would go up.

But, the market spent most of the day moving absolutely sideways. Does that mean that the market was confused about what the jobs report meant? Does it mean that the market was confused about what affect the jobs report would have to the market?

Now, if the jobs report had been good, and we had this reaction, we would be having the exact same issue. A good jobs report would suggest the Fed would pull back sooner, and that would explain a downside market reaction. Yet, if the market rallied, they would have said – “well, of course, it is because the good jobs number means the economy is doing better, so the market should rally.”

But, why was the market basically flat for most of the day?

Are you starting to see my point about how useless this is in determining market direction? In fact, I will state outright that the market does not care about economic reports – even the worst reports seen in history.

Yes, I know I use that picture a lot. But, folks, it drives home the point of just how unimportant these economic reports are to the market direction. And, it also shows you how a market can rally even in the face of the worst jobs report in history. At the end of the day, what matters is market sentiment, as that is the true driver of market direction.

As far as the current market structure, let me take a moment to review what we have been saying for most of 2021. We expected that the market was going to rally into the 4440-4600SPX region (as it began the year at 3750SPX). As we know, we topped just below 4550SPX. From there, I was expecting a pullback into the 4165-4270SPX region. This past week, the market bottomed in the futures right at that 4270SPX region before we began the rally we saw into the end of the week.

But, admittedly, the market has gotten more complex than I had expected last week. The bottoming structure did not look complete to me, as I thought we would see one more drop before this pullback completed. Therefore, I am still questioning whether this correction has indeed completed.

So, rather than bog you down in the details, I will note that the main smaller degree support I am watching in the coming week is the 4380SPX region. If we can maintain that support, and build a 5-wave rally structure over 4500SPX, then we have a strong indication that the last correction is done and we have begun the next rally to 4900SPX. If so, the next buying opportunity will be within the retracement off that initial 5-wave rally, which I am now guesstimating will take us back into the 4400SPX region. Should the 5-wave rally complete, I will have a much better idea as to where the pullback will take us.

Since I do not wait until the last squiggle completes to begin buying these dips (as I always layer into my positions), I did outline to the members of The Market Pinball Wizard that I began buying additional long positions as we were striking the bottom this past week, even though I saw potential for a bit deeper before this correction could complete. Yet, I retained some cash that I intended to use at those lower targets which I thought we would see, as I outlined last week. If we do not see those targets, then I deploy the remaining cash on the pullback from the initial 5-wave structure off the lows.

However, if we see a sustained break of 4380SPX (especially early in the coming week), then it suggests that this correction is not yet done, and may even take several more weeks until it completes. Moreover, due to the size of this rally, if it turns out to be corrective in nature, then it even opens the door to this pullback taking us as deep as the 4050-4100SPX region. Unfortunately, the market structure has become more difficult than I had initially expected, so we will have to see how the market progresses in the coming week in order to quantify that deeper pullback potential.

I would like to take this opportunity to remind you that we provide our perspective by ranking probabilistic market movements based upon the structure of the market price action. And, if we maintain a certain primary perspective as to how the market will move next, and the market breaks that pattern, it clearly tells us that we were wrong in our initial assessment. But here is the most important part of the analysis: We also provide you with an alternative perspective at the same time we provide you with our primary expectation, and let you know when to adopt that alternative perspective before it happens.

As I have said many times before, this is no different than if an army general were to draw up his primary battle plans, and, at the same time, also draws up a contingency plan in the event that his initial battle plans do not work in his favor. It is simply the manner in which the general prepares for battle. We prepare for market battle in the same manner.

So, while I will never be able to tell you with certainty how the market will move in the coming weeks, months, and years, I present you with enough information to know where my primary perspective is wrong so that you can adjust in order to take account for the alternative situation. And, until such time that the market proves our primary perspective is wrong, we will continue to follow our primary perspective, which at this time is pointing us to much higher levels in the coming years.

By now, I hope you recognize the difference in our analysis approach, other than the accuracy thereof. We strive to view the market, and utilize our mathematically based methodology, in the most objective fashion as possible, no matter how crazy it may sound. Moreover, it provides us with objective levels for targets and invalidation. So, when we are wrong in the minority of circumstances, we are able to adjust our course rather quickly, rather than fighting the market like many others you may read have been doing during this entire rally off the March 2020 lows.

So, while I hope I am helping many of you in maintaining an objective perspective within this non-linear environment we call the stock market, I want to wish you all well in your future trading and investment endeavors. As of now, I maintain my long-held expectation to see the market in the 6000SPX region in the coming years, of course, unless the market tells us otherwise. But, please approach the market with the respect that a bull market deserves, as surprises usually come to the upside, and we likely have much higher to go before this bull market ends.

View all charts illustrating Avi's wave counts on the S&P 500.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets.

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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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