Setting Up A Break Down

For the last 8 years, I have been publishing my analysis publicly. Yet, I am still amazed at how the market follows the patterns we track almost perfectly, and how news seems to fit in within those patterns.

This past week, as we were expecting a market top, Mr. Powel and President Trump certainly provided the catalysts for the decline for which the market was setting up.

Now, for those of you that believe that the tariff news was the “cause” the decline, I again want to remind you that the same tariff war escalation seemed to have “caused” a 9% rally in 2018.  I remember how many of you who commented to my articles during that uptrend noted how it did not make sense to you. 

So, I guess if the market now drops when we enter further tariff escalation, the market is now making sense to you.  But, does that really mean that the tariffs are the true cause of the drop?  If a trade war action is truly a cause of a drop, why did we rally 9% in 2018 with the same catalyst?

Moreover, consider that the latest tariffs represented about 75 billion of costs which many viewed as a catalyst for the declines.  Yet, when the Congressional Budget Office announced on Wednesday that the budget deficit has increased to 1 trillion dollars (more than 13 times the cost of the tariffs), the market rallied over 40 points that same day.  And, did not even flinch at the announcement.

Now that all of you are so sure you figured out what happened this past week, does this make you scratch your head?  Well, it should if you are being intellectually honest.  Yet, many of you will attempt to provide convoluted explanations in the comments section below as to why the market continued to rally on bad news on Wednesday (as well as in 2018), yet tanked on Friday with bad news. 

For those of you who are looking for consistency in analysis, and something that makes sense all the time and not just some of the time, I want you to consider the following reasoning.  When the market is in a uptrend pattern, seemingly bad exogenous news will be ignored, or “discounted” as some call it, as the market continues on its way to complete its uptrend pattern.  Yet, when the market has completed its pattern or is in a downtrend pattern already, the seemingly bad news seems to be the cause of the negative reaction to negative news.

The conclusion with which you should walk away with is that when market sentiment is negative, all news is viewed as negative.  And, when market sentiment is positive, then all news is viewed as positive.  And, it really is the simple.  One need not perform logical gymnastics to understand markets, yet many of you, as well as those in the media, just can’t help yourselves from doing otherwise. 

I know what I am saying seems so counterintuitive because it was so clear that the market was down on Friday due to the tariff news.  But, it was also so clear that the market rallied 9% in 2018 on trade war escalation.  It was also so clear that the market ignored news with significantly larger negative implications on Wednesday.  And, in order to maintain your superficial perspective of what moves markets, you have to ignore 2018 and Wednesday, and only focus on Friday. 

What you should be focused upon is what truly moves markets:  market sentiment.   And, as I have said many times before, I know of no other method which tracks market sentiment and provides context to the market better than Elliott Wave analysis.  It allows you to tune out the noise, and only focus on what is really important – the status of the current trend. It allows you to know when exogenous events will be ignored and when it will seemingly drive the market.

Allow me to repost a study which explains why this happens.  In a paper entitled “Large Financial Crashes,” published in 1997 in Physica 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.”

And, as Ralph Nelson Elliott said 80 years ago:

“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.”

As one of my members noted on Friday, (as they were prepared for this downdraft):

“Now that I've been immersed in EWT for all of 2 months, I have not been spending much time watching CNBC as I had prior. Well, today I found myself watching Steve Liesman and literally laughing out loud as he attempted to explain markets. My sense is that EWT provides a bit of an oasis for some weary, pundit fatigued market observers like me.” 

So, where are we in the current trend?

Well, it seems that the market is now finally prepared to embark on its break down below 2700SPX.  While we will likely still see “bounces” along the way which will make people feel bullish again, as long as we remain below this past week’s high, pressure will remain to the downside, and my next target region is going to be the 2600-2685SPX region which I have outlined over the last several weeks.

Most specifically, if you review the 5-minute SPX chart I have attached to this update, you will see that my ideal set up points to a bottoming in wave 1 off this past week’s high.  As long as we hold over the 2800 region, then I am going to expect a corrective “bounce” for a wave 2 before the market is ripe for its next decline phase, which can shave off 100 points to the downside in a very rapid move.  To see a 3%+ down day during that 3^rd wave down would not surprise me at all.

So, sentiment is now ripe for a break down.  But, does this mean I am 100% sure we see that break down?  The answer is clearly no.  How can anyone be 100% certain of the future.  Rather, we view the market from a probabilistic perspective and it suggests that there is a high likelihood that the market is going to break down in the coming weeks.  And, this is not due to some news event being the cause of it.  Yet, I am quite certain there will be some accompanying bad news as it almost always happens that way.  But, the market sentiment is now ripe for such bad news to seemingly have an effect, whereas before Friday, it was not – as we clearly saw on Wednesday.

If you pay close attention to investor reactions rather than just superficial correlations, much of what I have said above will become clearer and clearer to you, and you will gain a new and clearer understanding of how financial markets work.

View original article with charts illustrating the wave counts on the S&P 500.

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