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How NOT to Get Stuck in a "Sucker Rally"
Knowing "wave personalities" can help you avoid investment pitfalls.
The action in stocks around the world over the past two months has raised a skeptical eyebrow for some investors, yet for others it has reignited the hopes of a new bull market.
Both perspectives are understandable. The world's benchmark stock indexes -- the DJIA, the British FTSE 100, Germany's DAX and Japan's NIKKEI -- are up 30%, 27%, 34% and 34%, respectively.
Even so, the rally has taken place against the grim "fundamental" background of falling housing prices, rising unemployment, the threat of a global pandemic, etc., etc. The skeptics are looking at this disconnect and asking, How can stock rally? The optimists say that the market is "forward-looking" and the worst is behind us. How do you know which group is right?
From an Elliott wave perspective, the answer to this question begins with remembering how market action unfolds in any liquid, freely-traded market: Five waves in the direction of the larger trend and three waves against it. There is more: Each of the waves has its own psychology -- or "personality," as the classic Elliott Wave Principle - Key to Market Behavior*, puts it. Here's a chart describing wave personalities in a bull market:
So, to answer the question whether this rally is for real or not, an Elliottician needs to determine where in the above pattern stocks currently are.
If you're a subscriber of ours, you already know the answer. As early as March 18, EWI's Mon.-Wed.-Fri. Short Term Update told subscribers that stocks were likely entering a wave 2 rally of Primary degree. What does it imply? Here's what Elliott Wave Principle says about second-wave personalities. (Remember, we are in a bear market, so you need to flip the above chart upside down and "adjust" the language.)
— Second waves often retrace so much of wave one that most of the advancement up to that time is eroded away by the time it ends. At this point, investors are thoroughly convinced that the bear market is back to stay. Second waves often produce downside non-confirmations and Dow Theory "buy spots," when low volume and volatility indicate a drying up of selling pressure.
"At this point, investors are thoroughly convinced that the [bull] market is back to stay." This rally is not at that point yet, but it's clearly headed that way, as more and more skeptics are turning into believers. Will it turn out to be a siren call? To find out, read our latest analysis and longer-term forecasts now -- risk-free:
*You get a free copy of Elliott Wave Principle with your risk-free subscription.