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"The news spooked the market." (NOT.)

There is an “early warning system” for sudden trend changes.

by Vadim Pokhlebkin
Updated: September 06, 2018

The phrase in the headline? You hear it all the time. Especially if the news was "unexpected" or "unscheduled," and a sharp move in the market followed.

But what if you were to learn that usually, the market's "reaction" is merely a coincidence?

Our story begins on September 5, when the British pound experienced its "...biggest 1-hour jump of 2018 on Euro, Dollar."

Yes, there had been an unexpected news item:

"The Pound surged around 1.5cGBP/USDin 15 minutes on the latest Germany/UK Brexit murmurings..." (Pound Sterling).

So, a Brexit rumor surfaced, and the market reacted. A caused B. The question is, though, why was the reaction so jumpy?

Clearly, forex traders were in a "jumpy" mood. Clearly, they were on the edge of their seats, looking for any excuse to buy cable. Why? Allow us to offer an unconventional answer.

Early in the morning U.S. time on September 5, our Currency Pro Service was tracking a 5-wave decline on an intraday GBPUSD chart (full labeling reserved for subscribers):

fofo 09-06-2018-1

You can see that wave patterns showed GBPUSD ending the 5th (and final) wave of a 5-wave decline. If you know your Elliott, you know that after a 5th wave is finished, the market reverses in a correction.

So, the expectation was for GBPUSD to start rallying soon.

Only then came the news of "Brexit murmurings." GBPUSD spiked higher:

fofo 09-06-2018-2

But here's the kicker.

Elliott wave patterns had suggested -- ahead of time, once again -- that any rally would be corrective, so we knew not to get married to it. As our Currency Pro Service editor, Jim Martens, put it,

"Notice a (b) over the surge.The move down from the high was the start of (c). If nothing else, we didn't get caught up in the rally attempt."

The GBPUSD rally indeed fizzled out fast:

fofo 09-06-2018-3

What makes forecasts like these possible? Elliott waves help you track and forecast the mood of the market participants -- like forex traders' "jumpy mood" on September 5.

Sure, the news may serve as a catalyst. But market psychology will always go where it wants to go, regardless.

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