Do These Explanations Make Sense for This Intraday Stock Market Turn?
The market “is not propelled by … external causality”
by Bob Stokes
Updated: October 21, 2020
On Oct. 19, the DJIA had been trading higher for much of the morning, but by the last hour of trading, the index was more than 400 points in the red.
During that last hour of trading, a major financial website offered this explanation (CNBC):
Dow drops more than 400 points as stimulus uncertainty grows and coronavirus cases rise
Also toward the end of that day's trading, the Wall Street Journal said:
U.S. Stocks Fall on Stimulus Worries
Well, these explanations seem to make sense. However, one must also consider that the lack of progress on another stimulus package and an increase in coronavirus cases are nothing new.
Moreover, the stock market has seen advances when bad news on either or both fronts were grabbing headlines.
For example, on August 12, Barron's said:
The S&P 500 Closed Just Below a New High
U.S. stocks gained on Tuesday, despite the lack of progress in efforts to negotiate another stimulus package...
And, on Sept. 25, Barron's said:
The Dow Rises Despite Virus...
Note that word, despite. Even in cases when the news clearly doesn't fit the market action, news outlets still try to tie one to the other. You see it all the time. It's hard to blame them, because almost everyone is conditioned to expect the news to drive the market.
But getting back to our example, it seems questionable that stimulus uncertainty or COVID-19 developments caused the DJIA's slide on Oct. 19. Indeed, it didn't; a change in market sentiment did.
As the Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter, says:
Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life. The path of prices is not a product of news.
So, what does determine the path of market prices?
The answer is, market psychology, which unfolds according to the paths described by the Elliott Wave Principle. This illustration shows the basic design in both bull and bear markets:
As Elliott Wave Principle: Key to Market Behavior says:
One complete cycle consisting of eight waves... is made up of two distinct phases, the five-wave motive phase... and the three-wave corrective phase.... When an initial eight-wave cycle ends, a similar cycle ensues, which is then followed by another five-wave movement.
When you look at the news to gauge what's next for the market, you are by definition putting yourself one step behind. First, something must happen, then the market is supposed to react -- and only then you can act.
By contrast, when you track wave patterns in market charts, you can see what pattern is underway now, so you can predict what pattern is next -- news or no news. Now you are one step ahead!
So, look to Elliott wave analysis rather than the news for insights into the market's next big move.
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Are You Ready for the Stock Market’s Next Big Move?
If an investor rides a bull market for all it's worth...
And if the market takes back the gains in a very fast downturn...
Then... that investor's stock portfolio goes back to where it began. Even worse: What if the downtrend turns into a massive net loss?
This will likely be the situation many investors will face at the bottom of the next bear market -- which Elliott wave analysis suggests may well be history-making.
Indeed, our Oct. 19 U.S. Short Term Update discussed the position of Large Speculators in a major index and said:
It was a historic change in such a short period of time.
Learn exactly what that means as you get our complete market analysis.
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EWI's 25+ analysts regularly review 100+ market indicators to keep subscribers ahead of big price turns. Right now, one of these indicators -- well-known to most experienced market players -- is flashing a warning signal. Get the details now.
What can you learn when you look at the stock market -- the Dow Jones Industrial Average, specifically -- going all the way back to 1788? A lot! For one, clear Fibonacci proportions begin to emerge between multi-decade historical periods. What's more, the same Fibonacci proportions also begin to point to the year 2021 as a very important moment in financial history.
In June 2020, it seemed the natural gas bear would stay for a while. Yet early July saw a turn from its long-term low. A four-month rally followed and prices more than doubled: See the forecast that got it right.