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What to Make of the Stock Market’s Bounce

“For certain, there will be countertrend rallies”

by Bob Stokes
Updated: June 01, 2022

The stock market selloff from March into the May low was comprised of eight straight weeks of decline in the Dow Industrials.

This was historic. The Dow Industrials have been around for 126 years and this was only the second time that the senior index suffered a decline for eight consecutive weeks. The other time was in 1923 -- also March into May.

But, getting back to 2022, on Friday May 20, which was the last day of the eighth week of decline, our U.S. Short Term Update said:

For certain, there will be countertrend rallies as the stock market decline progresses, and some that will be very sharp.

Interestingly, after the market close on the last trading day of the following week, a May 27 CNBC article noted:

S&P 500, Dow snap losing streaks for best week since November 2020

The Dow had climbed 6.2% from May 23 through May 27, so a significant bounce in a relatively short period of time.

Countertrend rallies near the start of a decline (or countertrend drops after the first leg of a bull market) usually result in many investors believing that the old trend (in this case, an uptrend) has returned.

For instance, a senior portfolio manager quoted in that May 27 CNBC article said:

"We have come a long way down pretty fast and if we can stabilize here then the declines we've seen might be all that's needed, or something close to that."

In other words, the attitude expressed is that the selloff may have removed the froth from the market so the uptrend can return. Yet, this can be a financially dangerous mindset, as stock market history indicates.

Here are three charts side-by-side from a classic Elliott Wave Financial Forecast:

BigBounce

On the left, notice that even the then president of the United States commented that "we have now passed the worst" after the first big bounce during the 1929-1932 bear market. Of course, much more decline was yet to follow. In the middle and on the right, you'll also notice positive comments following a bounce in the Nikkei's bear market of the early 1990s and during the NASDAQ's drop about 20 years ago.

The lesson is that the same patterns of investor psychology tend to repeat over and over.

The Elliott wave model reflects these repetitive patterns.

You are encouraged to learn the current message of the Elliott wave model so you can prepare for what may take the majority by surprise.

Just follow the link below to get started.

Here’s How Most Investors Cope with Stock Market Uncertainty

They do what they've always done: look to others for clues as to what to do next.

Problem is -- the crowd is almost always wrong at major stock market turns.

By stark contrast, instead of joining the crowd, our Elliott wave experts track the crowd's patterned behavior. These patterns have repeated throughout market history. This repetition of recognizable investor patterns brings predictive value.

Our flagship investor package shows what these patterns are revealing about the U.S. stock market's likely next big move.

Tap into our current insights by following the link below.

Financial Forecast Service

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All month long, Financial Forecast Service helps you stay ahead of the waves in the U.S. markets on the timeframes that matter the most. FFS covers the stock indexes, bonds, gold, silver, the U.S. dollar, as well as market psychology and cultural trends. It is our most popular service.

Comprises the monthly Elliott Wave Financial Forecast, 3x-per-week Short Term Update and at least 12x-per-year Elliott Wave Theorist.

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