Following the "Heard" Can Get You Into Trouble

Elliott Wave Trader  |

So, I heard that good news is now bad news and bad news is now good news in the market. Or was that bad news is bad news and good news is bad news? Or, was that bad news is bad news and good news is good news? To be honest, I just can’t keep up with all the convoluted ways people try to explain how to view the market based upon news. And, it changes all the time.

Last week, I heard the dollar rally was causing the market to tank. Well, by Wednesday this past week we had rallied 130 points off the lows in the S&P 500, and the dollar continued to rise along with us at the time. This is another Foghorn Leghorn market moment for analysts:

Don’t bother me with facts, son. I’ve already made up my mind.

Source: Warner Bros.

Lastly, all I heard on Monday was how we were certainly going to crash. In fact, if you had viewed any media site that day you would have seen all the bearish headlines and expectations for impending doom. Most specifically, many were certain we would crash on Wednesday since it was a quantitative tightening day. Well, they sure tightened something all right . . . the noose around those thinking that the Fed controls the market and overstaying their welcome on the short side, as Wednesday provided us with a 50+ point rally.

It certainly seems as though if you followed everything you heard this past week, you were likely on the wrong side of these sizable market moves.

But, the simple reason for the strong rally we experienced was that the bearish boat was too heavily weighted on one side, so it clearly tipped over and took on water. And, on Wednesday, the market took out many of those on the short side of that boat who were expecting it to crash for one reason or another. It sure does not seem like anyone reminded investors that they were not supposed to fight the Fed on Wednesday.

Amazingly, there was no news associated with the rally (and even opposite news on Wednesday). So, what will all those who believe that news drives the market do? I am quite sure they were like deer caught in the headlights during the short squeeze this past week. In fact, one Bloomberg commentator noted: "no particular news today . . . sometimes bounces happen." Now, that was helpful.

So, let me get this straight. According to Jeff Miller (whose “Weighing The Week Ahead” series I strongly urge you to read), there was “no satisfying explanation” for the market drop from 2940, and according to Bloomberg this recent rally simply “happened.” So, why did the market move so dramatically?

Well, our ElliottWaveTrader.net subscribers know that we don’t need news or explanations to understand how the market moves. Our subscribers were put on notice that once the market broke below 2880SPX, it opened the door for the market to drop to the 2600SPX region. And, on Monday, the market bottomed out at 2603SPX and began a strong rally. And we were able to call for this action before the market even topped. So, do you think news really directs the market or is there something much more powerful that directs the market?

In the coming weeks, these are the goal posts you should follow. Ideally, the market will provide us with more of a pullback. And, as long as we hold the 2640SPX region, I am looking for a rally back over the 2800SPX region.

But, I will warn you that, depending upon how that rally takes shape in the coming weeks, Santa may be delivering coal this year for Christmas. Much will depend on the action at the end of November and early December, as the risks of a major correction have risen quite high.

So, for those who followed my analysis over the last few months, and stopped out of your long positions on a break down below 2880SPX, this pullback in the market is giving you an opportunity to ride the market back up on the long side. However, you will have to remain extremely vigilant if you intend on holding your long positions beyond the 2820SPX region.

If any of our Fibonacci Pinball supports are going to break on our way higher with a 5-wave structure to the downside, I will likely be looking to the short side of the market, with the 2200SPX region as my primary target to the downside. And, if the market tops anywhere over 2820SPX, and then begins an initial 5-wave decline, we will likely see market action similar to what was seen in 2011.

After being a staunch bull for years, my bear suit has been cleaned and pressed, and laying on my bed waiting for the signal from Mr. Market to don my freshly cleaned suit. And, should that signal present itself, the downdraft may be faster and larger than what we just experienced in October.

See charts illustrating the wave counts on the S&P 500.

Avi Gilburt is a widely followed Elliott Wave technical analyst and founder of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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