Sentiment Speaks: Stocks Drop On Worries Central Banks Will Do Exactly What They Said They Would Do

One of my members wrote this headline in our trading room when the market dropped after the recent Fed meeting. And, the reason he did so was to illustrate just how ridiculous most of the pundits’ perspectives are on the market.

But, at the end of the day, the market dances to the beat of its own drummer. And, I have written dozens of articles over the last 11 years with specific examples. Yet, many still choose to the wear their blinders when viewing market action. And, as they say, you can lead a horse to water...

In the meantime, I want to take this opportunity to re-post something that Robert Prechter wrote in his seminal book entitled The Socionomic Theory of Finance:

“Observers’ job, as they see it, is simply to identify which external events caused whatever price changes occur. When news seems to coincide sensibly with market movement, they presume a causal relationship. When news doesn’t fit, they attempt to devise a cause-and-effect structure to make it fit. When they cannot even devise a plausible way to twist the news into justifying market action, they chalk up the market moves to “psychology,” which means that, despite a plethora of news and numerous inventive ways to interpret it, their imaginations aren’t prodigious enough to concoct a credible causal story.

Most of the time it is easy for observers to believe in news causality. Financial markets fluctuate constantly, and news comes out constantly, and sometimes the two elements coincide well enough to reinforce commentators’ mental bias towards mechanical cause and effect. When news and the market fail to coincide, they shrug and disregard the inconsistency. Those operating under the mechanics paradigm in finance never seem to see or care that these glaring anomalies exist.”

So, when most of the market participants were looking for the market to continue dropping in June, with suggested targets of 3400, and 3200, and even 2200, I presented this analysis to my members, as I was expecting a sizeable rally to our target box overhead:

And, I even published an article not long thereafter (on July 3^rd), wherein I noted the following:

“But, for now, as long as we hold the 3620SPX support, I am looking for a rally to develop over the coming weeks to take us north of 4200SPX.”

And, a few weeks ago, on August 17, I published my next article which warned those that read it that “it is a good time to de-risk, and allow the market to provide us with the set up that will point to 5500SPX. For if we do not get that set up, then we could very well see another significant decline take us down to the 3200-3500SPX region.”

You see, I was expecting that the market was going to pull back from the 4325SPX region. Yet, we had no guarantee it was going to provide us with a higher high thereafter to strongly suggest that the market is setting up for new all-time highs. And, as we stand here today, we still have no such guarantee. That is why I strongly urged to de-risk as we were completing that last rally to 4325SPX.

Now, due to the depth of the current pullback these last two weeks, the market has even opened the door to a more immediate bearish outcome before it can again attempt a set up for new all-time highs.

In the very near term, I would like to see the market rally back up towards the 4100-4200SPX region (the details of the specific retracement targets are left for our members of ElliottWaveTrader). The manner in which the market reacts AFTER that rally will tell us if we are setting up to drop to 3400SPX, or if we are going to continue in our set up to 5150SPX or higher.

At this time, I cannot tell you which is more likely with any strong conviction. There are times the market does not allow for strong conviction. And, during those times, one must simply let the market develop and it will then tell you what it has in mind as the structure develops.

For those of you that may remember, as the market was approaching the 2200SPX region in March of 2020, I was providing you a strong conviction expectation that the market would rally from that region to 4000+, even though many laughed at my views. And, while I expected the market to rally from the 3637 low in June to 4200+ and then see a sizeable pullback, I have no more strong conviction expectations right now. So, I will be tracking the market structure very carefully in the coming weeks to let the market tell me what its next 500+ point move will be.

As for the traders amongst you, the next rally may be a good time to add some protective positions. As the rally takes shape and gives me a solid target as to where it can terminate, I will likely do the same in that region.

But, for now, I must warn you that this is still a treacherous market, and it has not yet given us the green light that it is ready to target new all-time highs. And, for those that have followed me over these last 11 years in the virtual pages of Seeking Alpha, you know that while I am not always right, when I have a strong conviction, I make that quite clear.

I am always honest and upfront with you about my perspective, and I provide you specific parameters for those expectations in my articles. At this time, I am going to be equally honest and upfront with you, and tell you that I simply have to patiently wait for the market to tell me a bit more clearly which way the next 500+ points is going to take us. Clearly, the members of ElliottWaveTrader will get my real-time views once the set up is clear. I will try to also post a public article when the market makes it clear. But due to my travel schedule, as well as the upcoming Jewish holiday schedule, I cannot guarantee that article will be contemporaneous to the actual market set up. So, in the meantime, it is prudent to protect your positions on the next rally.