By Elliott Wave International
Elliott Wave International has mentioned time and again that the mainstream financial media nearly always mentions a news development as the reason for a given day’s stock market action.
More than that, we’ve provided example after example of how these so-called explanations usually don’t hold water.
For example, on August 26, when the Dow Industrials closed lower by just over 1,000 points, a headline said (Marketwatch):
Dow closes down 1000 points, Nasdaq falls 3.9% after Powell warns of pain to households in inflation battle
That “warning” was given by Fed Chairman Powell in Jackson Hole, Wyoming when he basically said that the central bank will continue with its aggressive rate hikes.
However, this stance by the Fed is nothing new, and indeed, the stock market staged a significant rally since mid-June. All the while, the Fed had been hawkish.
Here’s a Forbes headline from July 27:
Dow Jumps 400 Points After Fed Hikes Rates By 75 Basis Points
There have been other similar headlines during the stock market’s two-month rally.
So, how can Fed rate hikes be bullish one day but bearish at another time?
Our decades-long observations here at Elliott Wave International is that news does not drive stock prices in the first place — contrary to popular belief.
The stock market is driven by investor psychology, which is reflected in the repetitive patterns of the Elliott wave model.
Indeed, before the 643-point drop in the Dow on August 22, and the 1008-point plunge on August 26, the August 19 U.S. Short Term Update (a thrice weekly Elliott Wave International publication which provides near-term forecasts for major U.S. financial markets) said:
As the week wore on, selling strength became more intense. On Wednesday, August 17, the NYSE advance/decline ratio was negative by 4.30-to-1. Today’s closing a/d ratio was negative by 6.32-to-1. The same with Big Board up and down volume. Down volume as a percentage of up and down volume was 81.4% on Wednesday and today it was 86%. Stocks have the strong potential to continue lower as prices trace out declining impulse patterns at various degrees of trend. [emphasis added]
In other words, patterns of the Elliott wave model were strongly suggesting further decline — regardless of what the Fed chairman said or didn’t say.
If you’d like to learn about the Elliott wave model, an excellent book on the subject is Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter. Here’s a quote from this Wall Street classic:
All waves may be categorized by relative size, or degree. The degree of a wave is determined by its size and position relative to component, adjacent and encompassing waves. [Ralph N.] Elliott named nine degrees of waves, from the smallest discernible on an hourly chart to the largest wave he could assume existed from the data then available. He chose the following terms for these degrees, from largest to smallest: Grand Supercycle, Supercycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette, Subminuette. Cycle waves subdivide into Primary waves that subdivide into Intermediate waves that in turn subdivide into Minor waves, and so on. The specific terminology is not critical to the identification of degrees, although out of habit, today’s practitioners have become comfortable with Elliott’s nomenclature.
You can learn more about the Wave Principle by reading the entire online version of the book for free!
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This article was syndicated by Elliott Wave International and was originally published under the headline Was It Really the Fed That Sent Stock Prices Tumbling?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.