Stocks: It All Boils Down to This
News and events do not alter the market’s trend
By Elliott Wave International
The trend of the stock market all boils down to investor psychology — which tends to unfold in similar patterns during every market cycle.
An important point to realize is that investor psychology is endogenous, which of course means “having an internal cause or origin.” Another definition in the dictionary is “not attributable to any external or environmental factor.”
This point was driven home when I first became acquainted with the Elliott Wave Principle and read the history of Ralph Nelson Elliott, the accomplished accountant who observed these repetitive stock market patterns while spending time in a hospital with an illness. He noticed, and I’m paraphrasing, that the trend of the stock market was uninterrupted despite World War II! In other words, the endogenous workings of investor psychology persisted even though an external event as significant as a world war had developed.
Besides wars, this applies to other news and events as well — such as terrorist attacks, Federal Reserve announcements, so-called oil “shocks,” “surprising” economic reports, natural disasters, developments in the world of politics and even a presidential assassination. The market may exhibit a relatively brief emotional reaction to dramatic news, but afterwards, the trend picks up where it left off.
In his landmark book, The Socionomic Theory of Finance, Robert Prechter describes a case in point with these charts and commentary:
[The chart] shows the DJIA around the time when President John F. Kennedy was shot. First of all, can you tell by looking at the graph exactly when that event occurred? Maybe before that big drop on the left? Maybe at some other peak, causing a selloff?
The first arrow [on this next chart] shows the timing of the assassination. The market initially fell, but by the close of the next trading day, it was above where it was at the moment of the event, as you can see by the position of the second arrow.
In the latter half of 1962 and 1963, the trend of the stock market — driven by investor psychology — was up — and continued upward despite historically dramatic news.
Know that Elliott waves are a direct reflection of this investor psychology and can help you anticipate what’s next for financial markets around the globe.
If you’d like to delve into the details of Elliott wave analysis, read the definitive text on the subject: Elliott Wave Principle: Key to Market Behavior by Frost & Prechter.
Here’s a quote from the book:
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. [R.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.
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This article was syndicated by Elliott Wave International and was originally published under the headline Stocks: It All Boils Down to This. 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.