Yes, That Is Red You See

The first question you have to ask yourself is why are we red when such a YUGE deal with the EU was completed this morning?  And, it should remind you again that the market does not act as a mechanical system in the manner in which most always expect.  And, it gives me another opportunity to post the wise words of Bob Prechter from his seminal book 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.”

The second question some are asking is if that is 5 waves down in the futures?  And, while I can answer that it is certainly possible, until we actually break down below some level of support, there really is nothing to discuss with regard to the structure to the downside.  

At this point in time, I will highlight the 6355SPX level as our micro support.  Until that support is broken, there is no real downside expectation to be had immediately.  And, thus far, we are still well over that level.  But, ultimately, it still takes a break down below 6201SPX to really get that downside ball rolling.  In the NQ, the initial level that needs to break is the 22,750 region.

For now, I am sure you are sick of hearing me noting how stretched this market is, so I will simply refer you to my previous analysis.  But, we have yet to break even a minor level of support, so the market can extend even further.  I believe this is what they call the “madness of the crowds,” especially when you see a 1000+ move in the SPX without more than a .236 retracement.