Hey, Who Stole My Rally?!

Oct 3, 2008: 4:20 PM CST

On Monday, the US House of Representatives rejected the “Bail-out/Recovery” Bill narrowly, sending the Dow Jones plunging, closing down 777 points.  Today, hours ago, the House passed the Bill by a comfortable margin.  Did the Dow rally like virtually everyone expected?  No – it fell almost 500 points from its intraday high.  It almost makes you want to pull your hair out – let’s look at these developments.

Friday’s House Passage and the Market… Rally?

Now that wasn’t supposed to happen!  Trading off news can be extremely unreliable – so why go through the frustration if you don’t have to?

I must admit I was one of those expecting an upwards move after the Bill passed and was a little (ok, a lot) surprised at the market discounting and screaming to the downside at the moment the Bill was passed.  One wonders if this was some sort of cosmic joke!

I’m not here to discuss the fundamental or news factors that goes into the Recovery/Bail-out bill (there are plenty of sites for that), but to focus on the charts and price moves themselves.

Price formed a measured move (flag-style) pattern that terminated with the intraday high at roughly $108.00 per share (Dow 10800) as the House began voting on the bill.  The “flag” pulled back to the 50 period EMA to find support and a run-up of an equal or ‘measured’ move of the first impulse of the morning.

Instead of continuing to the upside, price began a large impulse to the downside.  The impulse has a 5-wave structure a la Elliott Wave, but can you tell me how this proposed 5-wave count down violates 2 of the 3 “Hard” Rules of Elliott Wave Theory?  Click the prior link to take you to the post that I wrote last night on the topic.

So price made a new low on the day, closing down 2% from the open – this coming after a morning gap-up and completed Elliott Wave 5-wave impulse up (can you classify it on the chart – look at the morning impulse).

What a day.

For reference, look what happened last Monday when the House performed the opposite outcome – voting down the “rescue” bill.

Monday’s House Bill Failure and the Market Plunge

Let’s play a logic game.

House votes down Bill, Market Plunges.

So if we use the opposite terms, we get the following:

House approves bill, Market Surges.

Even though the logic may be correct, the market action did not confirm this logic, nor does it have to.  That’s why – despite what everyone thinks and despite the highest probability likely move – the market can do anything at any time for any reason (per Mark Douglas in Trading in the Zone and the Disciplined Trader).

Trying to apply logic to the market can tie you into emotional knots and cause endless frustration.

It’s better to assess the probabilities, make a decision, and take your stops when wrong and (try) not to get upset at the outcome – you don’t control the outcome.

Why did it happen?  Who knows.  Plenty of explanations will be offered.  I heard a gentleman on CNN a few minutes ago declare (loose quote):

“It’s like celebrating when the Ambulance finally arrives.  You’re happy, but you realize that the patient is still sick/injured.”

If that logic holds, then the patient (the Economy) is now in the ambulance – there is much recovery ahead. Maybe the market realized that – or perhaps they’re skeptical with the current bill thanks to all the pages of legislation and ‘sweeteners’ added.  Or at threats that “the party’s over” or any number of reasons.

Stick to the charts, manage your risk, and be extraordinarily careful in this wildly swinging, uncertain environment.

3 Comments

3 Responses to “Hey, Who Stole My Rally?!”

  1. Dominick Says:

    Hey Corey great job with the Elliott Wave explanation. I remeber the rules, however can you outline it on the chart as an example. I’m just not that good at spoting it yet.

  2. saurabh Says:

    Hello Sir, Good morning.
    Nice explation and u know what have u done .. u have asked a question to trickle our mind 🙂 ..keep asking those more often .

    Answers are

    1. ( regarding the down trend ) , wave 3 seems to be shortest while it is not supposed to be so, according to the rules. and wave 4 entered in the wave 1 territory too

    2.( Rearding the uptrend ) it is preety much clear

  3. Anonymous Says:

    Which wave rule you´re referring for ?

    I draw this on thursday night, retrace comes not before SPX 1080 and same with QQQQ, at so far no surprizing issues.

    http://1.bp.blogspot.com/_Wt9bhJccdPw/SOYDFpJuCLI/AAAAAAAAFq8/ZIxV35JmYUc/s1600-h/qqqq.png