Optimism
- Alexandre Marro
- Feb 3
- 4 min read
" Clearing blue sky, A promise in bare branches. In winter, there are sunny days. In adulthood, childhood can return." The markets are a collective psychological response to the world and its changes. 1. Last Wednesday, the Federal Reserve maintained its position of no additional rate hikes nor rate cuts in the future term due to a strong economy. Rate cut: When the central bank (such as the Federal Reserve) lowers interest rates. This can stimulate borrowing and spending, boost economic growth, and potentially increase stock market performance.
Rate hike: When the central bank raises interest rates. This is typically done to control inflation, but it can lead to decreased borrowing and spending, slower economic growth, and potentially lower stock market performance 2. On the same day TSLA posted earnings that fell short of investor expectations, and Microsoft posted earnings that surpassed investor expectations. Overnight, the price of TSLA shares moved up from 389.10 to 400.28 while MSFT shares fell from 442.33 to 418.77. 3. Yesterday, President Trump rolled out tariffs on imports from both Canada and Mexico citing a need to strengthen domestic infrastructure. Invariably, retaliatory tariffs were announced. Economists and investors worldwide braced for the coming uncertainty ahead. Overnight, all markets responded to the news. Crypto markets experienced price shocks to the downside, futures markets gapped down. Today, the markets recovered with a moderately strong close to the upside. How does one make sense of what is occurring in the markets when there are infinite data points and conflicting news sources? Elliott Wave Theory is a concept founded by Ralph Nelson Elliott describing market phenomena as psychological representations of human sentiment, which is a balance between optimism, and pessimism which is repeated cyclically and can therefore be referred to as having a fractal nature. Supply and demand underly the market movements, and the emotional response of market participants involves swings between fear and greed, revulsion and euphoria. Fear is one the most basic human emotions, and it’s the word we use to describe our emotional reaction when we sense danger or unsafe.
Elliott claimed that social or crowd behavior trends and reverses in a recognizable pattern and his theory is based on reading the patterned human behavior of crowds by its effect on market prices.
Crowds tend to shift from optimism and pessimism naturally. In other words, Elliott proposed that social mood swings are patterned and appear in the price movement of markets, and these movements then tend to follow the Elliott wave model. A complete market cycle is depicted by Elliott Waves via 2 components - a motive wave, and a corrective wave. The motive wave forms in the direction of the overall trend. The corrective wave forms during retracement periods counter to the trend direction. These take on varied forms, with the general structure being 5-3-5-3-5 (Motive), and 5-3-5 (Corrective). The fractal nature of waves means that the general structure is represented within the waves themselves, and within their subwaves. Elliott Waves have rules that validate or invalidate them, the most important subset of which is this: Rule 1: Wave 2 can never retrace more than 100 percent of wave 1.
Rule 2: Wave 4 may never end in the price territory of wave 1.
Rule 3: Out of the three impulse waves (i.e. wave 1, 3 and 5), wave 3 can never the shortest.
Elliott Wave structure is further characterized by the Fibonacci Sequence - a series of numbers where each number is the sum of the two preceding ones, usually starting with 0 and 1. The sequence typically begins as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34 etc. The Fibonacci Sequence is seen ubiquitously throughout nature. Fibonacci Ratios are used by traders for establishing price targets and by Elliott Wave Practitioners to validate / invalidate motive wave components.
Fibonacci Ratios are applied to Elliott Waves to determine categorization and validation of the wave - as mentioned previously, Elliott Waves follow a subset of rules which either validate or invalidate them. Fibonacci relationships are part of this characterization.
As with all forms of analysis, there is no one form that reigns supreme. In Technical Analysis, strategies are formulated using a "Cluster of Evidence." As traders, we form our own strategies and set objective rules within them - the cluster of evidence is meant to improve the statistical probability that your strategy is a valid forecast. Therefore, identification of Elliott Waves is meant to enhance your other forecasting tools to create a more complete picture. Elliott Wave Analysis of the S&P 500 2/3/2025
Today I covered a brief introduction into Elliott Waves and Fibonacci sequences and how they can fit into your technical analysis. For more detailed information about using them in your analysis I offer 1-1 coaching via zoom in the about me section of this site.
The markets are a storm
Let's ride the lightning
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