Herd Behavior … After The Top

Correction, Or Collapse

Structural Damage, SOXX

Even though technical conditions show we’re at least in a correction, if not outright reversal or collapse, record inflows for 2022, vs. 2021, present the herd-driven behavior of the public (and funds), to go long.

According to the link above, flows have been out of bonds and lesser performing equities, into equities that have gone down less.

In addition, you can see some of that flow (not addressed in the article) going into gold and the mining sector.

Stepping Back

Pulling away from charts and indicators for a moment, figuratively closing one’s eyes to get a ‘feel’ for what’s happening, it looks like the following:

We’re in a (potential) massive juggernaut reversal that’s been decades in the making; possibly having origins going all the way back to the ’87, crash, the ’95, bull market and then, repeated bubbles of 2000, ’07, and now.

At this point, it looks like the ‘average investor’ is doing the only thing they know how to do … that is, go long.

Those with at least some market knowledge, just got decisively whacked with their ‘put buying‘ strategy as the market has rallied strongly off the lows.

Pavlovian Panic

We’re witnessing the knee-jerk reactions of a public that’s been conditioned for decades, not to ‘think’, but only ‘do’.

Expect this type of behavior to go parabolic if the markets really do turn lower on a sustained, long-term basis.

Prechter has written extensively about crowds or the herd; especially in his text The Wave Principle of Human Social Behavior.

We can see this visceral behavior real-time, in other seemingly unrelated markets. Two examples below:

First, we had oil futures going negative for the first time in history; then we have LNG tanker rates going negative first time as well.

The model seems to be:

“Everybody wants it, and then, they don’t”.

The crowd runs to and fro, effectively leaderless.

With that said, one can make a case we’re just beginning, or already in an economic collapse; now being followed by the early stages of a market collapse.

Meanwhile, The Elephant Gets Bigger

Let’s not forget the massive elephant that’s just now getting so large, it can’t be ignored (time stamp 2:40).

Recall the example at this link … disparate crowds have a tendency to come to the same decision and modify behavior, all-at-once.

You have to wonder, when that crowd is going to simultaneously press the Sell, button.

Hit, In The SOXX

Unprecedented events are everywhere. That includes the massive, ‘never before seen‘, thrust lower in the SOXX.

The uptrend shown in the weekly chart of SOXX, has been decisively broken and with enormous volume.

The week ending Friday January 28th, saw 16.7-million shares traded … the most ever for the index (ETF).

More detail on trend break

Then, There’s Elliott Wave

Before the ‘Elliotticians’ get miffed by the previous (cookie cutter) comments, here’s this:

When this method works … it’s great.

It provides good projection areas and the useful ‘Fourth Wave of Lesser Degree’, targeting.

Note: A quick internet search for this Fourth Wave method (authored by Prechter) turns up nothing.

Logging onto ‘Club EWI‘, putting in ‘Fourth Wave’ has no items found.

One can try contacting Elliott Wave International, to request a copy of this targeting method. It may still be available (for a price).

The data used by this author to target the 4th wave retrace (shown below), is from a hard copy, dated, 1/8/2003. That information was excerpted from The Elliott Wave Theorist, July 9th, 2002.

First, the 2-Hour chart from Thursday’s update is repeated below with the ‘lesser degree’, added in magenta font:

Getting closer-in on the 4th-wave area below:

It’s subtle and difficult to spot. The price action congestion area is the ‘4th wave of lesser degree’.

Summary:

The previous update showed entry points for what is now SOXS-22-01 (not advice, not a recommendation).

Friday’s price action put this position well in the green; getting it to +24%, based on the close.

The table below are the ETFs being tracked along with the leveraged inverse fund tickers.

The percentage gain/loss, is for this past Friday’s action and shown for the inverse funds.

Obviously, the semiconductors were hit the hardest on Friday and so, SOXS, had the largest gain.

A good stop level for SOXS would naturally be Friday’s low (not advice not a recommendation). If we really are in an Elliott Wave 3, down … price action’s expected to continue its decline with haste.

Stay Tuned

Charts by StockCharts

Note:  Posts on this site are for education purposes only.  They provide one firm’s insight on the markets.  Not investment advice.  See additional disclaimer here.

The Danger Point®, trade mark: No. 6,505,279

SOXX, Downside Reversal

The Elliott Wave, Connection

A couple of things first.

Number One:

This site does not use Elliott Wave as a primary analysis tool.

However, to be aware of the technique, will at times provide an additional edge … like now.

Number Two:

Once again, gold and the mining sector have become unbearable to watch.

The amount of hysteria, hype and bloviation serves to make this market all about ego. Ego is a four-letter word for the professional speculator/trader.

We’re leaving it alone for now and moving on to the market at hand: Semiconductors (SOXX).

Semiconductors, SOXX

On a Monthly basis, the chart below is the entire trading history for the sector:

The next chart zooms into the area(s) of interest.

This market, the semis, had its most powerful thrust lower in January, for the entire history of the sector.

The following chart is where it gets interesting.

Elliott Wave labeling as shown. If correct, Wave 3, down has just started (not advice, not a recommendation).

Warning:

My former mentor, the late David Weis, who once worked for Prechter, said the approach is a “cookie cutter” (his words) attempt to force the markets into a pre-defined construct.

With that caveat in hand and the understanding the ‘wave’ could fall apart at any time, let’s see what it would project if price action followed the current labeling and structure.

The daily chart shows a Fibonacci projection based on the Elliott Wave labels:

The projections are in percentiles of the first wave distance.

Elliott Wave rules are that ‘Wave 3’ can’t be the shortest wave. If the structure holds, that means Wave 3 (if that’s what we’re in) would go below the 100%, level and potentially to 161.8%, level.

To Trade, or Not To Trade:

This structure was spotted late yesterday … after abandoning the gold sector. There had already been the pre-requisite hype about CPI numbers and such giving the ‘excuse’ for markets to rise.

That meant risk of a short position (yesterday, early today) was low: not advice not a recommendation.

The chart below of leveraged inverse fund SOXS, shows entry points for what is now: SOXS-22-01

Summary:

Taking a cue from the late Dr. Martin Zweig, on his words during this broadcast, he was very hesitant to use the word ‘crash’.

So, this update is hesitant as well.

However, if the forecasted move of SOXX, to the Fibonacci projected 161.8% level (or more) is realized, it’s a decline over – 37%, from current levels.

It would be significant … crash or not.

Stay Tuned

Note:  Posts on this site are for education purposes only.  They provide one firm’s insight on the markets.  Not investment advice.  See additional disclaimer here.