First, for some groundbreaking news (emphasis added):
"WHEN you next sit down to watch the TV news, listen out for a telling phrase. At some point the newscaster will say something like: 'The financial markets reacted to the report with a sharp fall...' Don't believe a word of it. The markets rarely react to news in this way.
"Earlier this year, physicist Jean-Philippe Bouchaud and colleagues at Capital Fund Management in Paris studied the news feeds produced by Dow Jones and Reuters that provide real-time reports of items of potential interest to investors. Looking at more than 90,000 news items relevant to hundreds of stocks over a two-year period, they studied how 'jumps' in stock prices – sudden, large movements – were linked to news items.
"They weren't. Most such jumps weren't directly associated with any news at all, and most news items didn't cause any jumps. 'Jumps seem to occur for no identifiable reason,' Bouchaud says.
"This finding flies in the face of traditional economic theory, which insists that markets are mostly in equilibrium, reflecting an overall balance of economic forces. Markets change, the theory says, when those forces change…[But] Bouchard's evidence says that, in fact, markets have unruly internal dynamics all their own, with rallies and crashes emerging seemingly from nowhere. This tells us straight away that something about the model is flawed."
– NewScientist.com, "Why economic theory is out of whack," 19 July 2008.
Those of you who have been reading EWI's Free Updates articles and paid publications will not be surprised by these findings. On this page alone, I’ve documented at least a dozen cases over the past few years of forex markets reacting to a news report in a way that’s opposite of how “logic” suggests they should.
What's this "internal dynamic" that moves market prices? From an Elliott wave perspective, the unequivocal answer is: collective psychology of market players (a.k.a. investors, traders or speculators). After all, markets move only because people buy and sell – and their buying and selling is rarely related to news reports, as the growing body of evidence shows.
So, the next time you see a headline like this one from July 24, "Euro Falls Against Dollar as German Business Confidence Slumps," think twice about whether the EURUSD moved because of a news report, or because it was going there anyway.
In Jack D. Schwager's excellent “Market Wizards: Interviews with Top Traders,” one famous investor summarized his success this way: “Listen to the market, it will tell you everything you need to know.” In other words, don’t let economic data confuse you. Listen to market sentiment; study the long and short-term trends; look for any repeating patterns in the charts, etc. That's the only way we know to not be distracted from what the market is trying to tell you.
Currency Trader Alert: Despite the recent slide, Elliott wave patterns in the EURUSD "continue to favor the upside." Get the complete forecast now inside EWI's Currency Specialty Service.