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Before Blaming DJIA’s Sell-Off on Turkey, Consider This

Why did stocks disregard bad news from Turkey for weeks – and then it suddenly mattered?

by Nico Isaac
Updated: August 13, 2018

It was a bear of a weekend for U.S. stock market bulls, thanks to the Dow Jones Industrial Average's triple-digit sell-off on Friday, August 10. According to the mainstream experts, those caught on the wrong side of the market's rout had one clear name to blame -- Turkey.; More specifically, an escalating financial crisis in Turkey, exacerbated by a very anti-Turkey August 10 tweet by U.S. President Donald Trump.

Here, the following August 10 headlines send a very direct message:

  • "Dow Drops about 200 points as financial crisis in Turkey spooks global markets" (CNBC)
  • "Dow Drops 196 points because that's the way the turkey tumbles" (Barron's)
  • "Financial crisis in Turkey rattles investors." (Seeking Alpha)

We'd love to say, "That's a wrap!" and tie this story up here with a tidy little bow. That, however, isn't possible. And here's why: The financial crisis in Turkey is far from new. Nor, for that matter, are the mounting tensions between the U.S. and Turkey.

In fact, Turkey has been on doom-and-gloom watch ever since the country's controversial President Recep Erdogan was re-elected in June. In the months that followed, the Turkish lira repeatedly plummeted to a history-making, lifetime low (in July and August) and the U.S. imposed sanctions on the Turkish ministers of Justice and Interior over the alleged unlawful imprisonment of a U.S. pastor (on August 1).

But don't take our word for it. These news items from the time recapture the dismal scene.

  • "Europe on Alert: Turkish lira falls bringing inflation to 14-year high... Erdogan's new term in office will quickly morph into a financial crisis." (July 3 Express.co.uk
  • "EU's Turkey Nightmare" (July 11 Financial Times
  • "Turkish lira drops to all time low after US imposes sanctions" (August 1 Wall Street Journal)

And yet -- instead of "rattling" or "spooking" U.S. investors, the Dow soared more than 1500 points between June 27 and August 7, smack dab in the middle of Turkey's ongoing crisis.

As for that anti-Turkey tweet by U.S. President Donald Trump, in which he announced a doubling of tariffs on Turkish aluminum and steel and said, "Our relations with Turkey are not good at this time" -- well, let's look at the time stamp. Trump published said tweet at 8:47 am on August 10.

The Dow, however, started to lose steam several days before Trump's tweet.

So, if the alleged connection between "bad news from Turkey" and Trump's tweets is tenuous, what is the reason for stocks' recent weakness?

As always, it was a matter of a change in collective psychology of the market participants.

Elliott wave analysis helps you predict those shifts. See, while the mainstream media sent investors on a wild "turkey" chase after stocks already turned down -- our Stocks Pro Service intraday analysis of the DJIA was there to warn of the potential downturn ahead. On August 8, our Stocks Pro Service editor Robert Kelley identified a rare Elliott wave pattern on the Dow's 10-minute price chart known as a triple zigzag* and wrote:

"Bottom Line: We should expect a decline to initial support at the previous fourth wave low at 25462.

"I'm calling the drop to today's low an initial zigzag in an unfolding double zigzag.; Wave x should be near an end and followed by another zigzag down toward support at the previous fourth wave low at 25462."

81218djia1

From there, prices began to weaken:

81218djia2

It's easy to look at the news of the day and find a "reason" for why a financial market made a certain move -- after the fact.

Elliott waves aim to identify an objective cause for price action -- before it unfolds.

Is Elliott wave analysis always right? No. Markets love to surprise, that's why our analysis includes critical support and resistance price levels to indicate where the price pattern interpretation is wrong, to help you manage risk.

Yet, in our opinion, despite the inherent uncertainty of all market forecasting, knowing in advance where prices will likely go is far better than having a good explanation of why they did it.

*Triple Zigzag: an Elliott wave pattern defined.

A single zigzag is a simple three-wave pattern labeled A-B-C. The sub-wave sequence, meaning the breakdown of each individual wave within the pattern is 5-3-5, in which the top of wave B is noticeably lower than the start of wave A. Occasionally zigzags will occur twice, or at most, three times in succession, particularly when the first zigzag falls short of a normal target. In these cases, each zigzag is separated by an intervening 'three,' producing what is called a double or triple zigzag.

doublezigzag


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