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Stocks , Investing

Some Rallies Are Real. Some Are “Fake.” Here’s How to Tell Them Apart.

Two trading days before the DJIA skyrocketed 1086 points, one indicator showed THIS.

by Bob Stokes
Updated: January 02, 2019

No market goes straight up or down without countertrend moves, which often fool investors into believing that the prevailing trend is over and a new one has started.

Our Dec. 21 U.S. Short Term Update warned subscribers not to be tricked amidst the recent turmoil. After reviewing the stock market's progressively lower prices, EWI Chief Market Analyst Steve Hochberg said:

Countertrend rallies will likely be sharp and may start at any point now.

Boy, was he right!

Just two trading days later, the DJIA posted its largest single-day point advance ever. As you'll recall, the index closed 1,086 points higher on Dec. 26.

The optimism on that day was reflected in this Marketwatch headline, which expressed the view of a financial firm's investment chief (Dec. 26):

Stocks are 'close enough to a bottom' for investors to step in

That investment chief might turn out to be correct. After all, the DJIA did finish 260 points higher the next trading day. And stocks have firmed up some more since then. The question is, will this last, or is this one of those "fake" rallies?

If it is, financial history shows that "stepping in" during countertrend rallies can be a losing proposition.

Robert Prechter gives this example through this chart and commentary from his June 2018 Elliott Wave Theorist:


Forty years ago, a brilliant and accomplished doctor asked me what I thought he should do with his portfolio of stocks. I looked at the purchase dates to find that he had bought all his shares in December 1968. December 2, 1968 was the day of the high in a B-wave advance in the DJIA. The average held near that level through December 13, when the Value Line Composite index, which was heavily weighted toward secondary stocks, made an all-time daily closing high that stood for decades. Presuming my friend did not make his investment during the holiday season, he must have done so within a week of the top day in either the Dow or the VLC. The arrow in the chart shows that timing. The ensuing bear market crushed prices for 1968's high-flying stocks.

Elliott wave analysis can help you see the markets at several degrees of trend. When you see which way the tide is pulling, it's easier to spot eddies that might spin, for a short while, in the other direction. An invaluable tool to avoid the market's "head fakes."

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