Charles-Marie Gustave Le Bon (1841-1931) was a French polymath, who is best known for his 1895 work,”The Crowd: A Study of the Popular Mind,” considered one of the seminal works of crowd psychology. He’s attributed with the quote,
“The memorable events of history are the viable effects of the invisible changes in human thought.”
Robert Prechter writes in “The Wave Principle of Human Social Behavior” that
“Major historic events that are often considered important to the future (i.e., economic activity, lawmaking, war) are not causes of change; they are the result of social mood changes that have already occurred.”
“Brexit” was a one day event—a vote by the citizens of the United Kingdom to leave the European Union. The recording of the referendum vote in June, 2016 was merely a “marker” of a social mood change that had already taken place. The point is that collective action is a lagging indicator of aggregate mood change. While an individual can initiate action immediately upon a change in mood (by casting a vote), society requires a good deal more time for an extensive swing in mood to be registered as action; before laws are written and actually put into effect, for example.
These latter activities will show up in accepted social customs well after the mood of the crowd has changed solidly in that direction.
But people continually mix up these “marker events” with an immediate shift in mood and expect, as a result, an immediate turn in the stock market. But the cause and effect is not that immediate. This is why I’ve adopted the mantra: “Events don’t move the market.”
Back to that vote on Brexit. I remember it well, because while I expected a turn down in the market (we were at an obvious top), I was on a plane from New York to Calgary (out of touch for about 8 hours). I was not able to take advantage of the event. When I landed late on a Thursday night, the damage had already been done. The market continued down to a bottom by the following Monday.
It was at that time that I assured people that the market was going to go straight back up; the waves had obviously dropped in a 3 wave (abc) configuration and it was, after all, an “event.” I can remember at the time being in a crowd of one in terms of my opinion, but sure enough on Tuesday, the market headed back up.
The Brexit vote was simply a marker of mood. Mood had already changed, but the effects of that mood change had not been put fully realized. No laws had been passed—there was no visible change in behavior. In fact, some five months later (November, 2016), not much has changed in the U.K.; they’re still discussing the vote.
The Economic Consequences of Social Mood Trends
Bob Prechter (author of “The Elliott Wave Principle”) continues,
“Social mood trends have economic consequences. Men make decisions that lead to the production of more goods and services when the dominant social mood is positive rather than negative; and vice versa. The reason for the lag between mood (as tracked by the stock market) and economic result is that it takes time for people to turn their decisions into policies, and eventually into actions.
As a result, economic trends lag stock market trends. This is an established fact, as the National Bureau of Economic Research in Cambridge has found that, year after year, the S&P Composite index of 500 stocks of major corporations is the single best indicator among the dozen that the Commerce Department uses to foreshadow broad economic trends.”
However, it is the trend (the change in social mood over time) that creates the change in action. Events themselves may have a short term effect of a day or two, but the trend will eventually continue on its original path.
If you understand this phenomenon, you’ll be both a better short term and long term trader.
The American Election
The most recent event that’s reverberating around the globe in the Clinton/Trump rivalry which has culminated in Donald Trump being elected as the next US President.
In the same vein as the Brexit vote, I’ve been hearing people’s predictions for the changes in the stock market for the day after the vote. Again, I suggested we might have some short term volatility, but I wasn’t expecting anything that would last past a day or two. This is exactly what happened, for the same reasons I cited above.
What was the more interesting part of the exercise to me, was to see (as a result of the vote), how far along in the revolution the American people had come. That’s what I was expecting the vote to tell me and I believe I received a fairly accurate answer.
I say this because Elliott Wave Theory tells me we’re weeks away from a market top. At the same time, the results of the elective were so close, it’s transmitting a similar story. The revolution has not turned negative yet … but it’s very close.
I’ve written here before that I believe we’re in the midst of a major financial and economic revolution, an age-old struggle between the rich and poor; the common man and the moneylenders. It goes right back to the days of Jesus in the Temple. That was two thousand years ago, a conflict that continues to play out again and again every 500 or so years.
However, one event doesn’t change the social mood. We’re in for a very long process in thinking and institutions. The the markets will soon start to be a very much more “vocal” marker of the immense changes society is going to experience—changes of epic proportions.
The newest phenomenon that seems to be playing out this weekend is the “flag” to the use of the color purple by the Clintons. What concerns me is that this might be a conscious effort to have a greater effect on public mood. I hope I’m wrong in imagining that there’s a more sinister double narrative to the more positive attempt at healing the nation by bringing the blue and red parties together in process of healing.
Perhaps I’ve become a little too cynical, should relax a bit more, and accept this gesture for what it might seem on the surface.
In the meantime, let me draw your attention to this article on Zerohedge. com: The Concession Speech by Senator Clinton.
With enough financial backing and the ability to mobilize groups to create a movement, a series of ongoing events could gradually take social mood down a very dark path, I fear. There are already rumblings of civil war. I hope as mood generally turns negative, we can keep our travel to the higher road.
It’s not events that you have to watch out for; it’s the mood of the crowd that has changed history.
Ending diagonals suggest a market that is extremely weak and barely able to trace out a new high. Although it falls under the banner of a motive wave, it has properties more aligned with corrective waves. Ralph Elliott described an ending diagonal as occupying the fifth wave position of a motive wave when the preceding move has gone “too far too fast.” He maintained that it indicates “exhaustion of the larger movement.”
Projection for a Top
Based on the ending diagonal we’re currently in (which is the pattern playing out in all the major US indices), I’m now projecting a final top to our five hundred year set of Supercycle waves at the end of the 2016 year or into early January.
Here’s my interview on TruNews from Friday, November 11, 2016: http://www.trunews.com/listen/11-11-16-peter-temple-america-under-new-management
I’ve re-measured the potential targets for wave 3 of this ending diagonal, trying to make them as specific as I can. The top end for the 3rd wave is 2237 (where wave 1=3). The previous wave 1 high is 2184, so wave 3 has to exceed that level. If we project wave C of 3 to be equal to wave A (starting at the low of our current wave B), then our upper-end target would be ~2232. In zigzags, wave A usually equals wave C in length.
Above is the 30 minute chart of ES showing the third wave of the ending diagonal in a bit more detail. We’ve likely seen all of wave B of this third wave up for ES. That’s because NQ (Nasdaq futures) retraced 62%, which is typically a full B wave. Since these indices move more or less together, the B wave for ES is also likely complete.
There’s also support for this prognosis in the USD currencies seem to have bottomed and now have to head back up, keeping with my ongoing theme of “all the same market.” USD currency pairs are more or less in sync with the US indices.
Summary: We are completing the third wave of the ending diagonal before zigzagging to the top of the largest bubble in history. The long awaited bear market is getting closer.
Let’s look at a recent projection from the Trader’s Gold service.
Above is the daily chart of EURUSD. I had predicted a turn up in the euro was imminent on October 24. We indeed turned up, but with the American election, have retraced back down to the lower trendline. That retrace was due to an event. However, the one area in which an event can have a longer-term affect on the market is at an inflection point.
Above is the daily chart of the EURUSD showing the breech of the lower trendline of the triangle.
From the Elliott Wave Principle: “On the basis with our experience with triangles, we propose that often at the time at which the boundary lines of a contracting triangle reach an apex coincides with a turning point in the market. Perhaps the frequency of this occurrance would justify the inclusion among the guidelines associated with the Wave Principle.”
Last night, EUR completed the E wave and is now in a first/second wave combination. Expect a retrace back up to the top of what I’ve marked as the top of the yellow 2 wave and then a third wave down after a major turn.
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