Psychology of corrective waves: comments from Tim Wood

Elliott Wave includes theories about market psychology in each of the waves, such as the false feelings of hope generated during "B" waves and other corrective waves (including pullbacks in the upward direction). I've been noticing that some of the increased confidence nowadays looks consistent with that. Not that I would counsel trading solely on that intangible (as opposed to tangible sentiment indicators like the VIX, ISE data, CPCE, SentimenTrader's gauge, and similar ratios that can be used as contrarian indicators). Now I see that Tim Wood of Cycles News & Views (see his website in "other sites of interest" at the right side of the page here) has also commented on this, in another of his articles at FinancialSense.com: Bear Market Rallies Spark False Confidence (5/8/09). You'll want to read the full article, but here are a few quotes:

... The bear market has ended and the economy is now on its way to recovery.

NO!!! What we are seeing is a bear market rally. The Obama team thinks their efforts are beginning to save the world and the general public is being lulled to sleep thinking that the worst is behind us. This is not the case. I told my subscribers that there were higher degree cycle lows expected in March and from a Dow theory perspective, I anticipated this to coincide with secondary low points. Regardless of what label we put on the March lows, the rally continues and the longer it does, the more false confidence it will foster.

Robert Rhea, the great Dow theorist of the 1930’s wrote: “It is almost certain that a panic rebound will recover 40 percent or more of the preceding decline.” Mr. Rhea goes on to say “Whenever a panic decline occurs, the market thereafter seems to need a resting period during which it appraises the damage to its structure. Prices frequently back and fill for several months in such areas. The action somewhat resembles that of a pendulum which, oscillating slowly as it seeks equilibrium, gradually comes to rest. The direction taken after equilibrium is attained is generally significant.”
....
It has been a while since I’ve written about this here, but when I look at the traditional secular bull and bear market relationships of the past, this too tells me that this secular bear market is not over. Here’s why. The Bull and Bear markets of the late 1800’s and very early 1900’s that Mr. Dow and Hamilton wrote about were one and the same as the upward and downward movements of a single 4-year cycle. As our country grew and more people were drawn to the market place, the Bull and Bear market periods became longer. Bull and Bear markets evolved from being single 4-year cycle events into a series of multiple 4-year cycle periods. This historical relationship can be used to help us gain an expectation as to when this bear market may be over.

Tim's comments are worth remembering as we wend our way through this bear-market rally. As he goes on to counsel, we need to rely on our objective guideposts to tell us when the countertrend movement up is giving way and the downtrend resumes.

*P.S. (Haven't read it yet myself, but I always like to see what's on the minds of Todd Salamone and, when Rocky also writes, Rocky White, both of Schaeffer's - in their Monday morning series - Monday Morning Outlook: Can the S&P 500 Index Conquer Key Technical Resistance? (5/11/09).