The phrase "climbing the wall of worry" is sometimes used to describe new bull markets. In other words, every time the market dipped, bearishness spiked in anticipation that "this is it, its over, back to the lows we come". And of course it was not to be. Bearishness would spike and when there was no real selling, the "dips" would get ferociously bought. This powerful rally has admittedly followed that trait somewhat. It has never experienced a 38% pullback to date from the March lows.
It is hard to gauge precisely when this "wall of worry" trait will run its due course. Usually time and distance from a bad event will fade the event and emotional connection will subside. When the bad event becomes "past history" and a new paradigm emerges (bull market at hand) is when it has a chance of releasing its grip.
I will admit, having only observed market behavior for over a year in earnest, that I had to experience this phenomena for myself. Indeed every dip in September and now October has been quickly splashed with media headlines about how the rally is over or some stuff. Calling an Elliott Wave pattern "complete" using technicals, sentiment and wave theory is not an exact science after all.
In review of these past 5 weeks, the media was indeed quick to break out the "rally is over" theme somewhat and it always bothered me. I suppose they don't want to look stupid so they try and get out ahead of things. They cannot help it.
It seems to me though that there is now great expectations for the third quarter earnings since AA "beat" with an earth-shattering $78M profit (sarcasm). That seems to be the emerging theme and the media can hardly contain the anticipation of upcoming third quarter earnings season. Particularly since they deemed the second quarter was a "wild" success.
I surmise that they are now trying to "get ahead of the market" (just like EW technicians try and do I guess) and anticipate that positive earnings and themes will produce bullish market behavior and prices.
The real key to a market top is when even in the face of declining prices, a certain level of bullishness persists (even with rising fear) and therefore prices are able to decline. This market trait has yet to prove itself out obviously since the March lows.
The longer a media "theme" persists, the more it gets entrenched and becomes the new prevailing conventional wisdom. The overreaching CW is that the recession is over, and recovery will be tepid. I would rather think that the CW needs to convert to a slightly more bullish outlook such as, "recession is over, and the outlook is pretty darn ok". So anticipation of better 3rd quarter earnings, but more importantly, the anticipation that better third quarter earnings will move markets higher is likely to be the factor that finally allows truely lower prices.
Another way of thinking about it is this: Earnings are indeed better in the 3rd quarter ( I expect it somewhat). And yet the market falls in the face of the "logic" that better earnings should spur the rally higher. And then when "good" earnings keep rolling in, one would likely maintain the expectation that the rally should continue higher as a result. But contrarily, only in this respect, can prices keep falling in spite of the "obvious" bullish "logic". This is when the media themes cannot see the drop coming. Cannot see the crisis brewing.
Cannot see the house of cards catching an ill wind.
So perhaps the first bit of earnings helps entrench and reinforce the bullish "media theme" (earnings beat and markets move higher). Then maybe some more "better-than-expected" earnings are reported and yet prices start to fall and yet the media and traders remain bullish. Shorts get out of the game because they too are convinced the recession is over and that all the "S&P earnings/multiples/ P/E fair value" crap actually makes sense.
The chart is self explanatory. A double negative daily divergence is normal for a market top. The shorter time duration between divergences as compared to 2007 top is due to the sub waves that produce the RSI tops are of one lesser degree.
So the bottom line is this: Wave theory, sentiment and Technical analysis are all aligning to produce a likely major market top.
And if you all think I'm crazy still and smokin weed, well, that's the way the psychology is supposed to work.
We just need to confirm two things:
1) A 5 wave move down of at least [EDIT] Minuette degree
2) In the face of falling prices the overarching theme remains bullish.
Technicals will continue to take care of themselves as indeed they already hint at a likely top.
So if your a bear, take heart. The best thing that can happen is that earnings are indeed decent (as reported by the media).