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Do Price Drops Bring on Fear in Investors, or Does The Fear Inside Investors Make Price Drops?

This is a key question to answer when analyzing markets… Do price drops bring on fear in investors, or does the fear inside investors make price drops?

First, to answer this question, we need to define what the study of social economics actually means.  Social economics (or Socionomics in some circles) is a study of actions that result from changes in a crowd’s social mood.  This is where people need to turn their heads around and think outside the box. It is a tough concept to grasp because we likely think one way.  Social mood motivates social actions instead of social action changing mood.

Most people I talk to in financial circles would say recessions in our economy make business people cautious, but I say the opposite.  I think cautious business people make recessions. Therefore, if you grasp this concept that social mood moves the economy, and you can measure the social mood, then you can identify when and where recessions are most likely to occur.  Knowing this information will give you the insight to sit on the back burner as things hit the fan.

Social economics says you can measure mood via the cryptocurrency market.  The crypto market, as well as the stock market, is an excellent meter of how the crowd is feeling. One reason is there are plenty of platforms for people to act on their moods immediately by buying or selling various crypto assets. However, decisions they might make at the very same time (which could be any reason) takes time to go in to effect. Therefore, the key here is that there is a lag between decision and effect.  This is why the market predicts the character of news, not the other way around.

I first taught myself technical analysis around 1999, and went on to take exams to certify in the discipline.  I was trading cattle and grains for one of the largest cattle brokers fresh out of college. I was taught in college the idea that technical analysis and theories like Elliott Wave are all voodoo and tea leaves, and I was to avoid these theories at all costs.  I learned prices in markets moved by supply and demand. Well, after a few years in the beef industry and learning how the real world works, I found that teaching to be hogwash. I learned that mixing a financial market with economic theory is dangerous and an act of futility to predict market price moves in the near-term.  I now measure markets using the Elliott Wave Principle, while using Fibonacci and other tools to measure the internal behavior in the market. I started to see the markets and the patterns people create more clearly, and now I am a passionate ambassador on the subject and have been applying these techniques for almost 20 years.

I interpret the news completely different from most people.  When I read that some big energy think tank is predicting rising energy prices for the next few years, I am going to think energy prices are probably near a top.  Social mood comes from the crowd, and the crowd generates news. When news stories cluster or sound extreme, they can have predictive value in the opposite direction. This is the opposite way most people read the news.

Let us look at the chart psychology of Bitcoin here...

 
 

Here is an analogy I love to use.  A trend line on a chart is like people in trench warfare that want to hold the line against incoming forces.  In this case, buyers are holding this trench and are fighting off the sellers. Currently, the sellers have some strength, but so far not enough to push through and take over the trend line.  

If momentum for the sellers increase, look for the buyers to retreat and find a new place to dig a trench.  This would be the next red trend line below. If the sellers build strength and gain trend power they could push right through and the buyers would have to seek out the next trend line, which is close to a full retracement near the $2000 level.

Psychology for the buyers looks gloomy now, but this is where the market’s mindset could possibly switch to benefit the bulls and make a run toward new highs later this year.