The Relief Rally - False Hope - A Lesson in Cyclical Trend & Market Behaviour Q1 2025
- Taz
- Mar 23
- 4 min read
Updated: Mar 28
Markets are not just driven by data and earnings — they are a reflection of human psychology. One of the most powerful ways to understand this behaviour is through Elliott Wave Theory, which maps out the emotional journey of investors through cycles of optimism and fear. When you overlay institutional money flow insights, you stand a very high chance of success in your trading and investing life. For example, did you know that recently, Institutions placed massive trade orders (6.4 million shares), on NVDA at $118.15? If you understand this and what we will cover in this blog, you have yourself an excellent trade setup and money making opportunity! (Watch this level closely; the NVDA weekly candle closed below $118.15 on the 21st March 2025. We look for confirmation of either a further A correction downside or a reversal for B in the coming weeks.)
Currently, with recent insights from major institutional research teams at JPMorgan Chase, Bank of America, and Morgan Stanley, we can see confirmation of this theory playing out in real time.
Let’s break down the final stages of a market trend, and the following correction using EWT, focusing on the roles of institutional and retail investors.
Wave 5: The End of the Trend — Euphoria and Exhaustion
Wave 5 is the final phase of a bullish trend. By this point, most of the smart money — large institutional investors — have already exited their positions. Momentum is weakening, but prices continue to rise.
Institutional Behaviour: Institutions recognise the slowing momentum and begin to sell their positions into the hands of enthusiastic retail investors. This is often called “distribution.”
Retail Behaviour: Retail investors are typically drawn in by media hype and stories of easy gains. Fear of missing out (FOMO) leads to irrational buying, even as fundamentals weaken.
Market Signals: Declining volume, divergences in technical indicators, and excessive bullish sentiment are signs that the trend is nearing exhaustion.
Example: You may notice euphoric headlines proclaiming “New All-Time Highs!” This narrative masks the fact that institutional money has already rotated into safer assets, which you can easily track with software that shows institutional orders.
Wave A: The Correction Begins — Reality Check
After the euphoria of Wave 5, reality sets in. Wave A marks the first corrective phase, characterised by sudden and sharp declines. But this correction is not necessarily caused by panic — it often results from institutional repositioning.
Institutional Behaviour: As JPMorgan recently noted, hedge funds, particularly quant and technology-focused funds, adjusted their positions. This created a cascade of selling.
Retail Behaviour: Many retail investors remain in denial, believing the dip is just a “buy-the-dip” opportunity.
Market Signals: Volatility increases, and fear starts to creep in. Analysts debate whether it’s a minor correction or the start of something bigger.
Key Insight: Institutions often sell into the panic they helped create, further fuelling the decline.
Wave B: The Relief Rally - False Hope - A Lesson in Cyclical Trend & Market Behaviour Q1 2025
Wave B is often referred to as the “sucker’s rally” or the relief rally. It’s a temporary rebound, providing hope that the worst is over. However, this move is usually weak and lacks conviction.
Institutional Behaviour: Some short sellers cover positions, driving prices up temporarily. Others take advantage of this false optimism to sell more.
Retail Behaviour: Retail investors see the rally as proof of resilience and often double down, believing the market is recovering.
Market Signals: Lower trading volume, weak breadth, and media narratives about “buying opportunities” are common in Wave B.
Example: Morgan Stanley’s recent mention of a likely “tactical rally”, after the recent declines aligns perfectly with this concept.
It’s a short-term bounce, but the larger correction is not over -
The Relief Rally - False Hope - A Lesson in Cyclical Trend & Market Behaviour Q1 2025 is playing out as expected.
Wave C: The Final Leg Down — Capitulation and Opportunity
Wave C is the most painful part of the correction. It’s characterised by widespread panic selling as retail investors finally give up. This capitulation often marks the true bottom.
Institutional Behaviour: Smart money begins to re-enter, quietly accumulating assets at lower prices.
Retail Behaviour: Fear takes over, and many investors sell at a loss, vowing never to return to the market.
Market Signals: Sentiment reaches extreme pessimism. Headlines turn bearish, and financial news warns of further turmoil — ironically, this often signals the bottom.
Key Insight: For long-term investors, this is where the opportunity lies. When fear peaks, value often emerges.
Putting It All Together
Understanding these waves allows investors to see beyond the noise and anticipate market behaviour. While retail investors tend to react emotionally, institutions act strategically — buying when fear is high and selling when optimism prevails.
Next time you see a sharp rally during a correction, ask yourself: Is this a sustainable move, or is it just Wave B in disguise? By recognising these patterns, you can make more informed decisions, sidestepping the emotional traps that often plague retail investors.
Stay rational, stay patient, and remember — markets move in cycles, but human behaviour rarely changes.
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