Trading Expected, Unexpected and Surprise Events

In the early day of the Market Profile, Pete Steidlmayer taught that ‘long-term’ perspective was governed by three types of fundamentals:

• Expected events: where traders correctly the fundamentals (i.e. assessed data in accordance with reality) and Value and Price were around the same levels. This lead to trading ranges.
• Surprise events: Acts of God unforeseeable by anyone. Price would lead Value and then return to Value. An example of this would be the effect of Chernobyl - we see a spike and then a return to the underlying trend. A true Black Swan event.
• Unexpected events: where traders incorrectly the fundamentals (i.e. failed to assess data in accordance with reality). Here, Value leads Price and Price eventually follows Value. These are often called Black Swan events but are usually foreseen by a few.

The current views on the world stock markets can be divided into two main camps:

1. Those that believe a new Bull market is underway. I am not sure if this includes breaking above the old S&P highs at 1576 or whether it means just getting to those prices.
2. Those that believe that Armageddon is just around the corner.

I believe both are wrong: I believe we will repeat the 1966 to 1982 path with perhaps a lot more pain. The reasons for this are partially fundamental and partially technical. Fundamentally I view this context through the eyes of Austrian economics coupled with the ideas Lord Rees-Mogg and James Davidson (Blood in the Streets).  Technically there is insufficient evidence to believe in either a bull or bear market.

The current price action is in-line with my expectations: the volume continues to deteriorate as we head up into the upper boundary of the Value Area, 1290. Once we accept above 1290, we can expect to see a sharp move to the Primary Sell Zone. From there I’d expect to see a return to the Primary Buy Zone of 1576 and 666.

What would change my mind:

• On the Bullish front, a  Whole Point Count for 18-day (monthly trend) swing at and above 1576.10 (see Nature of Trends for the meaning of Whole Point Count)
• On the Bearish front, two consecutive S&P closes (of which one is a bearish-conviction bar) below 1045 after the S&P enters 1067 to 1290. This assumes we see the close below 1045 without first seeing a close above 1378.

If I have to lean to onside or another, I’d lean to the bearish side. It seems to me that traders are failing to appreciate the reality of a weaker US economy and a more serious inflation problem than is being acknowledged. The numbers that are coming out are starting to show that inflation is on the rise.  I’ll be watching the CPI on Wednesday to see if we have evidence that will discount or confirm my inflation scenario.

I attach a 12-m swing chart of the cash S&P showing:

• The Value Area (33.33% to 66.67%)
• The Death Zone (50% to 33.33% where the S&P may turn down)
• The Primary Buy Zone (892 to 800) and
• The Primary Sell Zone (1576 to 1443)

S&P 12-M