The courses taught today on the traditional Market Profile focus on the bell curve, ‘the Profile’, with little comment on the other aspects.

Peter Steidlmayer taught that there were 5 elements to his traditional approach:

  • Long-term Perspective,
  • Long Term Activity Charts (LTAC),
  • Market Structure,
  • Market Timing and
  • Trade Location.

Each element played its part bringing a trade to a successful conclusion. And although this was not expressly taught, I took the view that Long-Term Perspective and LTAC provided ‘the context’ to Peter’s approach. Nowadays ‘context’ in the Market Profile is provided by the longer-term distributions; but I still find Peter’s way of classifying fundamental events useful.

There are three types of events:

a) Expected events when fundamentals are correctly perceived by the market and as a result, we have range bound markets. In range bound markets we buy the low end of the range (what I call the Primary Buy Zone) and sell the upper end (the Primary Sell Zone)

b) A surprise event which are an ‘act of God’, an event totally unexpected by the market. In such as situation, price moves away from value and then returns to value. Chernobyl (April 26 1986) was such an example. Following a muted response to the disaster on April 28, the S&P fell from 243.55 to 232.25 over 13 trading days. Six days after the low, the S&Ps were trading at 244.75. In such a situation, the strategy is to take a position on the basis that price will return to their original levels.

c) An ‘unexpected event’ where the market fails to recognize a shift in the fundamentals; a shift that signals a move by value away from price. In short, an event that will change the longer-term trend of the market. (In my jargon a change of trend of at least quarterly trend proportions).

I believe that an ‘unexpected’ event occurred in August 2007 when the major Western Central Banks poured liquidity into their respective economies’. We are talking billions of dollars over a very short time. Usually we’ll begin to see reflected in the economy, the effects of excess money reflected within six to nine months time: in this case, say from March 2008 onwards. In other words, inflation figures will start rise. The FEDS will then find themselves between a rock and a hard place (of their own making). The Weekly Leading Indicator published by the Economic Research Institute (http://www.businesscycle.com) shows that the US economy is set to slow down in the months ahead.

So the FEDS will have a climbing inflation with a weak economy and Bernanke is reported to shifting towards an inflation targeting system. Given their charter and stated policy, the probability is the FEDS will have to raise rates. In turn this will have an adverse effect on the US economy and US Stock Market.

Now let’s add another spark to the potential firestorm.

China’s inflation is said to be running at the highest level in a decade (Financial Times 11-16-2007). So far the half-hearted attempts to stem the rise have done little to alleviate the problem. When the Government starts to take strong measures their stock market will turn down. In addition a slowing US economy will have a severe impact on the Chinese. ‘China‘ central bank estimates that every 1% drop in the US economic growth translates into a 6% fall in Chinese exports (FT 11-16-2007)’. Exports now account for 33% of the Chinese economic growth. So a slump in the US economy will impact the Chinese, and a slowdown in both countries, the rest of S-E Asia.

I see these facts as painting an ‘unexpected event’ portrait for a US stock market downturn. The probability is set to begin from the time the US inflation figures start to rise - this clear and present danger to be present from March 2008 onwards.

Now don’t get me wrong. I am a technical trader and the timing of short entries (if any) will be based on my chart patterns. But my best trades have been when I identified a story not yet heard by other traders e.g. at the ADUS secondary bottom in about September/October 2001.

If this scenario proves correct, we’ll have the usual seasonal strength in 2007 with new highs into March 2008 onwards. From that month onwards, I’ll be looking for evidence of the onset of a downtrend of at least 13-w proportions (i.e. trends in the quarterly time frame).

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