What is the Expectations Indicator?
The Expectations Indicator was developed over the winter of 2009. As most of us remember the market experienced a very violent downward swing followed by an equally dramatic push up in a very short period of time. With these volatile movements in the market, a simple method of predicting market direction was developed by Lou Ebner.
The concept is simple, when the market has high expectations it focuses on the negatives and when it has low expectations it focuses on the positives. A primary underlying concept behind the expectations indicator is the news is relative. In other words on any given day their is equally good and bad news and it just depends on what our expectations are that determines our reaction.
An example to to help visualize this concept:
On any given day there is a car accident involving four people where two of them die and the other two survive. A person with high expectations will react negatively that they all did not survive. A person with low expectations will react positively that at least two people survived.
Same outcome but two very opposite reactions. This is the basis behind the Expectations Indicator.
Expectations Simply Put:
A stock market with High Expectations is deemed to have a Bear Market bias.
A stock market with Low Expectations is deemed to have a Bull Market bias.