Basic Advances and Declines

Above this post you will see a weekly chart of the Dow Industrial average which records this average's action from mid-2002 until now. On this chart I have illustrated the average's postion within an ongoing sequence of George Lindsay basic advances and declines.

George Lindsay's theory of basic advances and declines is simple to state but harder to apply. Lindsay believed that bull and bear markets in the stock market averages tended to last certain intervals of time which he called standard time intervals. An advance which lasts a standard time interval is called a basic advance, and similarly for declines. Linday had a theory of how find the start and end points of these time intervals and a theory of how these intervals alternated in length and direction over time.

For more details you have to read Lindsay's article "Counts from the Middle Section" which is reprinted the booklet "Selected Articles by the Late George Lindsay". This booklet is available directly from Investor's Intelligence (and NOT from their online bookstore!).

In my 2003, 2004, 2005, and 2006 stock market forecasts I was working under the presumption that a basic advance had begun from the March 12, 2003 low which is labeled bb on the chart. A basic advance starting from bb would predict a bull market top for late 2005. In the event the market remained strong through all of 2006 so I have had to abandon that hypothesis.

Now I think that basic advances started from lows on July 24, 2002 and October 10, 2002 which are labeled points a and b on the chart. Both of these basic advances I think ended on April 6, 2004 which is labeled point c.

Basic declines then began from point c and can be taken to have ended either on October 24, 2004 or on April 20, 2005, points d and e.

From points d and e two distinct basic advance started. For certain reasons related to my interpretation of Lindsay's theories I think the one which starts from point e will be what Lindsay called subnormal in duration while the one from point d will just barely qualify as a long duration advance. If the basic advance from d lasts 765 calendar days it will end on November 29, 2006 at point g. If the other basic advance from point e lasts 577 days it would end on November 18 at point f. The numbers 577 and 765 are both examples of what Lindsay called standard time intervals.

In any case the projected highs in late November tie in well with my estimate based on the minor three peaks and a domed house formation upon which I last commented here.

Lindsay liked to think of the process making a market forecast as being similar to assembling a jig-saw puzzle. You want the pieces to fit together easily and the more pieces that fit easily together the more confidence you have that the puzzle is being properly assembled.

So far we have two pieces of the puzzle which suggest an important top in the Dow for late November 2006: the three peaks and domed house formation and the theory of basic advances and declines. I shall discuss two other pieces leading to the same conclusion in subsequent posts.