How Much Farther?

During the past few days I have been trying to evaluate the stock market's upside potential from current levels. In my 2007 stock market forecast I estimated a top for May 17 using George Lindsay's theory of basic advances and declines. Over the past months I have used this projection as a guide for interpreting two current examples of Lindsay's famous Three Peaks and a Domed house pattern.

While I love to predict the future my only real committment as a speculator is to stayed glued to the trend as evidenced by the market's pattern of higher lows and highs or lower lows and highs. I never trade my forecast per se unless it is consistent with what I see as the developing trend.

To get a handle on the market's trend and the trend's likely points of reversal I use a few simple statistical devices. I have commented on two of these recently.

The first chart above this post shows the daily count of the number of issues traded on the New York Stock Exchange which advance in price. The blue line is the 20 day moving average of this number. In a recent post I explained that in a bull market tops are most likely to occur during a time span beginning 2 months after the moving average peak and ending 4 months after the peak. In the current situation this method calls for a top for the current upswing sometime between June 16 and August 16.

In a separate post I noted the lengths of previous upswings in the bull market which started from the 2002 lows. Using the Spiders as an index I projected a top for the current upswing at 156.70 (vs. the current level of 151.00).

Along the same lines I should also add that these bull market upswings lasted anywhere from 4 to 8 months. So the top for the upswing which began on March 14, 2007 should be expected in the July 14 to November 14 time frame.

For these reasons I no longer believe that the May 17 date first mentioned in my 2007 stock market forecast will be a significant market top.

An expectation more in line with the statistical consideration just discussed would be for a July top. There is even a 1 in 3 chance that the market will be stronger than even I expect and continue its advance to late October or early November.

The second chart above this post shows a slightly revised version of the basic advances and declines in the Dow. The two alternatives for a top date are July 13 and October 30.

In the third and fourth charts above this post you see my current interpretations of two separate domed house portions of two distinct Three Peaks and a Domed House formation.

The third chart shows the long term formation. Note that I have renumbered the recent action so that the March low is point 20, the end of the five reversals part of the domed house, instead of point 22, a low within the top of the entire formation. I have also pushed the projected top, point 23, to July 13.

The fourth chart shows a minor version of the three peaks and domed house. Note that the rally from point 10, the March low, has been fast and furious so far. In particular, there has been no sign yet of the 5 reversals part of the formation which normally preceeds point 23. For this reason I feel quite comfortable pushing point 23 for this formation to July 13 as well.