Thursday, June 23, 2011
Lindsay's dome house(s)
Here are two daily charts of the Dow industrials going back to the March 2009 low. I want to discuss the current position of the market within what appears to be an ongoing 3 peaks and a domed house formation. My previous Lindsay commentary can be found here.
Judging from e-mail requests and comments I get George Lindsay's Three Peaks and a Dome House is growing in popularity. It even made an appearance on Market Watch a few days ago.
At the top of this post is the interpretation given by every Lindsay fan (except for me, of course). According to this interpretation the top of the domed house (point 23) was the May 2 high. After a couple of lower tops, the market should crash at least as far as its July 2010 low.
I think this interpretation is flawed for two reasons. The minor reason is that there is no obvious "five reversals", triangle type pattern which usually preceded point 21. Even so, not all domed houses are alike and the absence of this triangle by no means negates the domed house interpretation of this chart. A more substantive objection comes from an application of Lindsay's other methods, among them his long time period of 15 years 3 months from low to high.
A major top is normally 15 years and 3 months (give or take a few months) from an important low, often a bear market low. Now there was a low in the Dow on July 16, 1996. It was only of intermediate term significance, but it did occur 12 years and 9 months after the October 1983 top, the Lindsay period from high to low. This makes the July 1996 low a legitimate point from which to count Lindsay's 15 year period. Counting forward 15 years and 3 months from the 1996 low brings us to September 2011, the ideal time for the bull market high. The May 2 top was 4 months early relative to ideal, but again this is not a fatal flaw.
Of more importance is the fact that February 2000 was a very major top in the Dow. Counting forward 12 years and 10 months brings us to December 2012 and the time of a likely major low. Note too that the ideal 4 year cycle would reach its low in March 2013.
This then leads to the conclusion that if May 2011 was a bull market top then the Dow is likely to decline for more than 18 months until its likely low in late 2012 or early 2013. This is quite a bit longer than any of Lindsay's basic declines and it is unusual for any bear market to span more than one basic decline. I also think that calculations using Lindsay's "counts from the middle section" also favor a bull market top later this year or early in 2012. For all of these reasons I do not think that the top in May 2011 will prove to be the bull market top.
These considerations (to say nothing of the wide-spread bearishness now) make me inclined to favor the interpretation you see on the lower chart. In this domed house interpretation the February top started the "five reversals" part of the domed house. Once this part of the pattern is complete the Dow should move to new bull market highs later this year and establish points 21 and 23, the latter being the top of the domed house.