Thursday, October 11, 2012
top of domed house ?
On October 5 the Dow put it its highest print and highest close of the bull market which started from the March 2009 low point. It is easy to see the "squarish" topping pattern characteristic of domed house tops. These usually look like lopsided head and shoulders tops. If this one runs true to form there should be a rally from yesterday's low to a lower top which would be point 25 on the chart. One fact which supports this interpretation is that the standard time count of 7 months 10 days if started from point 15 predicts a high in early October.
It is certainly possible that I am a bit early in my interpretation here. Perhaps the October 5 top will turn out to be point 21 instead of point 23. Nonetheless, if this is a valid 3PDH formation it is telling us that the bull market top has either been seen or is not very far away in terms of price. I should note that there are examples of formations in which the bull market top turns out to be point 27, not point 23, and that would push the top further out in time and higher in price.
Given the uncertainties associated with the evolution of the top of the domed house I think it is prudent not to be too confident anticipating the start of a bear market until the Dow breaks below the rising green trend line I have drawn.
I want to mention a few other facts which lend support to the bearish case here and a couple which contradict it.
The single most important fact in my mind supporting the bearish case is the generally weak performance of banking stocks in this market. The big 3, Citibank, Morgan, and Chase are all trading below their 2011 tops as well as below their tops reached during the first quarter of 2012. You can add Goldman Sachs to this list too as well as the bank spiders.
Along the same lines is the weak performance of foreign stock markets, especially European ones compared with the US market. They too are below their 2011 tops and several are below their early 2012 top also.
Finally to the bearish case I would add the facts that the number of stock in the Dow and the S&P 500 which are trading above their 50 and 200 day moving averages has never reached the high levels seen earlier this year and in fact are also showing divergences relative to the September 14 top too.
The bullish evidence? The strongest single piece of bullish evidence I see is that the majority of investors surveyed by AAII are bearish. I think it would be unprecedented for a bear market to start under such conditions. But precedents are made to be broken as are all statistical records. The other piece of bullish evidence can be found in the action of the bull market leaders, Google and Apple, both of which made historical highs within the past couple of weeks. Another leading sector, home building, is also at new bull market highs.
Looking at all this evidence I'd say that the bearish factors are ones which are not helpful for precise timing. The AAII sentiment number suggests that my call of point 23 is early, but as I said above that just means that the domed house will take more time to develop its top. So I think the best way to approach this market is to defer a bear market prognosis until the green trend line is broken or until another point 23 or point 27 at new bull market highs becomes visible when AAII sentiment is bullish, not bearish as it is now.