Wednesday, February 13, 2013
top imminent ?
Here are four charts which suggest to me that the market averages are approaching a top which will be followed by a significant drop, one which will carry below the November 2012 low or even lower. I don't think this top is in place yet but the warning signs are becoming more evident.
The top two charts show how the advance during 2013 is beginning to slow and become more narrowly based. The top chart shows the 20 day moving average of the daily count of new 12 month highs on the New York stock exchange. This indicator has recently reached the highest level of the past 4 years and bear markets rarely start before it has been declining for several months while the Dow and the S&P continue to rise. On this basis one would not expect a bear market drop to start anytime soon but a drop of 10-15% in the interim would remain a definite possibility. This possibility is underlined by the fact that the new highs moving average has begun to decline (red arrow) even as the S&P 500 and the Dow have advance to new bull market highs.
The narrowing nature of the advance is also clearly seen in the second chart from the top which depicts the 10 day moving average of the number of advancing issues on the NYSE. You can see that this indicator remains well below the two highs it reached during the advance from the November 2012 lows, a bearish divergence and a sign that some sort of drop lies ahead.
As you know I have been following the evolution of an example of George Lindsay's three peaks and a domed house formation for more than 18 months now. The bottom chart shows the Dow daily going back to 2011 and I have labeled the turning points to correspond to the points in the ideal version of this formation.
I think point 23, the top of the domed house, occurred in September 2012 and that the November low was point 26. Normally the rally from point 26 of the domed house ends below point 23 but not always.
In this case the formation associated with the September 2012 top can easily be interpreted as a mini-three peaks and was followed by point 10 in November 2012. The hourly chart of the Dow which is second from bottom picks up the story of the subsequent mini-domed house from that point 10. The peak of any domed house is always above the highest of the preceding three peaks. This rule thus predicted that the current rally, the mini-domed house (which will end in point 27 for the big formation), would carry the market above the point 23 of the big formation seen at the September top.
It looks to me like point 23 in the mini-formation (which probably will be point 27 of the big formation) has either occurred this week or will soon develop. If so the prognosis is for a drop below point 10, the November low. But the topping process may easily take more time, especially since we again could see point 27 of this mini-formation above the high of the mini-fromation point 23 wherever it occurs.
If I am correctly interpreting the market's position in the mini and the big domed houses Lindsay's theory then implies at the very least a drop below the November 2012 low. In fact the implication of the big three peaks and domed house is that the market will drop below its June 2012 low (labeled point 20 on the bottom chart).
It is quite possible that the May 2012, September 2012, and February 2013 (?) tops will themselves turn out to be the three peaks portion of yet another Lindsay 3P and DH. This would require a drop at least below the November low which would identify the three peaks. The subsequent domed house rally would then carry the market to new bull market highs from its starting point (which would be below the November 2012 low and probably below the June 2012 low). The top of that domed house wouldn't be due until late 2013 or early 2014.
Sometimes in Lindsay's theory the three peaks follow the domed house instead of preceding it. One of you has suggested in the comments that this latest three peaks may actually be completing a 3P DH formation in which the domed house was the October 2011- May 2012 rally. However,according to Lindsay's theory the three peaks always occur below the level of the associated domed house and this rules out this more exotic interpretation.