Thursday, February 05, 2015
Today I thought I would update my views on the market's position in the light of the timing theories of George Lindsay.
The bull market which began from a low point in March of 2009 has so far consisted of two of Lindsay's basic advances. The first lasted from March '09 to February '11, not quite 24 months, making it a normal basic advance. The second began in November 2011 and ended (I think) in July of 2014, an interval of 32 months, making it an extended basic advance. Lindsay's basic advances never last longer than 33 months. Most bull markets consist of only one basic advance but there are some examples which have two (the 2002-07 bull market being one such example). Depending on how big a decline you require before identifying it as a bear market one could find examples of bull markets which have three or even four basic advances but this is very unusual.
According to Lindsay an extended basic advance like the one from November '11 to July '14 is followed by what he called a "right shoulder". This "right shoulder" consists of one or more rallies which in most cases do not exceed the high of the extended basic advance. But there have been two examples in history where the "right shoulder" was higher than the high achieved during the extended basic advance. The first occurred in 1915-1916 and the second in 1965-66. In the first case the Dow exceeded the high of the extended basic advance by 10% while in the second it did so by 5%.
In the current situation the Dow has already exceeded it July '14 high so if that was the high of an extended basic advance were are seeing the third higher "right shoulder" in the historical record. As a rule the "right shoulder" ends about 5-9 months after the high of the extended basic advance. For reasons which I will explain shortly I don't think the current "right shoulder" is anywhere near its end. I suspect it will last 9-10 months and carry the down 10% above its July'14 top. This means that a high near 18,800 in the April-May time frame is likely to mark the end of the current "right shoulder".
Why do I think the Dow will go still higher than it is today? The bottom pair of charts above this post show two examples of what I think are evolving 3 peaks and a domed house formations which Lindsay invented. The top chart is schematic of the ideal 3 peaks and a domed house formation.
The middle chart shows a major example of the 3pdh with the tops, points 3, 5, and 7 separated by 9 1/2 months. Point 10 was the October 15 low. It is not clear to me how to interpret the series of lows since mid-December. They could easily constitute points 12 and 14 of the major formation. But I lean towards interpreting the last of these lows as point 20, the end of the "five reversals" portion of the domed house. One reason I like this interpretation is that counting the standard 7 month, 10 day time span from point 10 projects point 23 for April 25, 2015. This is just about 9 months from the end of the extended basic advance in July '14 and perfect timing for the top of the "right shoulder" which always follows extended basic advances.
Once could get a bit creative in interpreting this major 3pdh formation by saying that the December 31, 2014 top was actually point 23 of the domed house and that the market is about to turn sharply lower. However there is another clue which suggests that higher prices are ahead. The bottom chart shows a minor example of the 3pdh formation - minor because points 3 and 7 are separated by less than 6 months (in this case they are separated by only 5 weeks). I think the low earlier this week was point 10 of this minor formation and that the domed house portion of the formation is now underway. This implies that the Dow will move above its December 31 high and thus makes it very unlikely that that high was point 23 of the major formation.
I would summarize the Lindsay situation by saying that the odds favor new bull market highs during the next 3 months but that this advance will be the terminal phase of a 6 year bull market. The advance is likely to carry the Dow to 18,800 or so and end in late April. The ensuing decline will take the Dow below the starting point of the major 3pdh which implies a drop below 15,000. However if a top does occur roughly on schedule then Lindsay's methods predict a long basic decline to follow which is likely to last at least a year. This suggests a total decline of 30-40% from whatever high is made by the Dow.