Thursday, July 16, 2015
I think the refusal of the Dow and the S&P to spend any time below their respective 200 day moving averages (red line in the top chart of the Dow) has very bullish implications. The news background arising from the EU-Greece crisis was very bearish but yet in response the the S&P as well as the Dow dropped only moderately for 6 weeks and didn't spend any time below their respective 200 day averages.
I think the US stock market is headed much higher from here. Over the past year I have been following the evolution of one of George Lindsay's three peaks and a domed house formation. Since the Dow has bounced off of its 200 day moving average I think the best interpretation of the market's current position within the domed house is that the July low corresponds to point 20 in the schematic above.
This interpretation is supported by the presence of a mini-3 peaks formation which I have labeled with a green 3,5, and 7 to correspond with the schematic. Point 10 of this mini formation then is the July low. The implication of this mini formation is that the Dow is headed for new bull market highs as the mini formation's domed house evolves.
A conservative reading of the situation calls for point 23 in the major formation about 7 months and 10 days after points 14. This would put point 23 of the major formation sometime in September of 2015 and this should coincide with point 23 of the mini-formation I have just identified.
But there is an even more bullish possibility lurking in the background. I think the entire period from July 2014 to the low point early in July 2015 can reasonably be regarded as one of Lindsay's "sideways" periods. Typically such periods are followed by a bear market. But if I am right about the market being headed much higher from here it will then appear that we are moving up out of an 11 months sideways period.
This last happened in 2004-2005 in the Dow when the average emerged from a nearly 2 year long sideways period to the upside and rallied for another 2 years and 40% subsequently. Lindsay warned that when a basic advance, typically lasting about 2 years, starts after a sideways period lasting 11 or more months the market will crash once that new basic advance is completed. This method forecast the 1929 crash as well as the 2007-09 bear market. Are we in for a repeat performance?
I am not a fortune teller but I think this suggests that a strong market for the next few months would be just the first stage of a much bigger advance. Such an advance would invalidate the major three peaks and domed house I have been following. It would continue into 2017 which also happens to be 15 years after the 2002 low, Lindsay's 15 year period from bear market low to bull market top. A very severe bear market would then start is 2017 and drop prices 50% or more. That bear market would then end sometime in 2019 when the 12 year period from the 2007 bull market top expires.
If such a bullish situation develops we will not have to look far for an explanation. As I have continually reminded you the world's central banks all are determined to avoid a repeat of 2007-09 and are also determined to prevent any sort of deflation. To this end they have adopted QE policies which currently are being implemented by the Bank of Japan and the European Central Bank, with the Chinese central bank a supporting player. This increase in world-wide liquidity is bullish for the US stock market.