Saturday, January 21, 2006
Lindsay's Domed House in the S&P
I have discussed George Lindsay's Three Peaks and a Domed House formation many times on this blog. Here is a link to all of my George Lindsay posts. The first chart you see above this post is the schematic which describes the ideal Three Peaks and a Domed House formation.
As I last discussed here I think that a three peaks and a domed house formation began in the Dow industrials with point 3 corresponding to the January 2005 top. A similar formation began in the cash S&P with point 3 corresponding to the March 2005 top.
Both averages established point 10 at the October 13, 2005 low and point 14 at the October 27, 2005 low. The second chart above this post shows what I think is the present postion of the S&P 500 and the Dow in the developing Domed House.
As you can see I think that the upcoming low of the current break will be point 20 and that the next rally will end in points 21-23-25, the dome of the Domed House. I expect this top to develop roughly at the 1350 level in the S&P and probably around 11400 in the Dow.
George Lindsay fans will note that I am expecting point 25 around April 5, the date of the ideal top-to-top count . On the other hand, as you can see in the schematic chart above, the standard time projection from point 14 of 7 months and 10 days calls for point 25 on roughly June 5. Why do I project point 25 earlier than this standard projection?
Lindsay often said that in making a forecast one must try to make all the pieces of the puzzle fit without distorting any one piece too much. In this instance we have four puzzle pieces that must fit together: the Three Peaks and a Domed House projection, the projection based on the technique of Basic Advances and Declines, the projection based on Long Time Periods, and the top-to-top count.
The long time period of 15 years 3 months from the October 1990 low called for a bull market top in early January 2006. So when making a bull market top projection I want to try to get as close to January 2006 as possible without violating the rules for projecting tops given by the other methods.
Right now I think that an extended basic advance started in the S&P 500 on March 12, 2003 and ended on November 23, 2005, an interval of 997 days. Now Lindsay's rule is that after an extended basic advance the market typically goes sideways for a period of months before beginning a basic decline. As I explained in my 2006 stock market forecast I expect this sideways period to last less than 5 months in order to fit with other Lindsay projections and thus the next basic decline should begin no later than April 23. So on this basis our time window for the bull market top now extends from January through April.
Next let's consider the time projection for the Three Peaks and Domed House formation. Lindsay said that this time count generally starts from point 14, but that when other methods point to an earlier top on can count from point 10 or point 6 or even point 4. In this instance I note that point 6 occurred in the S&P 500 on August 29, 2005. Adding 7 months and 10 days brings us to April 7, 2006. As I mentioned above, April 5 is the ideal date for a top according to the top-to-top count. Lindsay said that every bull market top he had studied coincided with some to-to-top count.
So, putting everthing together, I think an April 5 date for point 25 is a reasonable guess. I think point 27 will be timed by the 7 months, 10 day interval from point 14.
I would note also that this projection is consistent with the recent behavior of the 20 day moving average of the daily NYSE advancing issues count which I discussed here. This past Thursday this moving average reached the highest level since the October 13, 2005 low. Based on historical averages, this means that no important top is likely for at least 2 more months, i.e. until after March 19, 2006.