Wednesday, April 25, 2012

three peaks and a domed house

Here is a daily chart of the Dow going back to the beginning of 2011. Above it is a schematic of George Linday's three peaks and a domed house formation. During the past two years we have seen two examples of this chart pattern.

The first one had its three peaks (points 3, 5, 7) during 2009-10, its point 10 at the July 2010 low, and point 23 at the May 2011 top. The normal downside expectation after the completion of a 3pdh is a drop to the starting point of the whole formation which is generally below point 10. The October 2011 low in the Dow did not meet this downside expectation. However it is worth pointing out that similar 3pdh formations developed in the German DAX index, the French CAC, and the British FTSE. All three eventually dropped to or below their corresponding point 10's which were at the July 2010 lows.

A second 3pdh formation began while the first was still in progress. It is illustrated in the Dow chart above which has its highs and lows numbered to correspond with the schematic above it. In this formation point 10 is the October 2011 low point. Lindsay observed that point one of points 21,23, 25 or even 27 generally occurs about 7 months and 10 days after point 14. This time projection lands in early July 2012. Sometimes the time count has to be made from point 10. That count ends in mid-May. So there is about a 7 week interval beginning in mid-May during which we should see the development of several of the highs associated with the peak of the domed house.

My own guess right now is that points 23 still lies ahead of us and will develop above the March top. But one could argue that  that top was indeed point 23 (red lettering). I prefer my own interpretation for two reasons.

First at the March 2012 top there were no divergences between the Dow and other market sectors of any consequence. Nor were there any divergences between the Dow and the European averages cited above. A move to new highs for the Dow at this juncture may well produce such divergences.

Second, as I explained above, the time projections for the peak(s) of the domed house suggest that these tops will develop during the May-July period.

While it never pays to be dogmatic about these things the fact that I see no significant underlying technical weakness in the US market leads me to believe that another rally to new highs will develop before any substantial correction begins which has any chance of revisiting the 2011 low points.

Added Later on 4/25/12: I forgot to mention that if you look carefully at the Dow chart above you will see a minor version of a 3pdh with the three peaks during March of 2012 and point 10 either at the early April low or yet to be made. In either case this minor formation forecasts a new high in the Dow above the March top. Lindsay observed that these minor formations develop frequently and have forecasting value.


Ted said...

Hi Carl,

Thank you for this analysis. It is also interesting that European concerns have returned in recent weeks and yet the markets are trading near their 3+ year highs.

On divergence that you may not have been aware of is that small cap stocks, as measured by the Russell 2000, have been significantly underperforming since early Feb 2012. The Russell 2000 has failed to make new highs in 2012 as well. Also, there is a possible head and shoulders formation developing in the Russell 2000 since early Feb as well.

Adsense said...

Great work yet i still consider this point 17 in the dow . possibly point 21 in nya yet xom showing a bit more bullishness to its pattern short term 60 minute spx minor point 15 next .
thank you

Joshua said...

Very nice work, I like 10-4-11 as 14 thou. And look for us to make new highs from here before Mid May, There I will look for a possible top