I last commented on my Lindsay analysis of the stock market nearly 6 months ago, in early August 2011. At the time it looked like the May 2, 2011 top was point 23 of a major domed house formation which had been evolving since the start of 2010. The normal expectation of the drop following point 23 is that it would take the market below point 10. In that major formation point 10 was the July 2010 low which in the Dow was at 9,614.
Now take a look at the daily chart of the Dow above this post. It goes back to the start of 2011. Point 23 of the major domed house was the May 2 top at 12,876. The drop to the October 4, 2011 low ended at 10,404, a level substantially above the normal expectation for a major 3 peaks and a domed house formation. So the question is whether or not that big formation has been completed with the subnormal drop into October 2011 low.
I think the odds now favor the view that the October 2011 low was in fact point 26 of the major formation and that point 27 lies just ahead of us (see the 3 peaks, domed house schematic at the top of this post). There have been occasions in the past where point 27 has been higher than point 23 and that is what I think will happen now. If this inference is correct then the the current rally in the Dow will carry the average to 13,000 or somewhat higher but then will be followed by a drop to or below 9,600.I have three reasons for this conclusion.
The first revolves around Lindsay's 12 year time period from major highs to major lows. There was a bull market top in the Dow in February of 2000. The 12 year period, which averages about 12 years and 8 months, predicts a significant low in the Dow around October of 2012, twelve years and eight months after the 2000 bull market top.
Secondly, the 2004 low point which was associated with substantial pessimism about the economy and stock prices, occurred in August of that year. Lindsay often observed that important lows are often echoed by important lows 8 year later. This points to August 2012 as a possible low point.
Finally, I think that the Dow has traced out a pretty clearly defined minor three peaks and a domed house formation beginning with the February 2011 top. I have labeled the key turning points on the daily Dow chart above. The three peaks, points 3, 5, and 7, spanned a 5 month period, not the 6-10 month period which is typically found in major formations. Still, 5 months is not far short of this 6-10 month interval and is long enough to make be think this is an important example of a three peaks and domed house.
I think point 10 of this formation occurred at the October 2011 low. As far as I can tell there are no obvious points 12 or 14, perhaps because this is not a fully developed major formation. But the five reversals, points 15-20, appear pretty clearly on this chart. The market is now on its way up from point 20 which was the December 18 low.
The next phase should be the development of points 21-25 which usually looks like a somewhat misshapen head and shoulder top. Point 23 should be above the highest of the three peaks which was point 5 at 12,876 in the Dow.
The timing of point 23 is more difficult to determine. Normally short bear market declines last about 8 months or a little less. If the 12 year period gives us a low in October 2012, then the preceding top should be in February, i.e within the next six weeks.
But I think the key thing to watch for is the development of points 21-25, the dome of the domed house. As I said, this should resemble a head and shoulders formation with point 23 above 12,876 in the Dow. The break below the neckline of such a formation would be the start of a drop to 9,600 or so.
