This rare and very bearish pattern was all the rage last summer, but it seems to me that the real version of a possible 3 Peaks and Domed House pattern has been at play over the entire last two years of the S&P’s very volatile and wide sideways trading range.
Consider first a rendering of this pattern by my favorite pattern technician, Thomas Bulkowski, with the image below from his excellent and often-used-by-me web site – thepatternsite.com – and worth visiting by all.
Next consider the unmarked 2-year daily chart of the S&P and there is clearly a strong resemblance to this pattern discovered by George Lindsey that brought him some distinction around corrections in the 1960s. According to Mr. Bulkowski, Mr. Lindsey provided several examples of this pattern at work including 1893 to 1895, 1910 to 1912, 1946 to 1948, 1964 to 1968 and then 1966 to 1969.
Looks like 2011 to 2012 may soon be on that list with the calls made by some well-known market players last year prescient even if too early with the 3 Peaks and Domed House that has been at play over the entirety of the last two years calling for a more than 20% fast decline in Q3 and/or Q4 of this year.
Let’s return to the chart of the S&P, though, to match it up the aforementioned points just to show how well this seemingly doomsday pattern, and something that makes me uncomfortable for both its message and sensationalism and something that is definitely ironic considering how much of my charting is devoted to bearish charts due to the very highly bearish nature of most charts, fits the last 24 months of highly volatile and directionless trading on the S&P.
For this, let’s look at the larger chart below with Mr. Bulkowski’s rendering below it.
The comparison is not perfect with point 2 being a bit lower and points 10 through 20 slightly muddled relative to how Mr. Bulkowski has them drawn, but for a possible 28 point-pattern-to-be with the first 27 put in pretty well, it is quite clear that this may be the 3 Peaks and Domed House pattern for real and something worth noting considering that point 27 may be nearly completed.
Should the S&P’s current small Rising Wedge have put in an apex yesterday or perhaps in the days to weeks ahead for a clear 27th point, its small Rising Wedge confirms at 1355 for a target of 1267 while its fulfilling larger Rising Wedge carries the precise objective of the 3 Peaks and Domed House at 1075.
It is the potential success of these patterns that would be truly worrisome, though, because a close by the S&P below 1075 would serve to confirm a major Double Top with a target of 728 and close to the target of the S&P’s truly major Rising Wedge that stands out in the chart above.
Let’s take the one pattern at a time, though, and this means focusing on the highly complex 3 Peaks and Domed House that points down for the S&P.
Having missed most of Day 2 of the Draghi Rally, it was interesting to see the sum of the charts after the event with three big dichotomies showing up with one playing out through the differing messages of the growth-oriented Nasdaq Composite and Russell 2000 the more “old” economy Dow Jones Industrial Average and S&P with the difference boiling down to lower highs versus near-term higher highs.
Starting out with the Nasdaq Composite, its lower highs are not only representing the near-term but the intermediate-term in the form of a third Bull Fan Line that may just mean it will be breached to the upside for a Symmetrical Triangle that will try to fulfill up as occurred at the beginning of this year on the LTRO – and not just words – of Draghi. What makes this far from a sure thing, however, is the fact that the Nasdaq Composite’s near-term uptrend is actually reversing down as shown by its position below that third near-term Bull Fan Line and, of course, the fact that lower highs typically do not bode so well for the marketplace being charted.
These are not typical times, though, with investors continuing to be herded by hope as opposed to looking at reality and perhaps a good reason to think that the Russell 2000’s more than year-long trend of lower highs shown in the chart directly above will continue to hold as hope fails to spring eternal in the face of Europe’s sovereign debt and banking crisis.
Such a bearish trend will remain in place even if the Russell 2000 pops higher to put in another top trendline touch of its Symmetrical Triangle at about 815 this coming week with this small cap index’s reversing intermediate-term uptrend supporting a continuation of those lower highs along with the Symmetrical Triangle’s target of 626 for a potential decline of more than 20%.
Worrisome about these lower highs from the Nasdaq Composite – in particular considering its decade-breaking high months ago – and the Russell 2000 is the fact that these growth-oriented indices tend to lead the Dow Jones Industrial Average and the S&P on genuine moves to the upside and with each holding back, it may be reason to think that the near-term higher highs in the latter two indices will fail to hold.
This is certainly the “eyeball” look of the Dow’s daily chart above, but it must be noted that the Dow’s three month downtrend trend is officially reversing up with its two-month uptrend completely intact and something that is simply not happening in the Nasdaq Composite or the Russell 2000 adding to the drama of what “side” will win this battle of lower highs versus near-term higher highs.
Without showing the S&P here and saving it for a note on one of the other big dichotomies born of the Draghi Rally, let’s turn to one last chart that perhaps provides reason to believe that the typical tells on how the risk assets will behave – the Nasdaq Composite and the Russell 2000 – and that is the chart of the Dow Transports and one that presents as the Russell 2000 does and this is to say poorly.
As can be seen in the daily chart of the Dow Transports on the following page, it, too, is showing a more than one-year trend of lower highs under the guidance of a Symmetrical Triangle as well.
Should these lower highs be breached to the upside on an unmarked Bull Wedge that hits its target as opposed to the partial fulfillments of the previous Bull Wedges, it will make the strong case for an upside break from this year’s sideways trend in the equity indices rather than a downside break.
But it is the confirmed and fulfilling Rising Wedge in dashed trendlines that strongly suggests these lower highs will hold and something that could cause the Dow Transports to decline by 20% over the next quarter or two.
Clearly the lower highs in the Transports will either be busted or hold simultaneous to similar trading action in the Nasdaq Composite and the Russell 2000 with the combination of the three a good way to balance the possible bullishness building in the Dow Jones Industrial Average and the S&P with the two sets of charts sending different signals right now on how the sideways uncertainty will end.
Put another way, it is going to be interesting to see whether it is the COMPQ and RUT or INDU and SPX that turn out to be right about another sideways summer for the equity markets.