S&P points higher
I went long of the S&P 500 at the end of last week and caught a nice move up to a new bull market high of 1423 on Monday. You'll recall from last week that I have a significant objective at 1440. Based on the point-and-figure chart, there is also another compelling target above there at 1460. And the month of April is a favourable time for such a move to take place.
I've read a couple of pieces of fundamental research this week that suggested that 2012 could turn out like 2011, or rather continue to do so. Stock markets also got off to flyer last year, helped by fairly robust economic data. As the year progressed, however, the outlook in the US and elsewhere worsened. Having stalled from early May, the main indices I cover then fell aggressively from mid-summer onwards.
I am all for making parallels with the past. The idea that the future will look somewhat like history is at the heart of technical analysis. But there's always a danger of taking this too far, as well as of spending all one's time fretting over the timing of the next major top, rather than riding the gains in the meantime. Still, it's healthy to understand the other point of view, in which spirit I'd like to share with you the following pattern that I learned of this week.
We've all heard of the famous "head-and-shoulders" formation. Well, now I give you "three peaks and a domed house" (3PDH). Complicated name, isn't it? And it's a pretty complicated formation too, at least to my simple mind. (You can read a full description of its make-up on Thomas Bulkowski's website: http://bit.ly/HU3Pe5). It's a rare formation – no surprises there – and has been followed by big bear markets in the Dow in several cases, including 1929-32.
3 peaks & a domed house
I've absolutely nothing against using patterns. But I believe that they should be screamingly obvious to the naked eye, and not just the naked eye of a trained chartist. I have gone over the purported cases of this pattern in the Dow going back to 1900. I found myself squinting quite a bit, even when I knew where I was supposed to be looking.
Dow's 3PDH 1929
As it happens, a couple of analysts have been using 3PDH to decent effect in recent months. Doug Kass (http://realmoneypro.thestreet.com) suggested in November that the S&P's action of 2011 had formed the initial three peaks followed by the customary significant decline, and was thus perhaps poised for a sharp move higher. He was spot on. But are we now carving out the final Dome before a big bear market?
S&P 3PDH 2012?
I have to confess I have no idea. Neither do 3PDH's proponents from what I can tell. The pattern involves far too much subjectivity for my liking. We could be part way through the sharp move up, right at the top, or merely on the threshold of the sharp move up. Give me a plain old "double top" any day.
I am away for the next fortnight. There will be no Outlooks, but this column will appear as normal.
