A distinguished technical analyst friend of mine reckons this perma-bearishness is because most chartists are outsiders, not working within City or Wall Street institutions. Like much of the general public, they look in disapprovingly upon the orgy of greed and speculation and conclude that it can only end in tears. This then leads them to focus their energies on timing the financiers' inevitable comeuppance.
For what it's worth, my own theory is that sensationalised pessimism helps to sell trading and investment newsletters. In a cluttered marketplace, extreme predictions grab people's attention. The other day, a reader kindly sent me a marketing leaflet for one such service, warning of the usual impending financial Armageddon facing British investors, and asked what I made of it. Not much, is my answer.
'Three tops and a domed house' model
I stumbled this week upon another very precise call for a top in the Dow Jones index. The analysis is based on the so-called "three peaks and a domed house" (3PDH) pattern, which might politely be described as one of the less intuitive formations in charting. I dismissed the significance of a previous purported occurrence in my column of 4 April last year and urged staying bullish. Since then, the US market has risen by 23 per cent.
Today's 3PDH
The latest 3PDH is, apparently, a slightly odd-looking variant. Such 'atypical' specimens are to be expected at secular - ie longer-term - bull-market highs rather than mere cyclical ones. Previous secular bull-market highs, in my understanding, would include those of 1929, 1966 and 2000, whereas cyclical ones would be 1998 or 2011. So, we could be on the verge of another major leg down in equities.
The 1929 dome
While I have criticised 3PDH for having a structure that is too vague, I now learn that it can give very precise messages in terms of timing. This, however, depends on having correctly identified the structure to begin with. In the case of the Dow's putative 3PDH of today, the target for a top in the market is in a window between 30 July and 9 August. Based on the sell-off since 2 August, it may already have happened, therefore.
Just in case you are in any doubt, this isn't my interpretation of what’s happening right now. From its fresh all-time high of 2 August, the Dow has come off by a grand total of 1.18 per cent. Viewed on the daily timeframe, the market looks to be in a fairly standard pullback within a strong uptrend. I wouldn't be at all surprised if the move to 16000 I’ve been predicting began very soon indeed.
Possible Dow re-entry
I have already scaled back my trading considerably in recent days, awaiting clearer direction from the market. A decent repeat buying opportunity might flash up were the Dow to drop to around its lower Bollinger band and bounce. That sort of action marked two great entry points in December and February last year. The specific moment I'd buy would be as the index crossed above its 21-day exponential average. Not as architecturally alluring as the Dome, I'll grant you. But more profitable over time.
