3 Peaks and a Domed House ?

I use a variety of methodologies in my work. Charts are absolutely one of the essential tools I use. However, the way I apply of technical analysis may be different than the work of pure technicians out there. I use charts primarily to tell me, in order of importance, 3 things:

– Is the stock/sector/index/market in an up trend or a down trend?
– Where is the nearest resistance or support level?
– Are there any reliable patterns suggesting an imminent reversal (or continuation) pattern?

You’ll note pattern recognition was last. I have found pattern recognition is a complex art, prone to human errors in interpretation. I use it, but sparingly so. The information imparted by trend and resistance/support analysis is very quick and reliable when compared with pattern analysis. (Perhaps that just means Im a lousy technician).

Regardless, there are occasions when the patterns are ominously clear. One such instance has arisen that warrants my sharing it with you: George Lindsays Three Peaks and the Domed House (TP&tDH). The parallels between the present market’s progression and Lindsays ideal formation are startling.

If youve been reading this site for a while, you know that I track Contrary Indicators closely; that I have been (mostly) Bullish for the past six months, but increasingly uncomfortable with that posture; that we advocated a rotation out of tech early October; that I am far less sanguine about the economic recovery than most of my peers; that last Wednesday (10/15), I interpreted the VIX as signalling an imminent correction which appears to be in full swing now.

Against that backdrop, I was somewhat stunned when someone showed Ned Davis Research‘s interpretation of Three Peaks and the Domed House. (See chart below). NDR is a highly respected independent research house; Davis himself has had many terrific calls over the past few years. (He also has the cleanest stock market data in existence).

I have no idea what the track record of 3 Peaks and a Domed House is (though Lindsay has a stellar reputation); I saw how parallel the charts appeared, noted that hardly anyone else (other than Ned Davis) was talking about them, and posted this.

Source: Ned Davis Research

It is only with great trepidation that I show Lindsay’s Idealized pattern. It is scary. Ive also seen parallel presentations of the same form in the period leading up to March 2000 (we know how that turned out). I have no experience with either the application or interpretation of TP&tDH. I present here to provoke your thought processes a bit. I have also included several reference links on the pattern and on Lindsay himself (below).

If you care to do additional research on this pattern, here’s a few links to start you off:

Reference to George Lindsay :

Essential Technical Analysis
(click the link Search inside this book; Go to the search box and type “George Lindsay”)
http://www.amazon.com/exec/obidos/ASIN/047115279X/thebigpictu09 20/103-3937756-4643047

Reference to Three Peaks and the Domed House:

Sand Spring Advisors
Three Peaks and the Domed House – Revisited, January 14, 2000
http://www.sandspring.com/articles/tp.html

Bonds & Gold
http://www.nqoos.com/3peaks_Lindsay.htm

SPX Daily
http://www.nqoos.com/3peaks_Discovery.htm

DJIA (Crosscurrents)
(go 2/3rds of the way down or search for the word “Domed”)
http://www.cross-currents.net/archives/oct01.htm