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3 Peaks and a Domed House ?

Posted By Barry Ritholtz On October 24, 2003 @ 6:05 pm In Finance | Comments Disabled

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 [1] closely; that I have been (mostly) Bullish [2] for the past [3] six months [4], but increasingly uncomfortable [5] with that posture [6]; that we advocated a rotation out of tech [7] early October; that I am far less sanguine [8] about the economic [9] recovery [10] than most of my peers [11]; that last Wednesday (10/15), I interpreted the VIX as signalling an imminent correction [12] which appears to be in full swing now.

Against that backdrop, I was somewhat stunned when someone showed Ned Davis Research [13]‘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 [13]

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 [15]
(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 [16], January 14, 2000

Bonds & Gold [17]

SPX Daily [18]

DJIA (Crosscurrents) [19]
(go 2/3rds of the way down or search for the word “Domed”)

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2003/10/3-peaks-and-a-domed-house/

URLs in this post:

[1] Contrary Indicators: http://bigpicture.typepad.com/comments/2003/09/contrary_indica.html

[2] Bullish: http://bigpicture.typepad.com/comments/2003/04/crossroads_.html

[3] past: http://bigpicture.typepad.com/comments/2003/05/bah_humbug_tax_.html

[4] months: http://bigpicture.typepad.com/comments/2003/07/rally_compariso.html

[5] increasingly uncomfortable: http://bigpicture.typepad.com/comments/2003/09/potential_buyin.html

[6] posture: http://bigpicture.typepad.com/comments/2003/08/dog_days.html

[7] rotation out of tech: http://bigpicture.typepad.com/comments/2003/10/good_quarter_mi.html

[8] sanguine: http://bigpicture.typepad.com/comments/2003/09/whats_your_time.html

[9] economic: http://bigpicture.typepad.com/comments/2003/09/shell_shocked_c.html

[10] recovery: http://bigpicture.typepad.com/comments/2003/10/tax_cuts_stock_.html

[11] peers: http://bigpicture.typepad.com/comments/2003/09/seasonal_weakne.html

[12] imminent correction: http://bigpicture.typepad.com/comments/2003/10/vix_foretells_s.html

[13] Ned Davis Research: http://www.ndr.com/public/container/index.jsp

[14] Image: http://bigpicture.typepad.com/comments/3_peaks_and_dome.html

[15] Essential Technical Analysis: http://www.amazon.com/exec/obidos/ASIN/047115279X/thebigpictu09 20/103-3937756-4643047

[16] Three Peaks and the Domed House – Revisited: http://www.sandspring.com/articles/tp.html

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

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

[19] DJIA (Crosscurrents): http://www.cross-currents.net/archives/oct01.htm

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