Revisiting the Three Peaks and a Domed House Technical Pattern - 09/28/11

  • Embracing both fundamentals and technicals can have its benefits.

At the same time the stock market enters this uncertain, murky period of less monetary and fiscal support in a somewhat broken, or at least wounded, state technically. While I don't rely on technical analysis, I recognize many do. While a lot of the “Fast” gang looks at technical levels in determining market direction, resistance and support, if I go technical I prefer looking at patterns rather than levels. And I highlighted my view that a George Lindsay Three Peaks and a Domed House pattern could be indicating an April 2011 top in the markets.

The gang laughed!

-- Doug Kass, “Crazy and Fast Times With ‘Fast Money’” (June 24, 2011)

My opening missive discussed weakening economic fundamentals; now, let’s move on to a technical observation.

A famous Woody Allen quote -- used by Warren Buffett previously in his annual report and letter to Berkshire Hathaway (BRK.A/BRK.B) shareholders -- has some bearing on our analysis of the markets: "Bisexuality immediately doubles your chances for a date on Saturday night."

In other words, embracing both fundamentals and technicals can have its benefits.

Earlier this year (on The Edge and in an appearance on “Fast Money”), I raised the issue that an unusually negative technical formation, "Three Peaks and a Domed House," might have indicated that an important market top  was being made in March-April 2011.

This observation, which caught the “Fast Money” team and a number of technically inclined analysts on Real Money by surprise, with the benefit of hindsight, might have been prescient.

Technical analyst George Lindsay coined this 23-step "Three Peaks and a Domed" technical pattern and gained celebrity because it pointed to a market peak in late 1968 --  and the largest stock market correction since World War II followed in the years after. (Here are some historic examples of such a technical setup.)

Below is a chart of S&P 500 cash year-to-date.

Observe the similarity between the chart above and George Lindsay's "Three Peaks and the Domed House" technical configuration below (with points 3,5, 7 and 9 corresponding to the S&P's March-April 2011 price action).