A Bearish Sign Most are Missing

02/04/2012 10:00 am EST

Focus: STOCKS

Ed Carlson

Author, George Lindsay and the Art of Technical Analysis

Author Ed Carlson applies some of the remarkably accurate technical teachings of George Lindsay to explain why traders should be careful about being too bullish in current conditions.

Bull market or bear market? Let’s ask Ed Carlson. Ed, I know you follow the Dow Jones Industrial Average. First of all, why do you follow the Dow versus a broader measure?

Ah, well, that’s a great question, and the only answer I’ve got for you is George Lindsay was very clear in his writings: he said if you want to know the true level of the market, look at the S&P 400—which is what he had, or the Value Line—but if you’re trying to time turning points in the market, use the Dow Industrials or an even narrower blue-chip average.

Why is that?

Because he said so! No, it has to deal with taking companies in and out of the averages.

You know, the broader the average, the more change there is in it; whereas, with the blue chip average, those companies tend to go on forever and ever.

Now, taking a look at the Dow Jones Industrial Average, are we in a bull market or a bear market rally?

There is a lot of chatter on the blogosphere right now. People who, shall we say, know enough to be dangerous think that the highs we saw on February 18, 2011, May 2, 2011, and again in July were the three peaks of a “three peaks and domed house” formation. 

If that’s true, then by definition, we’re still in a bull market and there are higher highs in the offing.

I disagree. You know, at the very least, even if we get a higher high than that May 2, 2011 high sometime in the near future, that interpretation represents a fundamental misunderstanding of Lindsay’s work.

And George Lindsay was around in the 1960s and 1970s; he wrote newsletters but didn’t write a book of his own. This three peaks and a domed house, can you explain that a little bit more to me?

Sure. Lindsay, as you said, was in the 1960s and 1970s. He wrote a newsletter called George Lindsay’s Opinion for a quarter of a century, actually, and his most well-known formation is three peaks and a domed house.

The three peaks and a domed house is used to find the top of a bull market—whether it’s cyclical or secular— usually to within about three days.

But the big mistake a lot of people make is using this model in isolation, as opposed to as part of an integrated approach using all of Lindsay’s methods, which is what he intended.

What other methods did he use, and would you be using now to predict this market?

A big one is what I had to name the “Lindsay timing model” because he never named it. He came up with these two sub-models, the 107-day top-to-top count and the low-low-high interval, and those are the two sub-models. You get a lot of forecasts from these sub-models, but the good news is you only want the ones where the two come to the exact same day or within maybe just a couple of days.

Another model of his that he liked a lot—and I like it too because it’s so exact, but unfortunately, it doesn’t always work, and again you need to use it as part of an integrated approach—is his count the middle section, and that actually helped time the beginning of this bear market that we’re in.

What is that?

Lindsay described the middle section as a time period in a bull market in which the rate of ascent slows down.  So the bull market is going up, and then all of a sudden it doesn’t really roll over, but the rate slows down and then it takes off again.

He’s got these highs and lows categorized so we know where to start counting from, and then we would either count from what he calls “point C” or “point E” to the top of the bull market, and you take that time span, move forward that many days, and that should give you the bottom of the next bear market. 

Or, in turn, you can count all the way from C or E to the bottom of the bear market, and that will take you to the top of the next bull market.

I know you follow just the Dow Jones Industrials, but do you think these strategies will work in any trading markets?

No, I don’t.

The Lindsay trading model—the 107-day account—did allow for use on other asset classes besides just equities. However—and this is another mistake a lot of traders make who are only half-way proficient with three peaks and a domed house— I get these e-mails all the time saying “Hey, I think I see a three peaks and a domed house in gold, or some currency,” and well, maybe you do, but unless you can combine these other methods with that three peaks, it’s kind of a risk to depend upon it. It is intended only as part of a total, integrated approach.

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