George Lindsay’s best-know model, Three Peaks and a Domed House, did an excellent job of identifying the top of the March 2009 bull market. Any confusion in using the model to forecast the October 5, 2012 high in the Dow with this pattern was most likely caused by one of two issues:
1. When the pattern displays a descending base, the count (221-225 days) must be taken from an inflection point in the five wave reversal (First Floor Roof) and not from the bottom of the base as is done from a horizontal base.
2. Using the model in isolation, rather than as one part of a holistic approach using all of Lindsay’s models.
The three peaks are apparent on the chart below with peak three followed by a sharp reaction Lindsay called the Separating Decline into the August low. That low was followed by almost two months of base-building. Note that the base was descending as the final low on October 3, 2012 was the low point of the base.
Lindsay was very clear that a base must be followed by two tests of the base. In this case those tests created the head and right shoulder of an inverse head-and-shoulders pattern. Only after the second test is complete can the First Floor Wall begin.
Once the First Floor Wall is finished a five-wave reversal is expected. We must take our 221-225 day count from an inflection point here. The descending base told us to expect a long domed house and taking the count from the base would have come up short.
Counting from the top of the first reversal on February 28, 2012 gave us an almost perfect count of 220 days to the top of the bull market.
How would we know from which inflection point to begin our count? The answer is found using Lindsay’s other methods to confirm each possible count in the Domed House. That will be the subject of a future article. Next week I will review the price forecast of a Three Peaks/Domed House formation.
[Editor’s note: want to learn more about this methodology? Ask our writer Ed Carlson a question below? Or, check out his website for information on his sneak peak view of his newsletter. ]
