Three Peaks and a Domed House Top In Play Again Our old esoteric chart pattern friend, the Three Peaks and a Domed House Top pattern (3PDH), is potentially in play again. Below is our latest plotting of this arcane yet uncannily accurate chart pattern as it currently may be playing out on the S&P 500. But first a brief profile on the 3PDH. The Three Peaks and a Domed House pattern was developed back in 1968 by the late, great technician George Lindsay, really a technical analysis savant genius. Lindsay’s research found that the market followed this pattern “at least 60% of the time” and that “the majority of all major advances ended in a pattern which resembled the Three Peaks and a Domed House.” This recurring market pattern occurs at nearly every major U.S. equity market top and articulates consistent market behavior. The 3PDH chart pattern demonstrates how markets tend to come off a low and move up until a resistance point is reached (point 3). Then after two attempts to move higher (points 5 and 7) there is a sell-off to point 10. This is the “Separating Decline” that separates the Three Peaks from the Domed House. Point 10 is always lower than either point 4 or 6, often both. If is not lower it does not qualify and the pattern is nullified. The Domed House starts with a base between points 10 and 14. A rally usually ensues and forms another higher base (points 15 to 20, Roof of the First Story). Then from there the final surge to the high creates the Dome from points 21 to 25. The drop-off returns to the vicinity of point 10. Minor and major formations of Three Peaks and a Domed House often overlapped with a Peak of one being a Dome of another. Sometimes Three Peaks followed a Domed House. Some tops could not be fit into the pattern and do not qualify. In some instances points 25 or 27 were higher than the point 23 Domed House Top. Our most recent successful use of the pattern began in October 2014 with timely and prudent follow up in July 2015 that came to completion in the summer of 2015 with the global financial crises fueled market carnage in August and September of that year. We began tracking the current count in August 2016. This is a recount of that with point 3 being moved back to the late December 2014 high, points 4-15 remaining the same and a recount from there on out. Correlating the current chart of the S&P 500 with the Basic Model above, the recent high on March 1 could be point 21 or even point 23. In either case a bounce slightly higher to a point 23 Domed House Top or even at point 25 or 27 seems likely given the historical seasonal prowess of the month of April and the propensity for markets to lose steam in May as well as the current technical setup for an oversold bounce. We have added a few key major support levels or levels any major correction or bear market could bring the S&P back to at: the November 2016 Election Low ~2085, the Brexit Low ~2000, the Point 10 Low ~1865 and big round 1800 below them all. We do not expect the 20%+ bear this year – though that could change if things deteriorate.
Will the month of May finally bring out the bears? Not sure if I ever remember seeing the VIX with a 10-handle going into May...
Typical May Pattern: Some Strength Early and Late Over the last 21 years the market’s performance in May has been on the tepid side. Over this time period may is DJIA’s and NASDAQ’s 8th best performing (or 5th worst) month of the year. May is the 7th best month for S&P 600, 6th best or Russell 1000 and 5th best for small-caps. Average gains range from a high of 0.9% for Russell 2000 down to just 0.1% by DJIA. Based upon the chart above, the first two trading days of the month have been bullish but after that weakness has begun that lasted until the fifth trading day before the market musters a comeback that stalls around mid-month, at roughly the same level achieved the first two trading days. From mid-month until the 18th trading day, the historical trend has been lower. A month-end rally also fails deliver. Only Russell 2000 has historically closed the month out meaningfully higher than it was when May first began.
Starting to have more bearish view on the markets right now. If there is a rally on Monday from French elections I may go short for a few weeks. Will wait and see
i agree and admittedly i've been leaning more bearish ever since reverting back to my old user handle expecting to see some fireworks this month ... sell in may and ... well you know the rest ... nothing to see here as of yet though but waiting
June not such a hot month in post-election years The first month of summer has shone brighter on NASDAQ stocks over the last 46 years as a rule ranking sixth with a 0.7% average gain, up 25 of 46 years. This contributes to NASDAQ’s “Best Eight Months” which ends in June. June ranks near the bottom on the Dow Jones Industrials just above September since 1950. S&P 500 performs similarly poorly, ranking tenth. In post-election years since 1953, June still ranks poorly and its average loss for DJIA and S&P 500 increases to –1.2% and –0.7% respectively compared to –0.3% and –0.03% in all years. DJIA in particular struggles, advancing in just three post-election year Junes (1977, 1985 and 1997). NASDAQ and Russell 2000 fare best in June, posting modest average gains.
6 of Last 8 Concurrent DJIA & S&P 500 Monthly Winning Streaks followed by Correction or Bear within a Year DJIA and S&P 500 are currently in a 7-consecutive-month winning streak. The streak began in April and at October’s close DJIA had gained 13.13%. S&P 500 had climbed 9.0%. Streaks of 7 months or more are rather infrequent. DJIA has had 15 such streaks lasting 7 or more months since 1901, S&P 500 has accomplished the feat 17 previous times since 1930. Concurrent DJIA and S&P 500 streaks have occurred just 9 times including the current streak. The last concurrent streak began in July 2006 and lasted until January 2007. DJIA and S&P 500 have advanced greater than 30% on average during previous concurrent streaks. Six of eight past concurrent streaks lasted 8 months or longer. The longest was a full year from April 1935 to March 1936. In the March 1958 and October 1960 streaks (shaded grey in tables below) DJIA went one month longer than S&P 500. When past streaks ended, the down month averaged a loss of 3.02% for DJIA and 2.56% for S&P 500. Both were generally higher 3- and 6-months later, but performance at the 1-year after point was lackluster with DJIA climbing just 0.49% and S&P 500 losing 0.50%. Three bear markets (greater than a 20%) began within one year after streaks ended (end date bold); 3/10/1937 to 3/31/1938 DJIA –49.1%, 12/13/1961 to 6/26/1962 DJIA –27.1% and 10/9/2007 to 3/9/2009 DJIA –53.8%. Corrections took place twice (end date bold & italic); 11/29/1983 to 7/24/1984 DJIA –15.6% and 1/5/1960 to 10/25/1960 DJIA –17.4%. The current streak has not ended yet, but it will. Historically, the odds would suggest a correction or bear market could begin within one year of the streaks end. If November or December turns out to be the month that ends the current streak, then mid-term year 2018 could be the host of the next correction or bear market.
Small-Cap Woes – An Early Warning Sign? November is the first month of the “Best Six/Eight Months” and it is also the first month of the market’s “Best Three-Month” span, but this November has gotten off to a below average start and small-caps (based upon the Russell 2000) are performing miserably. At today’s close, DJIA, S&P 500, NASDAQ and Russell 1000 are fractionally positive for November. This compares poorly with historical average gains over the past 21 years at this point in November ranging from 0.73% for S&P 500 and Russell 1000 to a 1.07% advance by NASDAQ. Russell 2000, off 2.10% lags well behind its historical performance of 0.77%. Tech and large-cap stocks broadly shrugged off weakness by small-caps that began early in October, but the laggard performance has grown notable this month. Historically, market rallies of meaningful magnitude and duration are supported by broad participation. Absent this solid foundation, further upside can become constrained. It is also concerning to see small-caps retreating when major tax reform which is supposed to be beneficial to them is widely anticipated. Perhaps major tax reform is not a “done-deal.”
10 Reasons to Worry Posted by lplresearch One of the oldest market sayings is: “markets climb a wall of worry”—needless to say, it is sometimes good to be cautious. We listed some of our worries recently in What Might Scare Markets, but the action in the S&P 500 Index over the past year—and so far in November—has that list growing. Here are 10 reasons to worry (in no particular order): On a total return basis, the S&P 500 has been up 12 months in a row. The S&P 500 has only pulled back (from peak to trough) 2.8% over the past year. Junk bonds have weakened relative to equities over the past few weeks, and historically this has been a warning for equities. The yield curve is the flattest it has been since 2007. The S&P 500 hasn’t closed lower by 0.5% or more for 50 consecutive trading days, the longest streak since 1968. The S&P 500 hasn’t finished red three days in a row for more than three months, the longest streak in seven years. The S&P 500 hasn’t corrected 3% from its all-time high for over a year, the longest streak ever. The average daily change (absolute value) for the S&P 500 in 2017 is only 0.30%, the second smallest range on record behind 1964. Transports have been very weak recently, a historical indicator of weakness under the surface. November is historically one of the strongest months going back to 1950, but over the past 10 years the second half of the month has been weak. Per Ryan Detrick, Senior Market Strategist, “It has been a long time since we’ve seen some volatility. Many small cracks are starting to form, and we wouldn’t be surprised if this opens the door for a modest correction. The good news is that with the global economy as strong as it is, this would likely be a nice chance to add to positions.” For more of our thoughts on why next year could see a continuation of the bull market, be on the lookout for LPL Research Outlook 2018: Return of the Business Cycle in late November.
Not much cheer on December’s first trading day over the last eleven years In the Stock Trader’s Almanac 2018, on page 86, it is shown that the first trading days of every month since September 1997 for DJIA have produced nearly the same amount of gains as all other days combined. Most consistent gains were produced by the first day of February, April, May and July. However December’s first trading day has not been as productive for DJIA or S&P 500. In the following tables, the performance of the first trading day of December over the most recent 21 years is presented. Aside from disastrous 2008, first trading day of December losses have been relatively mild. The second worst loss, slightly less than 1% was in 2001. Although the table is full of years with 1% or greater gains, consistency is lacking. Since 2006, December’s first trading day has been weaker, down seven of the last eleven for DJIA and NASDAQ and eight of eleven for S&P 500.
Why 2018 Could Be a Challenging Year for the Market Historically, midterm election years have not been that kind to traders and investors and 2018 is a midterm year. Since 1902, DJIA’s average full-year performance in midterm years is just 4.1%. S&P 500 is slightly stronger since 1930, gaining 4.8%. Midterm years that were also the second years of newly elected presidents have been even weaker, DJIA +1.1% and S&P 500 –0.4%. New Republican presidents were only fractionally better with DJIA gaining 2.2% in newly elected Republican president second years while S&P 500 climbed just 0.3%. One positive midterm 2018 has is past years ending in “8” have averaged healthy gains (purple line in charts below). The only year DJIA has suffered a double-digit decline in years ending in “8” was 2008.
Midterm January Performance Tepid January has quite a legendary reputation on Wall Street as an influx of cash from yearend bonuses and annual allocations typically propels stocks higher. January ranks #1 for NASDAQ (since 1971), but sixth on the S&P 500 and DJIA since 1950. It is the end of the best three-month span and possesses a full docket of indicators and seasonalities. In midterm years, January ranks near the bottom since 1950. Large-caps have been the worst with S&P 500 and Russell 1000 ranking #11 (second worst) and DJIA #10. Technology and small-cap shares fare slightly better in the rankings, but average performance is still negative. DJIA and S&P January rankings had slipped precipitously as the month has suffered some significant losses over the last 18 years. From 2000 to 2016 both indices declined 10 times; three in a row from 2008 to 2010 and again 2014 to 2016. January 2009 has the dubious honor of being the worst January on record for DJIA (-8.8%) and S&P 500 (-8.6%) since 1901 and 1931 respectively. The first indicator to register a reading in January is the Santa Claus Rally. The seven-trading day period begins on the open on December 22 and ends with the close of trading on January 3. Normally, the S&P 500 posts an average gain of 1.3%. The failure of stocks to rally during this time tends to precede bear markets or times when stocks could be purchased at lower prices later in the year. On January 8, our First Five Days “Early Warning” System will be in. In post-presidential election years this indicator has a solid record. In the last 17 midterm election years, just 8 full years followed the direction of the First Five Days. The full-month January Barometer has a midterm-election-year record of 10 of the last 17 full years following January’s direction. Our flagship indicator, the January Barometer created by Yale Hirsch in 1972, simply states that as the S&P goes in January so goes the year. It came into effect in 1934 after the Twentieth Amendment moved the date that new Congresses convene to the first week of January and Presidential inaugurations to January 20.
Why Midterm Years Can Slip Up Bull Markets Posted by lplresearch Equities were met with tremendous success during the first year of President Trump’s term, but now we’re headed into the much more historically troublesome midterm year. As Ryan Detrick, Senior Market Strategist notes, “Midterm years tend to be a banana peel for markets, as they see the largest pullbacks out of the four-year presidential cycle. However, those who hang on for the ride tend to see a significant bounce over the next year.” Taking a closer look, since 1950, the S&P 500 Index has been down 16.9% on average at its intra-year low during midterm years, though it tends to bounce back, posting an impressive 32.0% average gain over the subsequent twelve months.* Now take a look at all of the midterm years and how the S&P 500 performed after the intra-year lows were made: The action over the past year has been historic on many levels, but we have our concerns as the bull market continues to move higher. In our next Weekly Market Commentary, due out later today, we will list some of the amazing streaks which make the recent market action truly special, but we will also look at a few other potential near-term worries which could trigger some long overdue volatility.
2 8 market update Video from Ron Walker TheChartPatternTrader I was a day late to post this in here but this vid is from Thursday.
Presidents’ Day: Long-Term Record Bearish Before & After Page 88 of the Stock Trader’s Almanac 2018, points out Presidents’ Day as the poorest performing holiday of the eight holidays that are tracked. Unlike the others, the trading day before and the trading day after this three-day holiday weekend are both down on average over the past 38 years. Depending on how February lays out in a monthly calendar, the Tuesday after Presidents’ Day is either the first trading day of option expiration week or the week after options expiration week. In the tables below, the years when Presidents’ Day occurs in the week after option expiration are highlighted. This year, Presidents’ Day falls in the week after options expiration. Since 2011, the market’s performance before and after the long holiday weekend has improved, most notably during the last four years. Some of this recent improvement could have been the result of sizable losses in January and the ensuing rebound rally. Recent market jitters, a tepid history on February’s option expiration day and a long holiday weekend could be sufficient reason for traders to trim positions this Thursday and/or Friday.
Watch Out for End of February Weakness Over the most recent 22-year time span the end of February has been prone to weakness. The bulk of the weakness appears to land on the last trading day of the month or the penultimate trading day, but it can begin as early as the fourth to last trading day. This weakness has been evident in Februarys with a gain or a loss. Perhaps it is the winding down of earnings season that triggers weakness in some years. This weakness can be seen graphically on page 20 of the Stock Trader’s Almanac 2018 or in our post last month “February’s performance generally improves in midterm years,” and in the table below.
