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S&P 500: Understanding the Three-Peaks Process


It's one of rapid advances in brief spurts.

It might just be my overactive imagination, but the visual in the short-term S&P 500 yesterday triggered this pattern in my mind.

I haven't studied this formation and know very little about the nuances for correctly identifying it other than the definition that follows.

Click to enlarge

Click to enlarge

George Lindsay defined the three-peaks process as one of rapid advances in brief spurts between which the market goes through long stretches of consolidation. The tops are typically somewhat rounded or flat and the tops usually occur within a similar price range, perhaps with a slight upward bias.

After the third peak (at point seven), a rather severe downtrend begins. It's called the Separating Decline because it separates the Three Peaks from the formation that follows. This decline usually encompasses at least two selling waves, labeled from point seven to point eight, and point nine to point 10. The decline eventually achieved at point 10 is always at a lower level than either point four or point six, and usually lower than both. Unless at least one of these lows is broken, one cannot label this formation as a Separating Decline.

A new advance and overall formation begins after point 10. It's the beginning of Lindsay's Domed House. After a sharp reverse from the point-10 low, first there's a small requisite double test of that low. This transpires during the period labeled points 12 and 14. After point 14, the market shoots higher into point 15. Lindsay labeled this advance the Wall of the First Story The Roof of the First Story follows, and typically takes the form of a flat or expanding zigzag with at least 5 reversals (down into point 16, up to 17, down to 18, up to 19, and down to 20). After the fifth reversal is achieved at point 20, the main uptrend is resumed into what Lindsay referred to as the Wall of the Second Story.

The advance that begins at point 20 has one major hesitation at point 21, a potentially sharp decline into point 22, and then a final rush up to point 23 before quickly falling back to point 24, retracing practically the whole move from point 22 to 23. Prices hold up and typically rally a little until point 25, leaving an imaginary line that could be drawn through points 21 and 23 that marks the edge of the Roof to the Second Story. Falling back from point 25 and penetrating this line leaves an overall formation that suggests a cupola or small dome on top of a building, and thus the reference to a "Domed House." A significant and lasting decline then commences immediately thereafter.

See also:
The S&P's Looming Break: Trade It or Fade It?

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