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Three Peaks and a Domed House: What the Classic Chart Pattern Is Indicating

By Doug Kass , RealMoney
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If George Lindsay's technical observation proves correct, the S&P 500 should embark on a sharp move higher. As I noted on June 24, 2011, in "Crazy and Fast Times With 'Fast Money,'"

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!

By means of background, technical analyst Lindsay coined his 23-step "Three Peaks and a Domed House" 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.)
Earlier this year I raised the issue that an unusually negative technical formation (in Stages 1 to 7) of Three Peaks and a Domed House might have indicated that an important market top was being made in the spring of 2011.

My observation caught the Fast Money team and a number of technically inclined analysts by surprise, as I tend to side with fundamentals.

The sharp downturn in stock prices in July (matching Stages 9 to 10) that followed provided an almost perfect fit to Lindsay's observed technical configuration.

But now (after possibly moving from Stage 1 to Stage 19) a positive setup and phase (from Stages 20 to 23) might be in order.

If the pattern of Three Peaks and a Domed House continues, a sharp upside move in the stock indices appears possible.

The chart below indicates that the technical pattern (though there was recently a slight undercut, just as there was a slight overcut in previous stages) is almost exactly synchronized. If history follows, we are about to move toward the domed house (and much higher stock prices) in the months ahead, as opposed to the doomed house mentioned yesterday by Dr. Bobby Marcin.

Below is a chart of S&P 500 cash year-to-date superimposed by Three Peaks and A Domed House. Please note the similarity between the S&P and Lindsay's technical configuration throughout this year.

S&P 500 and Lindsay's Pattern

Click to enlarge
Source: Bloomberg

It is almost eerie.

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No positions in stocks mentioned.

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