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June 18, 2006

Three Peaks and a Domed House
by Tim Wood

Today I want to share a rather rare chart formation with you. The pattern known as "Three Peaks and a Domed House" was made known by George Lindsay. I have very little history on Mr. Lindsay other than the actual work that is available in his "Selected Articles" and what was published in the 1971 Encyclopedia of Stock Market Techniques. I know that Mr. Lindsay began publishing an advisory letter in 1951 and this letter continued until 1975. The following is quoted from these sources.

The Model: The Essential Movements In Sequence

Chart 1 (Below) shows the basic model. The first shape to remember is called the Three Peaks. It usually starts with a base (between points 1 and 2 on the chart), but the base is not important. After point 2, the average rises sharply to the First Peak at point 3. Typically, the top of a peak has a rather flattened shape. After the top has been completed, prices react more than you would expect after such a short advance. The chief characteristic of this movement, as of the whole chart, is that the average makes rapid upside progress, but keeps going for only a short time. In between the brief spurts, the average goes through long stretches of consolidation, or sideways movements.

After the reaction to point 4, the average advances to the Second Peak at point 5. The price movement at the top is normally similar to the action around point 3, and the following decline is roughly comparable to the earlier one. After the second decline ends at point 6, the average rises to the Third Peak at point 7. The tops of all Three Peaks are usually in the same general price range. Whiled there can be considerable variation in the exact levels, the symmetry of the whole formation is usually apparent.

After the Third Peak (at point 7), a rather severe downtrend begins. It is called the Separating Decline because it separates the Three Peaks from the formation which follows. The Separating Decline usually comprises at least two selling waves, from point 7 to 8 and from 9 to 10. Point 10 is always at a lower level than either point 4 or 6, and it is often lower than both. Unless one of the two prior lows is broken, it doesn't qualify as a Separating Decline.

After the Separating Decline, a new formation begins. It is called the Domed House. It begins with some kind of base, shown between points 10 and 14. It is important to distinguish whether the base is irregular, or well-formed and symmetrical. To be a satisfactory base, there should be a rebound from the low at point 10 and then two secondary dips to points 12 and 14. One test of the low doesn't suffice; there must be two.

After point 14, the average shoots up in a fast, short-lived advance, ending at 15. This is called the Wall of the First Story of the house. The Roof of the First Story follows point 15. You may recall that a triangle on a chart usually has five reversals. The same is true of the Roof in a Domed House. The main trend had been upward until point 15 was reached. Then the price goes down to point 16 for the first reversal and up to 17 for the second. The subsequent moves are down to 18, up to 19 and down to 20. After the fifth reversal is completed at point 20, the main uptrend is resumed. It is usual for the Roof of the First Story to take the form of the Five Reversals.

The advance after point 20 is called the Wall of the Second Story. After the Wall runs its course at point 21, the average hesitates a while and touches point 22. Then, it spurts to 23 but quickly falls back to 24, retracing practically the whole gain. When drawn on a chart, these movements suggest a cupola or small dome on the top of a building. Hence, the whole formation is called a Domed House.

Prices hold up, or rally a little, until point 25. A horizontal line drawn through points 21 and 25 suggests the Roof of the Second Story. An abrupt decline follows 25, and then a recovery to 27. This point often falls at a level which suggests that it is the right edge of the Roof of the First Story, which began at point 15. If the top pattern is viewed as a head-and-shoulders formation, either point 25 or 27 may be called the Right Shoulder, depending on which one is more prominent on the chart.

Following point 27, the average drops abruptly and returns to the level of point 10, or within a very few points of it. Sometimes prices get back to the starting level in one continuous downtrend, and sometimes there are extended recoveries on the way down. But there has never been and exception to the rule that the entire gain in a Domed House has eventually been canceled.

Note that the advance from point 14 to 15 is balanced by the drop from 27 to 28, and the rise from point 20 to 21 is offset by the spill from 25 to 26. This gives the chart pattern a squarish effect, suggesting the walls and roofs of a building of two stories. At the same time, there is a rounded effect at the top such as a cupola might give. The whole formation becomes a Domed House.

Both the Three Peaks and the Domes House are distinguished by advances and declines which travel many points in a straight line. But the movements never last very long. In between the few explosive moves, the market spends much of the time backing and filling in a comparatively narrow range. These characteristics usually make it easy to recognize a formation shortly after it begins. And once a formation is under way, it normally lasts a long time. This gives it predictive value.

If you will compare Lindsay's model pattern above to the current chart formation shown below you will see that there are striking similarities. In fact, by all appearances it does seem that this pattern is currently applicable.

But, let me also add that this pattern also began forming in July 2002 on the DJIA and that it stretched and morphed and then stretched and morphed again into what at the time appeared to be one of the largest Three Peaks and a Domed House patterns ever. Then, in January when the Industrials made their move above the March 2005 high, that giant pattern was finally blown up. I say this only to make the point that this is a very elusive chart formation and that it fractal and it can evolve and morph.

I have also found that when this pattern forms and comes to fruition, it is at important market junctures for sure. The key, is of course, it coming to fruition and not evolving or morphing into something else. I have also found that this pattern is fractal and can appear on multiple timeframes in that I have seen this pattern form on hourly charts, daily charts and even monthly charts. As an example, below is a monthly chart of the dollar and Three Peaks and a Domed House count that I covered in my newsletter as the dollar fell into the 2004 low. Let me point out that in this particular case the Point 10 daily closing low was 80.43. Recall from above that Mr. Lindsay said from Point 27 the drop was abrupt and quickly returned to the Point 10 low. In this case the pattern worked out with near perfection and the closing low at Point 28 was 80.53. Yes, one tenth of a point from the Point 10 low. I actually used this pattern and combined it with my cyclical and statistical analysis as the dollar declined into the 2004 low and that time it worked beautifully.

Going back to the stock market, there is presently little doubt that this pattern seems to be unfolding and this is certainly worth knowing about. Furthermore, this pattern is not to be taken lightly as it obviously has a historical precedence that makes it worth at least being aware of and watching. But, it is also wise to know and understand that nothing is certain about this or any other pattern during its formation. Any chart pattern, be it a triangle, a double top or bottom, a head and shoulders pattern, wedge or whatever can take on the shape of the suspected pattern, but until it is all over the pattern in question can in fact change, evolve, morph or simply be invalidated all together. The value in these patterns is that they do give us a heads up as to what to expect and our job is simply to understand them and monitor them so that we know if the pattern is still on track or not.

Therefore, I recommend approaching this formation at face value as it must continue to prove itself. As long as it appears clear cut, great. But, if it should appear to get off track then I will have to begin to discount its integrity. In an effort to make this pattern more useful and easier to monitor I have incorporated cyclical counts, my Cycle Turn and Trend Indicator and other tools which allow for the development of statistical probabilities to further guide me on the development of this pattern. I will also add here that this pattern appears to currently be unfolding on multiple levels. The chart presented above is representative of only one level.

Should you be interested in following this pattern closer and staying abreast on its developments, then visit www.cyclesman.com for subscription information. Also, the June issue of Cycles News & Views is now available. In this issue I discuss the specifics of the 4-year cycle and what the statistical implications currently are as well as specific timing expectations. I also cover gold, the dollar and bonds. A subscription also includes web-based updates 3 times a week.

Tim W. Wood
Cyclesman.com

Copyright © 2004-2008 by Tim W. Wood. All rights reserved.

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