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November 03, 2006

The Dow Industrials are Wrapping Up a Pattern Similar to 1929
by Robert McHugh

In 1929, probably the most famous of all stock market tops, the top was identified by a rare Broadening Top pattern, also known as a Megaphone, shown below. It was characterized by a long rally into its point a, and an extending rally into its point e. Waves b, c, and d were relatively short. This is the exact pattern we see in a chart of the Dow Industrials from 2002 through 2006. The entire rally from October 2002 has in effect been one very large Broadening Top Megaphone pattern, identical to the shorter time-frame pattern that led to the 1929 stock market multi-year clobbering. The second chart shows another major stock market top in 1957, once again earmarked by a Broadening Top pattern, with expanded rallies into waves a and e. It too led to a clobbering once completed.

There is some guidance as to when the top is in from these patterns. In both instances, 1929, and 1957, prices peaked at the upper boundary line after drawing the upper boundary line an exact symmetrical angle mirroring the lower boundary line — which was drawn using declining turn points. That would suggest a top around 12,500ish if a top is coming over the next month, or higher if this pattern wants to complete in December or early 2007. Point d is not below point b in the 1929 chart, as is the case in the 2002-2006 chart. It is below point b in the 1957 chart, so where point d lies does not seem to matter.

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"O Lord, Thou has searched me and known me,
Thou dost know when I sit down and when I rise up;
Thou dost scrutinize my path and my lying down,
And art intimately acquainted with all my ways.
Even before there is a word on my tongue,
Behold, O Lord, Thou dost know it all.
Thou hast enclosed me behind and before,
And laid Thy hand upon me.
Such knowledge is too wonderful for me;
It is too high, I cannot attain to it."
Psalm 139: 1-6

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Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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