May 27, 2011 Third Advance Follows Three Declines
The last six days generated a quite common pattern seen 65 times over the last eleven years, namely three straight gains on the heels of three contiguous losses. Todays diagram identifies these with a red dot. Just a casual glance reveals that these occur more frequently when prices are moving up than when they decline.
Further, with the good to bad times ratio being near four to one, it seems that we can consider this sequence as a structural feature of the market. Yet this pairing reveals also a tendency to signal a major change in the future direction of prices.
Notice that many of the eight incidents in the 2000/2003 period occur near the lower turning point, just before prices start a new bull phase. Similarly, three of the five incidents in the 2007/2009 decline happen immediately before prices rebound.
However, these sequences also appear in bunches when prices are approaching a top, as revealed by the near twenty repeats just before the October 2007 highpoint. The frequent repeats of the +3/-3 pairings currently could signal a top in the near future. However, note that the pause of a few weeks ago, that was accompanied by a series of repeats, resulted in a pause rather than a turnaround.
DJIA .31 percent
NASDAQ .50 percent
S&P500 .41 percent