Ascending Middle Section on the Dow

The Ascending Middle Section is a pattern discovered by George Lindsay, a famous market technician in the previous century. I first learned about this pattern on Carl Futia’s blog in 2009. He identified an instance of this pattern that began in 2005.  The pattern predicted a bear market low in November 2008. That was noteworthy because, even though the final low on the Dow was in March 2009, the Dow bottomed within a month of breaking the 2008 low. The Middle Section also predicted that after the low, the next major top would form in February 2011. I consider Feb. 2011 to be the top of Primary Wave 1 in the new bull market.

Here is Carl Futia’s post explaining the 2005-2011 pattern, including the idealized schematic:

http://carlfutia.blogspot.com/2009/01/2009-stock-market-forecast.html

I recently discovered another prospective instance of this pattern on the Dow as shown on the charts below:

Dow Middle Section

Dow Middle Section with Forecast

It appears that the Dow is currently rallying to the first Point J. After Point J, the market declines for a period of time equal to the time elapsed between Point E and Point J. If Point J occurs in early-mid 2015, that would imply a decline lasting roughly a year. After the bottom at the second Point A, the market rallies for a period of time equal to the time elapsed between Point E and the second Point A. That would imply a rally of roughly two years during 2016-2018.

This analysis fits my long term Elliott Wave count as well. The J – A decline would be Primary 4, and the subsequent two-year rally would be Primary 5.

Typically, secular bull markets end when the general public is very enthusiastic about stocks and the economy. That is not always the case for cyclical bull markets within secular bear markets (ex. 1974-1976, 2002-2007, etc.). However, I really think the current bull market is a secular bull market given that it began after a nine-year expanded flat on the Dow and S&P 500, with both declining phases being severe.

Although sentiment among market professionals has been bullish for a while, the general public is far from applauding the economy and the stock market, largely due to the slow employment growth. Although the U3 (official) unemployment rate is getting close to pre-recession levels, the U6 unemployment rate (which includes discouraged workers who have left the work force and part-time workers who want full-time work), is near the midpoint between it’s recession peak and it’s pre-recession low. This suggests to me that, assuming no unexpected crisis for the U.S. economy erupts, we are only half-way through the economic recovery cycle, so the longer term bull market in stocks should continue for several years.

However, major corrections (like what the Middle Section forecasts for 2015), can still happen if the market gets too overbought as a result of bullish sentiment among market professionals that’s too far ahead of the economy.

 

 

 

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