If you’ve ever surfed you know how right The Beach Boys were. You truly are sitting on top of the world when you catch and ride a wave on a surfboard. Tomorrow will be a glorious day. I will strap my 9’6” Ron Jon to the roof of the family truckster and head up to Martha’s Vineyard to spend the week with old friends, the waves and some lobsters. The vibration always changes for me in August when the humidity dips and I find myself on the beach and paddling out with much more regularity than any other time of the year.
Surfing has become a summer rite of passage for me, but it is also the time when the market waves begin to break and have come crashing to shore often enough for us to be especially leery during the two worst months of the year, August and September. Before we try to ride some overhead surf into a light offshore breeze and get lulled into a false sense of security by the lazy market days of summer, let’s step back and consider the possible headwinds ahead of us over the next few months.
While we do not expect any major downleg until 2014 when Bernanke is gone and midterm election machinations weigh on the market, a brief respite of 10-15% is expected over the next 2-3 months. The market cannot ride this bull wave forever. In fact, one of our old favorite patterns has perked up again: George Lindsay’s Three Peaks and a Domed House Top (3PDh).
In yesterday’s Blog I highlighted some recent research from Ed Carlson, combining election cycle and Lindsay patterns that projects an end to the 2009 bull market in August. I have plotted out the DJIA’s current potential 3PDh pattern, which if completed could bring DJIA back near 13000 at point 14 – about a 15% drop from the highs and roughly the same level as the 2008 and 2011 highs and the 2012 spring high.
Click for larger graphic…