V.6:11 (416-421): Patterns that detect stock market reversals by Bill Ohama and Melanie Bowman

Patterns that detect stock market reversals by Bill Ohama and Melanie Bowman

Full-speed ahead on its maiden voyage and presumably protected against disaster, the Titanic sank in the chilly North Atlantic Ocean, shattered by an undetected iceberg. In the stock market, another kind of iceberg awaits at every major market top and has carried unsuspecting traders to similar ruin at least a half dozen times in the past 22 years.

When I noticed this phenomenon in the fall of 1965, after studying the records of the Dow Jones Industrial Average (DJIA) May 1965 major top and June 1965 low, I coined it the Titanic Syndrome. A close friend, a graduate of Caltech, told me at the time that the odds against the Titanic Syndrome repeating itself again and again were astronomical. Since then, it has proven itself to be a consistently accurate warning of every all-time high.

The Titanic Syndrome is deceptively simple. Two statistics, printed daily in the financial press, tell you whether the iceberg will wreak disaster. You know you are on board the Titanic when the DJIA hits an all-time high for the year or rallies 400 points and—within seven trading days, before or after this DJIA high—the number of yearly lows on the New York Stock Exchange Composite Index (NYSE) exceeds the number of yearly highs. (The NYSE defines yearly as the past 52 weeks.)

This excess of NYSE lows is the iceberg that presents grave danger to any trader who blindly believes the new DJIA high, based on 30 industrial stocks, will lead to higher prices throughout the market. After the Titanic Syndrome has appeared, the DJIA may rally slightly above its top, but the other averages, especially the Dow Jones Utility Average (DJUA), do not make new highs. It is all but certain these averages and indices are peaking and ready to drop.