I’m going to start this post with a definition of a T1 Pattern: A move followed by a sideways range often precedes another move of almost equal magnitude in the same direction as the original move. Generally, when the second move from the sideways range has run its course; a counter move approaching the consolidation zone may be expected. Bear with me on this, you can get a handle on what I’m saying by just looking at the charts that I will be attaching,
Let’s Look at an Example
“Now, if I step way back and take a big look at this entire bull market I began to wonder if maybe the entire bull market is shaping up as a T-1 pattern. And the sideways price action in 2015 and 2016 was a midpoint consolidation in a much larger T-1 pattern with a target sometime in 2018 around 30,000. Notice how much more aggressive the rally has become as we exited that sideways trading range in late 2016 after the presidential election.”
“Like I said, it’s tough to actually call a T-1 pattern in real time when it’s still in progress, but so far I think that’s what is playing out, which means we’ve got about another 800-900 points before the Dow finds a more significant top. But because I’m not absolutely sure we are in a T-1 pattern I’m going to play the rest of this move in the unleveraged funds. If it turns out that we do make it to 25,400-25,600 over the next 2 or 3 weeks then the 2nd half of the T-1 pattern will come into play. Namely, a retest of the midpoint consolidation zone. This is where we would want to buy aggressively again with heavy leverage, as this would be the launching point for the run to 29,000-30,000. At that point we would have confirmation the T-1 pattern is indeed in play, the midpoint consolidation would have been tested, and then the real fireworks would begin.”
“Of course, it’s way too early to have a lot of confidence in Scenario 1 but I got to thinking what if the bigger T1 pattern is in play? Perhaps now that QE is finished we revert back to the normal 4-year cycle in stocks instead of the seven-year cycle we’ve had the last two times. Presumably, it might also shorten a bit to balance out the last two anomalies. So instead of our next multi-year cycle low coming in 2023 maybe it arrives in 2019 instead.”
“Clearly, the vertical explosion we’ve seen since the election isn’t long-term sustainable and I kind of doubt we could keep this up 5 or 6 years into a 7-year cycle. So it makes sense to me that stocks are likely to revert back to their normal 4-year cycle and we get a top sometime next year and then suffer a hard move back down to test the midpoint consolation zone at the next 4 YCL. That would certainly panic central banks and you would have to think they would return to what worked last time and start printing more money.”
So, which scenario do you like? I’m guessing that most of you would opt for Scenario 2, corrections can be scary. At this point in time, the sentiment numbers are not even close to bull market top numbers.
Additionally, market tops do take some time to develop.
Wishing you all a Happy and Prosperous Holiday Season and New Year!