Pattern recognition is the primary task of Technical Analysis. Determining and distinguishing between patterning and order on the one hand and noise and chaos on the other is the essence of good TA.
Analysis shows that markets have created prolific (though throughly unrecognized) Head and Shoulders topping patterns during the February to May 2012 time frame as well as during the period 2009/2010 to 2012 (also throughly invisible to most market participants).
In addition, there is a extremely high degree of correlation, a sort of fractal echo, between the 2011 top and crash and the current market setup.
The daily chart of NYSE illustrates both of these patternings very well:
This chart illustrates the nearly identical point-to-point fractal echo of the 2012 market with the 2011 top and crash. Just follow the numbers:
The consolidation over the last week may be a 2012 analogue for the August 3, 2011 rally:
There is also a fantastic degree of coherence between the 1987 period from the top through the day before Black Monday and the exact same period of time leading up to Monday, May 21, 2012:
Although we haven't had a "Black Monday", you might be able to substitute another day of the week soon. The day after Memorial Day might be a good candidate.
Although I make great use of Elliott Wave Analysis as part of a comprehensive Technical Analysis methodology, I don't use time cyclicality much. However, I do use Fibonacci relationships. Fibonacci retracement and extension clusters, taken together with other chart levels, can be extremely helpful analytical tools. Fibonacci applied to time shows some significant correlations:
The 1987 top (red) Fibonacci time zone correlates exactly with the 2000 and 2012 tops. The 1987 bottom zone (black) correlates exactly with the 1990 recession bear market low, the 2002 bottom and the 2011 bottom. The 2007 top (green) correlates with the 2007 bottom and the 2012 top.
Looking at the weekly chart, we also find a high degree of time cyclicality:
The 2007 high (green), correlates with the 2008 wave bottom, the 2010 wave high and the 2011 wave high. The 2009 price low (red) correlates with the 2010 wave low and the 2011 wave low. The 2010 wave high (black) correlates with 2011 wave top and the 2012 top.
A daily chart of INDU appears to show some shorter term Fibonacci time relationships as well:
This very high degree of apparent cyclicality would seem to fit very closely with the apparent cohesive patterning we are seeing in the 2011-2012 time frame. If indeed there is a rhythmic patterning relationship between the 1987, 2011 and 2012 tops, the probabilities of an "out of left field" crash leading to a hard bottom and subsequent resumption of the very long term bull trend appear to be high.
Taken together with the very large body of technical evidence that we are currently in a high risk, high potential crash window presented in my recent blog postings and editions of the BullBear Market Report, I think there is more than sufficient cause for investors to at the very least hedge their exposure to risk.
I turned bearish at the February 2012 technical top and began shorting aggressively at the April and May highs:
There's an elephant in the room and no one wants to acknowledge it.
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