The Three Peaks and a Domed House patterns may occur on either a major or a minor scale. When it is of a major scope, a typical formation begins at a bear market low. The patterns which start in the latter part of a major bull market do not normally last as long as those that begin at a bear market low, and they are often less symmetrical.
— Georg Lindsay, Developer of the Three Peaks and a Domed House
The market could be tracing out a Three Peaks and a Domed House pattern. Besides George Lindsay, several analysts have done a lot of work on this pattern – namely Carl "Boxman" Futia, Tim "Cycleman" Wood and Jerry "32" Favors. They all know more about the pattern than I do but I’ll put in my two cents, anyway.
Carl Futia was nice enough to lend me his schematic of the Three Peaks and a Domed House pattern. Here’s what it’s supposed to look like.
The current pattern is of a minor variety which started during the April market low. The pattern has reached or is about to reach it’s zenith. The first interpretation suggests one more sharp rally before the market begins to roll over. I have used a Zig Zag chart with a 1% swing setting to make the pattern a bit easier to see.
The second interpretation shows that the market has already reached it’s peak and is now headed down to point 26.
I actually like this interpretation better given yesterday’s action. In addition, if you look at the broad market Wilshire, it suggests that point 23 has been reached, as well.
There’s nothing magical about the Three Peaks pattern. It’s open to interpretation just like any other pattern. For instance, Carl Futia believes the pattern won’t top out until April. And I’ve found that it works about as well as any other stock market pattern, with about a 60% probability of doing what it’s supposed to. Early in this bull market, a Three Peaks pattern was forming perfectly but it never really came to fruition with a thundering crash at the end. Nevertheless, the pattern is worth keeping an eye on, especially given the relatively high sentiment readings and breadth divergences that are usually indicative of a top forming.