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In addition to the Titanic Syndrome, a major tenet of my stock market analysis is what I call the 3-D concept, a chart pattern that occurs at both tops and bottoms, major and minor, in the stock and commodity markets for weekly, monthly or yearly time periods. I developed the 3-D concept in 1969 while researching commodity price movements. Again, it is such a deceptively simple tool that brokers, bankers, insurers and chartists have cast doubt on its validity. Yet, with the 3-D concept I can get in or out of the stock market within a week of its ultimate top or bottom because the 3-D concept detects the reversal as it is actually occurring.

The 3-D concept is based on the time-tested theory of divergence established in the late 1800s by Charles Dow and popularized by the Dow Theory. Divergence is simply the failure of one price pattern to mimic other price patterns in the same or related markets (Figure 2). Thus, the 3-D concept adds the third dimension of divergence to the normal two-dimensional, price-time chart analysis for stocks as well as commodities.

In a nutshell, the 3-D concept signals that a market top or bottom is forming when the price movements of any two popular stock market averages/indices or any two spot/futures contracts related to these averages/indices do not make new highs or new lows at roughly the same time. That is, they diverge. For example, a 3-D top forms when one or more averages/ indices fail to make new highs as other averages/indices make new highs. This divergence is warning you that the market may be dropping soon and it's time to sell issues in the group that did not make a new high (i.e., sell utility stocks if the DJUA did not make a new high) and place stops above the previous high.

Similarly, 3-D bases are created when one or more averages/indices fail to make new lows while other averages/ indices make new lows. This signals that the market should be rising and it's time to buy issues represented by the average that did not make the new low and place stops below the previous low. I put the greatest emphasis on 3-D signals from the DJIA, DJUA and the Value Line Index . Value Line gives me a broad market comparison to the Dow averages. The utilities average has a very close relationship to bonds and interest rates, and the failure of utilities to match the rise of industrials indicates a shortage of long-term financing and a weakness in long-term bonds. This, in turn, indicates a shortage of capital for stock purchases and an imminent decline in stock prices. At almost every market top, the utilities average has peaked before the industrials.

I find that divergences between any two cash or futures contracts in the debt market, such as T-bonds vs. T-bills, are equally significant because they are related to the amount of investment capital available to the stock market. This very same divergence occurred from October 15, 1987, when T-bill futures made their lows, until October 19, when T-bond futures made their lows.

In addition, I monitor the Dow Jones Transportation Average, Standard & Poor's 500 Index, the New York Stock Exchange Composite Index,, Major Market Index, a number of other widely published averages and indices plus all related futures. Divergences among any two of these would constitute a 3-D top or base.