|The article, The Four-Month Rule, discusses the principle that General Motors (GM) has historically acted as a warning at market tops. The rule is outlined in Martin Pring's book, Technical Analysis Explained:|
If in a bull market GM fails to make a new high within four calendar months of its previous peak (although some analysts prefer a 19- to 21-week rule), the bullish trend of the market has reversed or is just about to do so. . . Similarly, during a market decline, if GM fails to make a new low within four months of its previous trough, a reversal in the downtrend of the market has already taken place or is just about to occur.
|Pring says that as GM has a habit of lagging in market recoveries - its real value is as a market top warning indicator when it demonstrates negative divergence with the Dow. He also prefers using weekly or monthly charts to increase the probability of confirmation. |
|Figure 1 – Daily chart of General Motors with the Dow and relative strength of GM versus the Dow (middle window) showing negative divergence that began in December 03. Also note the declining volume (lowest window). The longer-term trendline on the Dow and GM are also shown as well as a potential parabolic blow-off or buying climax on GM.|
|Graphic provided by: MetaStock.|
|While it is too early to say conclusively, we will have to wait for confirmation on the weekly or monthly charts as to whether GM is giving a signal, a market top of some sort is indicated for those who believe GM leads reversals. Whether it is a major reversal or minor correction remains to be seen. The fact that GM did not participate in either the Santa Claus rally or January effect is somewhat of a concern.|
|Look for GM to continue to lead the Dow lower on increasing volume with commensurate high volume distribution days for further confirmation that a longer-term correction has begun. Certainly something that bears watching (pun intended).|
Blackman, Matt  The Four-Month Rule, Working Money, October 21
Pring, Martin . Technical Analysis Explained, McGraw-Hill.
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