Last week, I said I would show why I believe we are at the top of the cyclical bull market that began in early 2009. Then I remembered a maxim I always followed when teaching: why do the work, when the "students" (my readers, in this case) should do the work instead?

Learning by doing is a lot more effective than just looking at charts. Thus, for the chart below I have a few instructions for you to follow that will help you pinpoint the probable top of this four-year bull market.

The chart is the exchange-traded fund for the Dow Jones Transportation Average (IYT). I use the transports because they rallied strongly last summer when many folks thought the bull market had gone wobbly. Furthermore many companies in the index are on the front line of the new economy: natural gas transportation, alternative engine technology and railroad logistics.


One of a technician's favorite weapons is a trend channel: a line connecting a rising series of lows (in this case) with a parallel line across a series of highs. When the channel breaks, it signals a major change in the market's outlook.

First: draw the bottom trend line. Take the bottom(s) of late June 2009 (at about the 53 level) and connect them with the lows of October 2011 (near the 71 level). Notice I do not use the panic lows of March 2009 as a starting point. Panic bottoms and blow off tops are not reliable long-term trend points.

Now, on your screen or on the piece of paper if you ran off a hardcopy, draw a line parallel to the one you have, thru the July 2011 top of about 101. You now have the channel I am referring to, and if you drew it correctly, the line fits nicely across some past tops and is close to current levels of IYT.

Keep an eye on this channel. If we touch the top trend line later this year or early next, it could be a major intermediate top and lead to a substantial correction. If we break through the bottom of the channel, it may well mean the current cyclical bull market has ended.

Notice I do not pick an exact number for a top: I use the top of the channel. Those who use exact numbers fail to realize that the market's "overvalued" point depends upon time and upon earnings. Furthermore, we are at record highs so there are no resistance levels to guide us.

Next week: The economic, political and foreign policy events that might bring this bull market to an end.