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As we enter the second half of 2011, let us take a look at where we are on a long-term technical basis and try to ascertain what may lie down the road. To do so, we need to work downward from the very long-term studies.

Much of this has been published before, but it bears repetition. Way back in 1984, I wrote about the long-term cycles in a piece called "The Super Bull Scenario." Those thoughts and projections still seem to be holding true today. On the first chart, below, we are seeing the Dow Industrials going back over 40 years

Dow Industrials, 1970-present
Source: Metastock

We see here that we are in a big sideways move that began in 2000. It is very similar to the consolidation between 1966 and 1984. That is, in fact, similar to prior cycles going back a century at least, in which we have consolidations lasting about 16 years and separated by advancing periods -- major bull markets -- also lasting about 16 years. The implication, since this consolidation is now 11 years old, is that it is going to go on longer, so we should not be looking for a move above the old highs. The lows are also likely to hold, but we are close to the highs and far from the lows, so we are likely to see a downward move in the months to come.

Look now at the two periods enclosed in blue ellipses. The similarity is striking. In both cases, about halfway through the consolidation, a lower low was made, leading to a strong up move with three up legs. That led to a sideways topping action and then a big new decline. If history were to repeat, or at least rhyme, we would be looking at a drop ahead.

But that is still a very long-term look. Let's move in closer and see where we are within that broad pattern. On the chart below, we are seeing the last year of Dow Industrials trading, depicted on an Equivolume basis.

Dow Industrials, 52 Weeks
Source: Metastock

Here we are seeing the very regular cyclicality. It looks as though the Dow is making a low just about every three months. That suggests the next cycle low will show up in July. Then we could start a new cycle, again giving us a high in six weeks or so and a low in three months, plus or minus.

The other feature of this chart is the apparent breaking of the uptrend line going back to August of last year. That tells us of a major change and hints that we should not be looking for a new high on the next up cycle. In fact, we are likely making a big head and shoulders and are now at the neckline. That would suggest we are going to be, by the end of the year, lower than we are now, but with a tradable up-cycle in between.
At time of publication, Arms had no positions in the stocks mentioned.

Richard Arms is a renowned stock market technician who invented the Arms Index (often referred to as the TRIN), which has become a mainstay of market analysis, appearing in The Wall Street Journal and Barron's. Arms also developed the widely used technical method Equivolume Charting. Since 1996, he has been publishing the Arms Advisory newsletter for money managers and financial institutions. He also has authored Stop and Make Money: How to Profit in the Stock Market Using Volume and Stop Orders, Profits in Volume, Volume Cycles in the Stock Market, Trading Without Fear and The Arms Index, and has been honored with the Market Technicians' Award for Lifetime Contribution to Technical Analysis. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Richard appreciates your feedback; click here to send him an email.

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