The Dow Report: Another Look at Market Fuel
By Tim W Wood CPA, October 31, 2003
The Dow Jones Industrial Average has continued to hold above 9,504.64 for most of October. The Dow Jones Transportation Average is also back above 2,862.85. These levels are representative of the 50% principle as described by George Schaefer. As long as the markets hold above these levels, this principle suggests that we could see a run back up to the all time highs. So, as I have been saying for a while now, if we only look at price all looks well. The only negative that I see on this chart is the fact the we now have a small divergence. This divergence comes from the fact that the DJTA has closed above the October 14, 2003 closing high, while the DJTA has not.
Now if we peal back the covers on the market and look at some of the internal elements we start to see an entirely different picture. I have talked about this before and I want to follow up on it because I feel that it so important in helping you to understand the true weakness of this rally. The chart below is of the DJIA and the indicator at the top is a 34-day moving average of advancing volume. I termed this market fuel a few weeks back. My point in sharing this chart with you is to show you one of the market elements that I routinely monitor. This element continues to be a negative indication for the market. This is true because in order for a healthy rally to continue it must have fuel and that fuel is advancing volume. I have warned that unless this condition is resolved the market will run out of gas. It is my opinion that we have actually begun to coast as we have moved into the most highs. Notice on the charts below that the divergence between the June price highs and the advancing volume has not been resolved. This remains a negative for the market.
A few weeks ago I also mentioned bear market fuel. I now want to show you what I meant and to do this we have to again look a little deeper under the surface. Below is a chart of the DJIA. The indicator at the top of the chart is a 34-day moving average of declining volume. If we go back to January we can see that as the market declined from the January highs the declining volume increased. Then as the market advanced out of the March low, declining volume decreased. From the June top, again decline volume decreased as we moved into the August low. From the August low the market moved up into the September highs and again the declining volume decreased. This has all been a normal relationship between price and declining volume. If you think about it, as the market advances, in a healthy state, you want to declining volume decrease and as it moves into a low you naturally expect to see the declining volume increase. However, since the September 30, 2003 low we have seen declining volume rise. This rise has occurred while the market has been advancing. This is a change in the character of the market. The fact that we are seeing this increase in declining volume is an indication that selling has picking up as we have moved up form the September 30, 2003 lows. This is not a normal healthy relationship. If this condition is not corrected it will provide the bear with the needed fuel to pull this technically weak market down.
It's Still Brewing
The bearish pattern that I have been monitoring is currently still on track. The many technical indicators follow as well as my cycles works also confirms that something big is in deed brewing. For these reasons I believe that we are now relatively close to seeing a wonderful opportunity on the short side of this market materialize. As investors we must remain focused and patient. My strategy is to take positions in the Rydex bear funds. That being in either the Tempest, Ursa, or Venture 100 funds. It is through my newsletter that I am working to help my subscribers gain a more thorough understanding of the market conditions that we now face. I also will be providing my subscribers with signals to enter into the bear funds once the setup materializes. For more information on my newsletter please visit www.cyclesman.com or call me at 318-342-9038.
Chart courtesy: www.stockcharts.com
Tim W. Wood
© 2003 Tim Wood