The Dow Report: Equities
By Tim W Wood CPA, January 23, 2004
The price action this week is suggesting that we could now be near a very important juncture in the stock market. Notice on the weekly DJIA chart below that we have broken out of the rising wedge pattern in what is called a throw over. The question is: Does this upside breakout truly represent a throw over or has this rising wedge pattern been violated? At this time there is honestly no way to know. We must see price break down here if it is true throw over. If this is going to happen the price action of this week is now suggesting that we could be at or near the moment of truth. Notice that even given the parabolic rise through the top of this wedge that advancing volume was relatively weak. Also notice that since the parabolic rise began the market has closed higher each week. This phenomena changed this week. We now have the first down-week and this could be warning of a reversal. If we see more weakness next week we will then have the first indication that the upside breakout of the rising wedge could have truly been a throw over. I would not be long the market at this juncture.
The last confirmed 4-year cycle in the dollar bottomed in October 1998 at 90.74. See the monthly dollar chart below.
But, what about the current 4-year low? If the last 4-year cycle low occurred in October 1998 then the next 4-year cycle low should have occurred in late 2002. The normal pattern that is seen at these 4-year lows has not occurred. For example, notice that historically after each 4-year cycle low we see the seasonal cycle that follows hold above the 4-year cycle low. This can be seen on the monthly dollar chart. The 4-year cycle lows are marked at the bottom of the chart with a "4" inside of a small box. Now note how each seasonal cycle that followed in 1974, 1979, 1984, 1988, 1993, 1996 and 1999 held above their respective 4-year cycle lows. Also note that the last 4-year cycle low in the dollar occurred in late 1998. Thus, the ideal timing for the next low was late 2002. We have not seen the normal pattern with a higher seasonal cycle low in 2003. This in turn is suggesting that the 4-year cycle could have extended. Should this be the case we should be moving into the 4-year cycle low relatively soon. Or, it is suggesting that this pattern was broken. If this pattern was broken and the 4-year cycle did indeed occur in 2002, the dollar could be in grave trouble as this 4-year cycle would have now already topped and the next low is not due until 2006.
I want to dig into these possibilities a little more here as this is extremely important. Historically, the 4-year cycle in the dollar has averaged 52 months. The longest 4-year cycle was 63 months. We are now in the 63rd month from the last confirmed 4-year cycle low in 1998. Because of the fact that the typical pattern seen at 4-year lows is absent, let's assume for the moment that the current 4-year cycle low has not occurred and that it still lies ahead. This would mean that we should see a bottom for the dollar this month. If not, we will then be so far outside of the historical norm that we will perhaps have to assume that the pattern of seeing the seasonal low holding above the 4-year cycle low has been broken. If this proves to be the case the situation with the dollar will be extremely bearish. So, the bottom line here is that we had better see the dollar make the 4-year cycle low as it declines into the coming seasonal cycle low. Otherwise, we could see a disastrous decline in the dollar. My other point that I want to make clear here is that the dollar could very well be forming the 4-year cycle low now and if so we can expect to see a firming of the dollar that should hold for at least the duration of one seasonal cycle. The dollar is now at a very important juncture. The next few weeks and certainly the next month or so should tell the tale for the dollar.
Tim W. Wood
© 2004 Tim Wood