The Dow Report: The Moment of Truth
By Tim W Wood CPA, March 19, 2004
As I explained in last week's Observation, the markets took a pretty hard technical blow for the week ending on March 12, 2004. This week the markets have basically just treaded water. This is expected after an initial break. Also, we had a trading cycle low that was due and the break from last week carried the market down into this low pretty much right on time. So, the timing was right for a low and it was also expected after the initial break down. The question now is, will the down-trend continue or do we have a bottom? Unfortunately, there is no way to know the answer to this question for sure, but we do have some technical clues. Let's look at one or two of them now.
First, notice on the chart below that the Industrials broke below the upward trend line which began last March. This is obviously negative. Also, notice that the January low was broken. This too is very negative. However, the market has now halted its decline at about 10,100. If the technical damage from last week is going to be repaired any time soon, we need to see a move back above the January low break down point at about 10,400. Should this occur, I would say that a technical healing process has begun and I would then look for a move back to the lower side of the March '03 to March '04 trend line. Any move back above this trend line would definitely be considered bullish price action.
The flip side of this coin is that if the market fails to penetrate the 10,400 level before further weakness develops then we should expect to see the recent low at approximately 10,092 challenged and likely violated. Such a break would serve to reconfirm the currently weak technical structure of the market and more downside can then be expected. Above 10,400 and a healing process begins. Below 10,092 and certainly a break below 10,000 will be negative but could prove to be very negative.
Next, I want to look at the Transports. The Transports have thus far been dealt the hardest blow. The November 20-week cycle low was violated, we had a non-confirmation with the Industrials, the March '03 to December '03 trend line was broken, the previous short term low (February low) was broken, we have violated the 50% level on the downside and we are now rallying out of the recent lows in a retest of the 50% level. The test is now at hand with Transports as well. The first sign of renewed strength will be to see a rally back above the 50% level at 2,862.85. Any break below the recent low at 2,771.04 will be negative and further weakness should be expected on any such break.
The moment of truth is also now at hand for the Dollar. In fact, I would go so far as to say that the Dollar is at a CRITICAL juncture. Let me explain. The February low, a cycle low of intermediate degree. This is why I became bullish on the Dollar as we were moving into that low. We have now seen the first short term cycle advance out of this intermediate term low and we are now moving toward the short term cycle low. It is the move into this short term cycle low that is of critical importance to the Dollar. Here's why. If we should see the February intermediate term low violated as we move into this short term low, we should then expect to see the Dollar continue to the next intermediate term low. Such a decline could easily carry the Dollar index into the 70's. Knowing that the February is a low of intermediate degree is of extreme importance because violation of that low would in all likelihood, prove to be extremely bearish for the Dollar. This would, in turn, surely prove to be very, very bullish for Gold, that is, from a Dollar perspective.
Now, let's look at the other side of this coin. If the decline into the coming short term low holds above the February low, it would serve as confirmation for what could be an even more important low in the Dollar. Should we see the February low hold, we can expect to see a move back up in the Dollar and a retest of the March 3, 2004 high. Just as the violation of the previous cycle low would be bearish, any violation of the March 3, 2004 high, after seeing a higher short term low, would be very, very bullish.
The reason that the price action over the next few weeks in the Dollar is so very important, is that we are dealing with confirmation of intermediate to long-term degree and at this point it could literally go either way.
Tim W. Wood
© 2004 Tim Wood