The Dow Report: The Moment of Truth Has Not Been Resolved
By Tim W Wood CPA, March 26, 2004
This week has been a trade off with last week. We did indeed move below last week's lows, but have since recovered. The DJIA remains below its break down point, which occurred at 10,427 from a Dow theory perspective. The DJTA remains below both the 50% level as well as the November intermediate cycle low. The DJIA has yet to confirm this same degree of weakness. In order to do so, we would have to see a break below the November lows which occurred at 9,619.
A short-term low was reached on March 24, 2004 at 10,048.20 on the DJIA and on March 22, 2004 at 2,750.80 on the DJTA. We now have to see what develops from these lows. If the advance out of these lows fade, then we can expect further weakness to develop. Any decline below 10,048.20 is expected to carry the market down into an even lower low with the next cycle low.
The dollar has remained in neutral ground. The intermediate term low that was formed back in February has thus far held. This is positive for the dollar. On March 18, 2004 the dollar made a short term low. The fact that this low occurred above the February low is also positive. The negative side of this picture is that since the March 18, 2004 low the dollar has not really made much progress to the upside. We have seen one strong day and that's it. As a result, the oscillators are burning daylight to the upside and this is negative. This could be a warning that the rally is failing. So, the dollar remains range bound and the technical picture remains mixed. It is my view that the dollar is consolidating and building energy, so to speak, for a break. Should that break be to the upside, it would likely be one of the great surprises of the year. Should this break come to the downside, it will set the dollar up for another leg down into the next intermediate term low later this year. Unfortunately, all we can do is wait this stalemate out.
Gold and the HUI
The top chart below is of the HUI. The lower chart is of gold. You can see in the HUI that a tug of war has been taking place. Gold has been up, but because of the fact that stocks in general have been under pressure, the gold stocks have not been able to make much of an advance. The HUI continues to work in a triangular pattern with both higher lows and lower highs. We are now seeing price work to the point where a break one way or the other should occur. If this symmetric pattern proves to be relevant, an upside breakout should be followed by a move to approximately 280. A downside break would take the HUI to the 170 range.
It's interesting to see that gold is in a pattern that is pretty much the opposite of the HUI. Notice that gold has recently been making lower lows and higher highs. This is, in turn, forming what, at this point, appears to be broadening pattern. Without getting into all of the detail of this pattern, John Murphy describes this simply as an emotional pattern.
Understand that these technical patterns can change and/or morph into other patterns or they can simply be negated. All we can do is look at the picture as it appears at the moment and change with that picture if need be. However, my real point here is that the dollar, gold and gold stocks are all in some form of a consolidation pattern and it is my view that the direction of the dollar is key. If one wants, speculative positions could be taken while prices remain inside of these consolidation patterns. However, if you guess wrong it could prove painful because of the implications described above. The more conservative approach might be to watch and act in accordance with the break.
Tim W. Wood
© 2004 Tim Wood