The Dow Report: A Brief Technical Assessment
By Tim W Wood CPA, April 23, 2004
Let's begin with a look the markets from a Dow theory perspective. On February 11, 2004 the Industrials topped out at 10,737.70. Please see the daily chart below. The Transports topped out the month before on January 22, 2004 at 3,080.32. This non-confirmation set the stage for the decline into the March lows. The Transports bottomed on March 22, 2004 at 2,750.80 and the Industrials bottomed on March 24, 2004 at 10,048.20. From this low the current advance began. On April 6, 2004 both indexes made minor highs. The high occurred at 10,570.80 on the Industrials and 2,974.84 on the Transports. The Transports have now bettered their April 6th high. The Industrials are thus far lagging. This has setup a minor non-confirmation. If this minor non-confirmation is corrected it will open the door for new highs. Should we see the non-confirmation corrected, a retest of the March 1, 2004 high at 10,678.10 would be the next resistance level. If this level is violated we could then very well see new highs.
Below is a chart of the Banking index. I have marked the March 24, 2004 low with a horizontal red line. This low corresponds with the low seen in the Industrials and the Transports. Notice that once the short term cycle advance was over price quickly violated the March 24, 2004 low. This is a significant development because it carried price down below the March 24, 2004 low. This is significant because the March 24, 2004 low was a low of intermediate degree. So, given that the advance out of this intermediate term low failed to advance above the March high and then was followed by a decline below the March low is very negative. Based on this chart it appears that the averages could very well have trouble ahead. Given the price structure of this chart today, it would take an advance above the April high or a higher short-term cycle low to turn this setup positive.
The next chart below is a chart of the XAU. We looked at this chart last week and I warned that because of the violation of the March trading cycle low the intermediate term trend of the XAU had turned. This has now occurred and this chart has gone from bad to worse. Notice that since last week the XAU has violated both of its recent intermediate term cycle lows. These lows occurred in early October and late January. We are now due to see a short term bounce here as we are very oversold and the trading cycle low is now due. The rally out of this low could be fairly strong, but I do not expect it to correct the technical damage that was seen here this week. At this time it looks to me as if there is more downside here to come after the coming bounce is over. Should technical healing occur and the picture change, then I will change with the market. Until then, I'm going to watch this one from the sidelines.
Below is a chart of the Computer Tech index. Notice that this index has also suffered technical damage in that the previous intermediate term low was violated. This violation has thus far been followed by a failed rally.
The metals complex and tech has been among the hardest hit. Probably the hardest hit has been the REIT's. The Industrials have held up rather well in this sea of weakness. The Transports were leading the way down but now appear the strongest. The next few weeks are going to be very important for the market. Will the weakness of these sectors spread in to the Industrials or is there a Dow theory mending process taking place?
For more information on my approaches to the market please visit www.cyclesman.com or contact me at 318-342-9038.
Tim W. Wood
© 2004 Tim Wood