The Dow Report: Global Trouble Looms
By Tim W Wood CPA, June 4, 2004
A few weeks ago I talked about the broadening top formation that is unfolding in the Dow Jones World Stock Index. It is now time to follow up on this chart as well as the progress of the pattern. When I first mentioned this index and this formation I warned that it meant we not only have issues with the US markets, but that we could potentially be on the brink of seeing the next leg of the Global bear market. This pattern has thus far unfolded pretty much by the book. My friend Tony Cherniawski has also recently written several detailed articles about this pattern and its formation in this index and others. But, I want to examine this pattern from a cyclical perspective.
In the orthodox broadening top you generally see a series of three higher peaks and two lower lows. This is then followed by a breaking of the lower trend line, as was seen in May, a move back up into the pattern followed by a hard decline once this rally back into the pattern has completed. In this particular incident, the two higher peaks normally seen in an orthodox pattern, have not occurred. It would appear that this index is so weak that the higher peaks have failed. The break into the May low served to break the lower trend line and the rally out of the May low has served as the bounce back rally into the pattern. Based on the traditional interpretation of this pattern we are now at the inflection point.
Now let's look at the cyclical aspect of this pattern. As you all know, most every major index formed an intermediate term low in March. From those lows, the markets rallied into a failed intermediate term top. When I say failed I mean that the previous high was not taken out. This failed top occurred in early April. This failure marked the top of the intermediate term advance out of the March low. Worse yet, the March intermediate term low was then violated with the move into the May low. From a cyclical perspective the violation of the March low suggests that there is more to go on the downside and that we should now be on our way down to the next intermediate term low. Therefore, the rally out of the May low should prove to have been a counter trend rally that is now complete or very near complete. So, from a cyclical perspective this index is also at its inflection point. Understand that this technical picture can change and if it does I will let you know. Also, understand that in technical analysis the analyst can only base his opinion on the evidence at hand at a given moment in time. At this particular moment in time I can tell you that this index looks as if it has trouble dead ahead. This in turn means that not only has the rally out of the March 2003 low been a bear market rally for the US stock indexes, but also for the major world indexes. Just today I heard someone on one of the major financial channels talking about what great condition the foreign markets were in. I have to wonder if these guys are truly that stupid or if they think they can just lie about a situation and make it go away. Honestly, I think they know that these markets are at an inflection point and that they are trying everything they can to "talk the market up." Well, as of this writing and based on the looks of this pattern the talking may not work much longer. No, it looks to me like the great bear market that most people think ended in 2003 is about to reemerge, and if so it could get very nasty in the not too distant future.
We have been operating under a Dow theory sell signal since March. The decline into the May low carried the Industrials below the intermediate term low that was made in March. Because of the Dow theory sell signal this was expected and was obviously a very bearish development for the Industrials. Since the March low, the Transports have been stronger. As you can see, the Transports held above their March lows. As of this writing both averages have remained below their April highs. We are now due to see the short term cycle move down. Violation of the May lows by the Industrials and of the March lows by the Transports will reconfirm the Dow theory sell signal.
The chart below is a daily chart of the Dow Jones Auto Manufacture's Index. The indicator at the top of the chart is a 5 3 3 stochastic. Notice here that the May low held above the March low. From a cyclical perspective this index is still bullish and will remain bullish as long as the May low holds. If the May low should be violated it would indicate that the intermediate term trend has turned down. Notice that the 5 3 3 stochastic indicator has turned down as we have moved into the short term top. We should now see a test of the May low. If violated, the bear can claim another victim. If not, it will definitely be a win for the bull in light of the technical weakness seen in other indexes.
The chart below is of the HUI. Back in March I stated that a downside break of the triangle that I have drawn in blue would give us a price target of approximately 170. On May 10, 2004 the HUI registered a low tick of 163.81. Therefore, the objective given by the measured move for the downside break of the triangle has been achieved. However, I presently do not feel that we have seen all of the downside that we are likely to see for this index. On May 27th this index made its short term cycle top. We are now moving into the short term cycle low. If the coming short term cycle low can hold above the May low then the golden bull will be given a chance. Should this occur, the next step will be to see the May 27th high bettered. If not we will then have another failed rally on our hands and more downside should then be immanent. As we move down into this short term cycle low to retest the May low a violation of the May low will indicate that the next leg down has likely begun.
If you are looking for an in depth technical market letter that is forward looking and that teaches, I urge you to consider Cycles News & Views as your source. The analysis covered in my newsletter is extremely detailed. This detail provides the reader with the technical evidence needed to make informed decisions that are not based on hope and hype but rather black and white technical facts. I will include a free copy of my Gold Report with any subscription. If you have an interest in the stock market or the metals market I urge you to get this information before it’s too late. Do not wait until after the market makes its next move to get informed. To contact me, please visit my website at www.cyclesman.com or call 318-342-9038.
Tim W. Wood
© 2004 Tim Wood