The Dow Report: A Brief Technical Look at the Retail Holders Index
By Tim W Wood CPA, July 23, 2004
"Retail HOLDRS are Depositary Receipts issued by the Retail HOLDRS Trust which represent your undivided beneficial ownership in the common stock of a group of specified companies that are involved in the retailing industry. The Bank of New York is the trustee. Retail HOLDRS may be acquired, held or transferred in a round-lot amount of 100 Retail HOLDRS or round-lot multiples. Retail HOLDRS are separate from the underlying deposited common stocks that are represented by the Retail HOLDRS. The Retail HOLDRS Trust is not a registered investment company under the Investment Company Act of 1940."
|Costco||CVS||Federated Dept Stores|
|Limited Brands||Lowes||May Dept Stores|
|Radioshack||Safeway||Sears Roebuck & Co.|
Below is a daily chart of the Retail Holders index going back to February 2003. This index actually made its 4�year cycle bottom on February 13, 2003 at 63.22. I'm sure that you are all aware that most popular market averages bottomed in March 2003. Therefore, this index bottomed first as it appeared to be looking ahead and seeing the bottom in the broader market averages.
Cycles are measured from low to low. Cycles can contract, expand or even skip a beat now and then, but on average they will tend to occur within a window of time that constitutes a norm for that cycle. For example, there is an intermediate term cycle in the stock market that typically varies between 16 and 25 weeks. Some 70% of these cycles will fall within this window. This cycle also has an average duration of 22 weeks and is typically known as the 20-week cycle. As a cycles technician, I use oscillators and shorter-term cycles to help identify these cycle lows as the timing window for the cycle is approached.
In the chart above I have marked each of the intermediate term, or 22-week cycle lows, with a "w." Notice that ever since the 4-year cycle low back in February 2003 each of these intermediate term cycles have made higher highs and higher lows. This is obviously bullish action. One of the tricks with cycle analysis is being able to identify the various cycle tops and bottoms of the various cycles. In other words, when a higher high or higher low is penetrated we want to know the degree of the cycle. Was this a short term, an intermediate term (in this case a 22-week cycle) or was it a longer term cycle high or low that was penetrated? In this respect cycle analysis allows us to look at the markets in different dimensions and each dimension has a different level of importance.
There is also a longer term cycle in most stock indexes that averages approximately one year. At present time, it appears that this cycle last bottomed on May 12, 2004 at 86.72. This low also coincides with the most recent 22-week low. I have marked this cycle low with a "w" and put a red box around it in order to differentiate it for the other cycle lows. Just for clarity, the May 12, 2004 22-week cycle low currently appears to have not only been an intermediate term cycle low, but also a cycle low of the next larger degree. Therefore, this low carries more weight than the lows of smaller cyclical degree.
Now, I want to draw your attention to the fact that the rally out of the May 12, 2004 low has thus far failed to carry price above the previous 22-week cycle high, which occurred in early March. This is a serious cyclical warning. Additionally, from what now appears to be a failed attempt to move above the previous 22-week cycle high price has declined, as of July 22, 2004, down to make an intra-day low of 86.74. This is only 0.02 points from breaking below the ever so important May low.
From a cyclical perspective, a move below the May low would mean that we have very likely seen the top for both the current 22-week cycle as well as the longer term annual cycle. In cyclical terms this would mean that both of these cycles have set themselves up with left translation, which is a very bearish occurrence. Left translation simply means that the cycle topped out to the left of its center point. This is typically seen in down trends and lower lows generally follow this pattern.
Above is a weekly chart of the Retail Holders index. Notice that from the March 2002 high down into the 4-year cycle low each of the weekly cycles were left translated and they each moved below their previous 22-week cycle low. We are currently set up with a very similar cyclical picture to that of April and May of 2002. Should we see a violation of the May 12, 2004 low at 86.72 it would again confirm that a major top has likely been seen. This would then in turn open the possibility for a similar decline to follow. This is not to say that such a decline is certain to follow, but this is to say that such a decline could not occur without first seeing the technical setup that would be present with a violation of 86.72.
So, based on the price action seen in this chart since March, it does appear that the consumer is pulling back on spending and that this is beginning to have an impact on the retailers. I will dare say that if we see a violation of 86.72 the consumer will continue to pull back and that the retailers will have only just begun to slow.
I hope that this brief cyclical analysis was helpful in showing you how cycles can be used to help analyze the markets. One inherent thing with cycles is that all fundamental and technical elements are factored into the cycle. If the news and the technical picture is positive, then the cyclical picture will also be positive and vise versa. The job of the cycles analyst is simply to interpret the meaning of the cyclical picture based on the various cycles. This was only a brief example of the concept. But, this very same concept can be applied to cycles of all degrees and to all markets on a larger scale.
[For a review on Cycles theory, see my May 7th Observation.]
Tim W. Wood
© 2004 Tim Wood