The Dow Report: The Global Bear
By Tim W Wood CPA, August 13, 2004
I have maintained that according to Dow theory, the rally out of the October 2002 low has been a giant "Secondary Reaction" which will likely serve to separate Phase I from Phase II of this great bear market. The sad thing is that few truly realize or believe that we are actually in a bear market. As you should all know from previous writings, Robert Rhea spoke of the three phases in which both bull and bear markets unfold. When talking about the bear market phases Mr. Rhea stated, "Each of theses phases seems to be divided by a secondary reaction which is often erroneously assumed to be the beginning of a bull market. Such secondary movements seldom prove perplexing to those who understand the Dow theory."
I have said in the past that I believed the ongoing bear market is a global problem and not one that is limited to the U.S. It is because of the technical complexity and magnitude of this secondary reaction combined with the cyclical forces that have lead me to believe that Mr. Greenspan can not save the entire world from the financial destruction that Mr. Bear currently has planned. One could argue that Mr. Greenspan did a good job holding things together as the U.S. markets rallied into their highs in early 2004. As a technician, I would also argue that his efforts have been coincidental. What I mean is that the cyclical forces were set to do exactly as they did even without the helping hand of Mr. Greenspan. This is not to say that his efforts did not help the "recovery." I'm quite sure they did. All I'm suggesting is that as a technician, I believe that Greenspan�s efforts in late 2002 and throughout 2003 were in line with the cyclical forces of the market. Now, these same forces appear to be reversing downward without regard to his continued efforts. In addition to these cyclical forces we also remain under a Dow theory sell signal and we also have a major upside Dow theory non-confirmation hanging over the market. This is where we see which force is greater, that of the Fed or that of the Bear. I personally believe that the technical forces of the markets, in this case the Bear, will ultimately win out over man's intervention every time. I believe that intervention can prolong the agony and will likely serve just to make the problem worse by pumping the bubble even larger.
A Look at Japan's NIKKEI
Below is a chart of the Nikkei. The recent recovery high for this index occurred in April 2004. From that recovery high the Nikkei moved into the May intermediate term low. It's worth noting that each of the intermediate term cycle highs and lows for this entire "recovery" rally has occurred at higher levels than the last one. That is until recently.
Notice that the rally out of the May low failed to move above the April intermediate term cycle top. This is potentially a cyclical bearish failure. The positive news is that the recent short term cycle low has occurred at a higher level than the May intermediate term low. This set this index up to move higher. However, as we look closer it appears that the most recent short term cycle low occurred in late July. If this cyclical phasing is correct this cycle has already topped and has now violated its late July short term low. This is indeed bearish and if correct we should not see a move back above what would be the short term cycle top, which occurred on July 30, 2004.
It's also possible that the short term cycle low occurred in early August. In this case the cycle is still moving up and could have a shot at moving above the July 1, 2004 short term cycle high. This would indeed be a positive development.
At this time there is some uncertainty as to which count is correct. However, at present I tend to side with the first scenario. Should we see a move above the July 30, 2004 high it would serve to invalidate this count and confirm the second one. Failure to move above the July 30, 2004 high followed by a break below the August 9, 2004 low would serve to confirm the first count. This would also carry the most bearish weight for the Nikkei.
A Look at Germany's DAX
The next chart below is of the German DAX. The last intermediate term cycle low in this index occurred in March. The rally out of this intermediate term cycle low also failed to move above its earlier intermediate term cycle top. This set up a failure of intermediate degree. From that failed high the DAX moved down into a slightly higher short term cycle low in May. This presented the DAX with the opportunity to move above the April short term high and thereby turn this picture positive. But, the advance into the July 1, 2004 short term cycle high also failed to move above its previous high. So, this set up a short term cyclical failure within the intermediate term failure. From the July 1, 2004 failed top the DAX moves down and makes another short term low which also occurred above the previous low. This again suggested that the market had a chance to move above the July 1, 2004 short term high. However, the rally out of the late July short term cycle low has also now failed at a much lower level. Additionally, we have now violated this late July short term cycle low as well as all of the previous cycle lows going back to March. I remind you that the March low was a low of intermediate degree that has now been violated. This is bearish action and suggests that we should see more weakness as the DAX probes for its next intermediate term cycle low.
A Look at Hong Kong's HANG SENG
The next chart below is of the Hang Seng. The most recent intermediate term cycle low for this index occurred in May. Just as with the other indexes, each of the intermediate term cycle highs and lows for this recovery has occurred at progressively higher levels on this index as well. That is until the decline into the May intermediate term cycle low which violated the previous intermediate term low. From the May intermediate term cycle low the Hang Seng moved into the June short term cycle top and then declined into the July short term cycle low. This low occurred at a higher level than the May intermediate term low. This was positive and from that low the Hang Seng has managed to test the June short term high. Should the Hang Seng muster up a move above the June high the short term cyclical structure for this index would remain positive. However, failure to see a move above the June short term cycle high would constitute a short term cyclical failure and would open the door for a test of the July short term cycle low. Violation of the July short term cycle low would indicate the current intermediate term cycle advance has concluded and that lower prices should then be expected.
A Look at the Oil Service Index
Below is a chart of the Oil Services Index. I discussed this index last week, but given the attention oil has been receiving lately I wanted to do a follow up. I pointed out last week that the last short term cycle low occurred in late July and that from that low this index rallied into a failed short term cycle top. Thus far, this has proven to be correct. From that failed short term cycle top this index has moved down and violated its previous short term cycle low. This is bearish action and I have to continue to wonder what this index sees. Could it be that it is looking ahead and seeing a top of least intermediate degree for oil? Maybe, maybe not. Such divergences can continue for quite some time. They are not timing tools. They are warnings. Let me make it clear that I'm not suggesting that oil has topped because the cyclical structure of oil is currently positive. What I am suggesting is that this divergence is a warning and until it is corrected we should be on guard for the possibility of a cyclical break down in oil itself. Should we see a cyclical break down in oil it would likely indicate that we have made a top of at least intermediate degree. When/If I see a crack appear in the cyclical/technical structure of oil I will let you know. As of this writing oil remains bullish.
US' Phase II Of Great Bear Market Could Be Global Event
Here in the U.S. the technical picture is currently pretty bleak. According to Dow theory we have only completed the first phase of this great bear market. The rally out of the October 2002 low up to the February 2004 high is the ever so important rally that Robert Rhea warned about, which serves to separate Phase I from Phase II of the bear market. In addition, we remain under a Dow theory sell signal and this rally ended with a Dow theory non-confirmation.
We have also seen very similar "recovery" rallies unfold in the foreign markets as well. Since the Dow theory applies to the Industrials and the Transports, I can’tapply it to the foreign markets. For that reason I must rely on my cycles work for this analysis. If you consider the fact that we are now seeing a cyclical break down in the foreign indexes, which is occurring right as the U.S. markets are also rolling over from this huge upward secondary reaction, and that this rally is likely to prove to separate Phase I from Phase II, it should serve as evidence that we do face a serious economic problem. In this case, I believe we have a worldwide economic problem and Mr. Greenspan cannot save the world. That I can almost guarantee you.
There is opportunity to make money in this environment. That is if you understand the environment. I use a unique approach in my market analysis. I employ the Dow theory, cycles analysis and the methods of other master technicians. The cycles work simply allows for the quantification and segregation of the various moves. The Dow theory work not only provides the Big Picture backdrop, but is also a method for "reading the averages." When these methods are in agreement, it generally pays to listen. I apply my methods to the U.S. stock market, gold, bonds and the dollar in great detail in my newsletter. The only reason I wanted to look at these foreign indexes was to show you that Phase II of this bear market is currently shaping up to be a global event. Please take heed of this warning.
Tim W. Wood
© 2004 Tim Wood