The Dow Report: Sectors and Cycles
By Tim W Wood CPA, November 5, 2004
In today's observation I want to examine a few sectors to see just how well they are participating in the current market rally. When I look at these sectors I have to look at them from a cyclical perspective. So, please don't let your eyes glaze over on me here. By using cycles it allows us to segregate the moves into moves of the same degree. Then, we see if the particular sector has moved above or below the previous high or low point of the same degree. In an effort to keep this relatively straight forward I will look primarily at the intermediate term cycle highs and lows. We can then gauge the relative strength or weakness based on the price movements above or below these intermediate term price points.
The first index that I want to look at below is the Housing Index. I have marked the recent intermediate term cycle lows with an "IT." I want to begin with the May 2004 cycle low. This low constituted both an intermediate term low as well as a low of the next larger degree. This was an important low. From that low this index rallied into the recent October high at 412.96. By doing so, this index was able to push marginally above the previous intermediate term cycle high point, which occurred in March at 407.93. Failing to have moved above the March high would have constituted a failure at this level. The fact that this index was able to push above this level kept the cyclical structure of this sector positive. Also, notice that the October intermediate term cycle low occurred above the May intermediate term low. This all serves to keep the intermediate term cyclical structure and trend positive. From the October intermediate term cycle low the Housing Index is once again moving up and the test is now on. The question is, "Will this intermediate term cycle expend its energy moving up or moving down?" If this index can push above the October high at 412.96 it will mean that this index has a chance to run much higher as the new intermediate term cycle has just begun. A break above 412.96 would be bullish and as insane as the housing market already is, this index will then be telling us that it could become even more insane. But, failure of this intermediate term cycle to move above 412.96 would constitute a failure, which would indeed be bearish. Also, for this sector to remain bullish it must hold above the October low at 367.60. For now, I have to be bullish on this sector and especially so if 412.96 can be penetrated.
I have also plotted my Cycle Turn Indicator in the upper window of the chart below. My Trend Indicator is plotted in the price window. Note that both of these indicators are now positive. I have not included a weekly chart here, but the Cycle Turn Indicator has turned up on a weekly basis. This serves to confirm the October intermediate term cycle low. The weekly Trend Indicator has not yet crossed over, but is very close. If it turns up in the next week or so it too will serve to further confirm higher prices.
The next index I want to look at is the Banking Index. The chart below is a weekly chart and I have again marked each of the most recent intermediate term lows. I have also included my Cycle Turn Indicator in the upper window and my Trend Indicator in the lower window.
First, look at the structure of the intermediate term cycle. To do so let's again begin with the May intermediate term cycle low. From that low this index rallied into the September high marking the high for the last intermediate term cycle top. From this top the Banking Index declined into the October intermediate term cycle low. From the October low a new intermediate term advance was born. That advance has now moved above the previous September high. This is bullish and clears the way for price to push much higher as the current intermediate term advance unfolds.
Now let's look at the indicators. The Cycle Turn Indicator shown in the upper window has turned up, thereby confirming the October intermediate term cycle low. Moreover, the Trend Indicator has also turned up. These are both positive developments which serve to confirm the move above the September high. This sector is currently bullish and will remain so as long as price holds above the October low.
The next chart below is a weekly chart of the Broker Dealer Index. Recent intermediate term cycle lows have again been marked with an "IT." Both the weekly Cycle Turn Indicator and the Trend Indicator have turned up indicating higher prices likely lie ahead in this index as well. But, in this case the current advance has yet to move above the previous Intermediate term high. I will add that these indicators have also turned positive for this index on the monthly charts. All indications are that higher prices lie ahead for this index as well.
Next we have the dollar. This is obviously not a sector, but the events that transpired this week in the dollar are extremely important and for that reason I wanted to talk about it.
The February 2004 low was not only an intermediate term cycle low, but also a 4-year cycle low in the dollar. Historically, the dollar has held up above that low for at least the duration of an annual cycle. This has been true 100% of the time following each of the previous 4-year cycle lows. What we saw this week was a FIRST. With the dollar moving below the February 4-year cycle low prior to completion of the annual cycle, the dollar has now moved into uncharted waters. Confirming this move is the weekly Cycle Turn Indicator and the weekly Trend Indicator. I'll add that these indicators are all now negative on a monthly and quarterly basis as well. There are some intermediate and short term cycle lows coming due in the dollar. However, because of the break below the February 2004 low any moves up from here in the dollar should be a counter trend bounce against the larger declining 4-year cycle.
Tim W. Wood
© 2004 Tim Wood