The Dow Report: The Bear Market Rally Continues
By Tim W Wood CPA, November 19, 2004
There are a few points that I want to discuss and clarify about the current rally. The first point being that we are still operating within the context of a bear market, according to Dow theory. The "Master Sell" signal was given in September 1999 and confirmed in March 2000. Everything that has happened since that time is secondary. We also know that according to Dow theory, bear markets unfold in 3 phases and that each of these phases is separated by important rallies. As an example of this I have included a chart of the 1942 to 1966 Bull market and the 1966 to 1974 Bear market that followed.
These rallies not only separate the phases of the bear market, but they also serve to confuse those who do not understand Dow's theory. This keeps the bullish hopes alive and then the bear takes the market down in the next phase, pulling all of the unsuspecting masses with it. The bear's job is to confuse and to do the most damage that he can. These rallies are all part of the confusion. The damage will follow. Please don't think it won't. To do so is exactly what the bear wants.
On March 10, 2004 a SECONDARY Dow theory sell signal was given within the context of the higher level "Master" sell signal from 1999. This SECONDARY signal has now been nullified. With Dow theory, price movement is segregated into "Primary Swings" and "Secondary Reactions." Primary swings are movements that occur in the same direction as the Primary Trend. Secondary Reactions are counter trend moves. The 1999 Dow theory "Master" sell signal was confirmed in March 2000. This set the direction of the Primary Trend DOWN. The giant rally out of the October 2002 low has been a large scale Secondary Reaction. Then, the March 10, 2004 Secondary Sell signal indicated that this larger secondary reaction was over and the secondary trend had also started to move back down in alignment with the Primary Trend. This in turn meant that the rallies out of the March, May and August 2004 lows were Secondary reactions. On November 5, 2004 the DJIA closed above the September Secondary Reaction high point. This served to nullify the March 10, 2004 Secondary Sell signal confirmation. This also served to produce a Secondary Dow theory buy signal. Many believe that this Dow theory "buy" signal will require a move above the February high. This is in error. The signal was triggered with the move above the last Secondary high point. But, also understand that this buy signal is subordinate to the 1999 Master sell signal.
So, we now have to look at this market from a different angle. Since March 2004 we have had to monitor the bear's performance in relation to the March 10th sell signal. In doing so we were watching for signs of failure on behalf of the bear. In other words, the bear had to continue proving himself. Finally, the bear failed at this level. Now our job is to monitor the bull's performance and watch for signs of failure on the bull's behalf. It is now time for the bull to continue to prove himself, but remember, this bullishness is still within the context of the higher level Dow theory Master sell signal and Primary Bear market.
Tim W. Wood
© 2004 Tim Wood