The Dow Report: The CRB, China and the Trend Indictor
By Tim W Wood CPA, January 28, 2005
A Look Over the Horizon
Last week I introduced my Trend Indicator and pointed out that it is currently warning of a decline for China. To save you from going back to last week's wrap up to view the charts, I have included a weekly chart of the Hang Seng below along with my Trend Indicator.
The Trend Indicator is designed to help you establish or see the direction of the market. When it is used on a daily chart it helps to determine the short term trend. When used on the weekly charts it determines the intermediate term trend. It is the crossover of the moving average that triggers the trend change. However, I have used this indicator on virtually all markets and I have found that there is another very important aspect of the Trend Indicator. That being, divergence and especially divergences at long term cycle tops and bottoms.
Notice the divergence between the Trend Indicator and price as the Hang Seng moved down into its 4-year cycle low in 2003. These divergences are marked in red. For those of you who may not be familiar with divergences, this simply means two points were not confirmed by both price and the indicator. For example, at the 2003 price low you can see that the lower price was not confirmed by the Trend Indicator because it made a higher low in 2003 while price made a lower low. This was a positive divergence. Then, in 2004 the Hang Seng moved to a new "recovery" high, but this time around the Trend Indicator made a lower high and thereby formed a negative divergence. It is this divergence combined with the fact that the Trend Indicator has turned down and crossed over that is warning of trouble for China and the Hang Seng.
We also know that China is responsible for much of the new consumption in commodities. So, if China's stock market is headed for trouble it is logical that their consumption of commodities would in turn slow. Furthermore, if a slow down in commodities is in the wind then the Trend Indicator should also be warning of this slow down here as well.
Below is a weekly chart of the CRB. Just as the stock market has a 4-year cycle, the CRB has a 3-year long term cycle. I have recently stated publicly that I believed the 3-year cycle in the CRB had either topped or was in the process of topping. But, does the Trend Indicator support this cyclical based opinion?
If you look at the weekly CRB chart above you will see that the 3-year cycle top in 2000 was marked by a negative divergence of the Trend Indicator. The 2002 3-year cycle low in the CRB was marked with positive divergence. Currently, we sit at or very near the 3-year cycle top in the CRB and again we are seeing negative divergence. In addition to the negative divergence, the Trend Indicator has crossed over signaling a trend change just like we see in the Hang Seng.
So, based on the fact that the 3-year cycle top is due in the CRB, which occurred with negative divergence, combined with the fact that we have a crossover of the Trend Indicator is indeed telling us commodities are topping. This also confirms the technical picture for China. Both charts are telling us that a slowdown in China and commodities is at hand.
As I explained last week, we could see an additional push up in the Hang Seng and perhaps even in the CRB. But, unless these divergences are corrected, this study will still imply both a slow down for China and lower commodity prices.
Over the last couple of weeks I have mentioned that I have greatly expanded my newsletter service to include not only the monthly newsletter, but also web based comments during the week. I also provide charts on the stock market, the dollar, bonds, gold, silver, oil, the HUI and others that include my proprietary Cycle Turn Indicator and Trend Indicators. If you are interested in a service that is a detailed technical based newsletter with a focus on the Dow theory, cycles analysis and the works of master technician George Lindsay, along with web based comments and these indicators, please visit www.cyclesman.com for details and Contact Information.
Tim W. Wood
© 2005 Tim Wood