The Dow Report: The Break Down

By Tim W Wood CPA, April 22, 2005

In this week's observation I want to briefly review a few of the Indices that I regularly comment on from time to time and evaluate the technical damage that has been done. To begin with we have the Dow Jones Industrial Average vs. the Dow Jones Transportation Average. In the chart below you can see that both averages have clearly violated their January lows. According to Dow theory the January lows represent the previous Secondary reaction low points. It is the violation of the Secondary reaction low points that serve to confirm the break down. Monitoring this break down is an ongoing process as there are other important developments to be aware of. But for now, the initial confirmation marking what should be the end of the mammoth secondary reaction, which began at the October 2002 low, has occurred.

The next chart below includes the Industrials and the Retail Holders. I have shown the chart of the Retailers in the past. I have found that the Retailers will often lead the Industrials. The Retailers broke down out of a 4 month consolidation period late last month. I said then that the break should have a negative impact on the rest of the market. Since then we have seen both the Industrials and the Transports confirm the weakness that was telegraphed by the Retailers. The Retailers and the Industrials are now in gear.

Confirmation of this break down can also be seen in the Morgan Stanley Consumer Index. After some 4 month consolidation and slight non-confirmation this index broke below its January low back in March. Then, was able to move back up into this trading range in April. However, this advance could not hold and this index has since moved to new lows from its December closing high. This too provides further confirmation of what we are seeing in the Retailers, the Industrials and the Transports as this index is also in gear with those above.

But, that's not all. Next we have a chart of the Dow Jones World Stock Index. This index has also broken below its January Secondary reaction low point. This index is confirming that what we are seeing in all of the charts above is occurring on a global basis.

I have pounded the table throughout this mammoth Secondary reaction that began in 2002. I have explained over and over again that this is not a new bull market according to Dow theory. I have explained that this rally will serve to separate Phase I from Phase II of this great bear market. Most believe that this great secondary reaction has been a new bull market. Nothing could be further from the truth according to Dow theory. The charts are telling us that the downturn into Phase II has likely begun and that this will be a global event. You have been warned, Again!

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Tim W. Wood

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