Financial Sense Online Market Observation with Tim W. Wood 12/09/2005

The Santa Claus rally began out of the October intermediate term lows and many of the indexes have formed non-confirmations with this latest advance. Those familiar with Dow theory know that it is non-confirmations between the Industrials and the Transports that are among the basic principles of Dow theory and no other averages are considered. The Primary Dow theory non-confirmation extending back to 1999, as marked in red on the chart below, still exists today. The Secondary Trend, which turned up in July, remains bullish. However, the Secondary non-confirmation, as noted in blue below, also remains intact. Wherefore, at this time, we have two non-confirmations, at two different levels, still in place today. According to Robert Rhea, when the averages are not in agreement, they are shouting "be careful."

Outside of Dow theory, there are other averages that are also important to watch. Below is a chart of the Industrials vs. the Dow Jones Top Ten. Note that when the Top Ten failed to confirm the Industrial�s March 2005 high, it resulted in the downturn into the April lows. Now, we are once again seeing the Top Ten failing to confirm the Industrial's recent advance. This non-confirmation is marked in red and indeed poses a threat to the overall market.

Confirmations and non-confirmations between the Industrials and the Retailers is also important to watch. With us now in the Christmas shopping season, I have been reporting on this index and will continue to do so throughout the remainder of this year. As reported in previous reports and as shown in the chart below, non-confirmations between these indexes are also very important. Thus far, this shopping season has not been sufficient enough for the Retailers to better their summer highs. As a result, we still currently have an intermediate term non-confirmation in place between the Industrials and the Retailers. In the past such non-confirmations have resulted in declines of at least intermediate degree.

So, yes, the Santa Claus rally may have begun early this year, but these non-confirmations serve as a subtle hint that the advance out of the Halloween lows may just turn out to be a trick or treat affair rather than a gift from Santa.

My December newsletter has been released. In it I give updated statistical projections based on the advance out of the October intermediate term lows. Cycles News & Views provides very detailed market analysis, time and price targets and both short and intermediate term market turns based on the proprietary Cycle Turn Indicator. If this indicator turns down at these levels, we will know that this rally is a Halloween rally and not the Santa rally.

The opinions of the contributors to Financial Sense^® do not necessarily reflect those of Financial Sense, its staff, or its parent company.