The Dow Report: Another Look at the 2006 Summer Rally
By Tim W Wood CPA, July 21, 2006
As the market rallied into the May highs, the cyclical phasing warned that a significant top was likely in the making. I warned subscribers of this top and that the cyclical phasing suggested an intermediate-term low was due in early to mid-June, and that from that low the next intermediate-term cycle advance would begin along with the "Summer Rally." On June 14th that low occurred, and from that low the market was up and running just as the cyclical phasing had suggested. In the June 30th Market Observation I wrote here that the Summer Rally had begun. But, I also stated that I personally had my doubts about the Industrial's ability to better the May high and based on current data, I still have my doubts as the odds are now against the market.
The advance into the early July top was also expected based on the short-term cyclical phasing as was the decline into the July 18th low, which served to retest the June 14th low. The bounce out of that short-term low is currently still intact and once again the question is: How far will it go? My short answer continues to be that this advance should be a failure because the current cyclical data is not supportive of any advance from here having legs enough to better the May high. Yes, of course this could change. But, until evidence to the contrary develops I can only go with the evidence at hand today.
Now I want to talk briefly about Dow theory. First let me make it perfectly clear that cycles are not a part of Dow theory. Cycle analysis is simply a method of identifying trends of like degree, i.e., short, intermediate and long-term, and quantifying those trends in order to develop probabilities. Those probabilities are then used to develop specific market expectations. Now having said that, let me add here that from a Dow theory perspective the Secondary Trend does in fact remain positive. The Phase I decline of the bear market is marked in blue on the chart below. All the while, the Secondary Phase II advance is marked in green and as of today, that advance remains intact.
Next, I have plotted a long-term daily chart along with my intermediate-term advancing issues line in the upper window and the corresponding declining issues line in the middle window. Note that the advance out of the June intermediate-term cycle low has turned the advancers up, but thus far only in a negligible way. Also note that the decliners have remained at lofty levels. I believe that we are likely to see the summer rally end with yet another lower high being made by this advancing issues line along with a higher low by the decliners.
Below is a chart showing an intermediate-term advance/decline differential. Here we have long-term divergences. We also find that this measure of internal strength is at levels in which most intermediate-term cycle lows have occurred. So, the key here is whether or not this indicator can confirm any advance that develops from these levels.
My point here is that the Secondary Trend, according to Dow theory, is in fact, still positive. But when we look at the cyclical phasings combined with the internals, I have my doubts about the longevity of any advance from these levels.
I said in January that the first half of the year would see the gain and that the second half would see the pain. Thus far, my 2006 forecast has been right on the mark and I now think the stage is being set for the pain.
I have guided subscribers through each crook and turn with my unique Cycle Turn Indicator. This indicator is key at guiding us as this setup continues to materialize. If you are interested in a statistical and technical based source that also utilizes Dow theory and provides turn points for gold, the dollar, bonds and the stock market, then Cycles News & Views may be for you. Please see www.cyclesman.com.
Tim W. Wood
© 2006 Tim Wood