The Dow Report: The Good, The Not So Good and The Not So Bad
By Tim W Wood CPA, September 29, 2006
The good news for this past week is that the Dow Jones Industrial Average bettered its May high. In turn, this changed some of the statistics surrounding the 4-year cycle that I shared with you last week. The reason this changed is because with the advance above the May high, we no longer have a failed annual cycle. This leaves this particular aspect surrounding the current set up of the 4-year cycle more positive. Therefore, the market expectations, based on this specific statistical quantification, have changed. As a result, the expectation for the decline into the 4-year cycle has now been lessened. The other good news is that my intermediate-term Cycle Turn Indicator turned up in association with the July low in the Industrials and remains positive today.
The not so good news is that while everyone seems to be focused on the fact that the Industrials bettered their May high and on an intra-day basis bettered the all time close, there is still an important Dow theory non-confirmation in place. Below is a daily chart of the Industrials verses the Transports. This complex non-confirmation began as the averages dropped from their July 3, 2006 highs. That decline carried the Transports below their June low, which marked the previous secondary low point, while the Industrials were able to hold above that level. When the Transports violated their previous secondary low point it put them in a bearish mode. However, the Industrials have not confirmed this bearish move and have held above their June low. This violation is noted in blue on the chart below. From the June/July low, the Industrials have managed to move higher. The Transports bottomed in August and have since failed to move back above their July 3rd high. As a result, this created a second non-confirmation that is illustrated in red. Now, with the Industrials bettering their May high while the Transports have not, this has created a third non-confirmation, which is illustrated in green. The bottom line here is that we have an important non-confirmation and most people seem to be overlooking its importance.
There are also other important non-confirmations at play. One such non-confirmation can be seen on the chart below. The Industrials are plotted in the upper window and the NDX is plotted in the lower window.
In the next chart below we have the Industrials verses the Russell 2000. Here too, the Russell has not confirmed the price action of the Industrials. Obviously the non-confirmations with the Russell and the NDX are not a part of Dow theory, but they are nonetheless telling us that this advance is not broad based. Now, let me make this point clear; non-confirmations are not sell signals. These non-confirmations are telling us that the participation in this advance is selective, which in turn is a warning, not a sell signal.
The next non-confirmation I want to look at is even broader based. In the chart below we have the Industrials in the upper window and the Wilshire 5000 in the lower window. Here too, we find that the much broader measure of the Wilshire is not confirming the Industrials. This is just not good action and serves as a warning that something is wrong with this advance.
Now for the bad news. Bettering the May high lessened the statistical expectations for the decline into the 4-year cycle low, but it did not change the fact that the 4-year cycle low is still ahead. Based on the data surrounding the 4-year cycle I maintain that the 4-year cycle low is yet to come. The data tells me that the trap this time around is that most people are erroneously falling for the idea that the 4-year cycle low came back in the summer. As I reported here last week, there is no sound evidence in my opinion to support that notion. I have told subscribers all along that I did not look for the 4-year cycle low to occur in the fall. That has not changed. As I see it, this is another trap that most people are falling into as everyone has been conditioned to look for the low in September/October. As I reported here last week, my cyclical phasing has not called for the 4-year cycle low in this window. I do look for what will be perceived as a false low coming, but that will not be THE low. No, the 4-year cycle is stretching and throwing major curve balls this time around and it seems that most people are taking the bait.
I can also tell you that bettering the May high has changed the implications for the current setup surrounding the 4-year cycle top. But, the key here is the phasing of the short and intermediate-term cycles, my Trend Indictor and more importantly the Cycle Turn Indicator. Once an intermediate-term sell signal occurs, then and only then will conditions be right for a decline into the 4-year cycle low to begin. Please understand that I cannot make that signal public, but I can tell you that it is still yet to come.
I will be covering the statistical implications, timing and projections that are now applicable as to the current setup surrounding the 4-year cycle in the October issue of Cycles News & Views. With a subscription you will also have access to the short-term update covering not only the stock market, but gold, the dollar, bonds, updates on the Cycle Turn Indicator, Trend Indicator and more. If you are interested in a statistical/technical based service that offers key turn points and statistical analysis, then Cycles News & Views is your source. Please visit www.cyclesman.com.
Tim W. Wood
© 2006 Tim Wood