A Brief Dow Theory Update
As we moved into the election we heard the talk that one candidate would be better for the market than the other. I explained at the time that it did not matter which candidate won and that it was the underlying and ongoing technical setup that mattered. In looking at the charts, the price action that occurred going into and following the election was in fact status quo in that the election obviously had no impact on the market. What does matter are the ongoing technical developments.
From a Dow theory perspective, the non-confirmation that began in February remains intact as does the bearish primary trend change that was first triggered in August 2011 and that was reconfirmed in May 2012. I realize that the market has continued to hold up in the wake of these developments. However, in spite of this fact, the averages have not been able to mend these technical developments and until this occurs, the simple fact is that they still exist and as a consequence, so does their threat. I have included a chart of the Dow Jones Industrials and the Transports below.
Now, I'm sure that you may be thinking that if the market has held up in spite of the Dow theory primary bearish trend change and the ongoing non-confirmation, then what value is Dow theory? Contrary to popular belief, Dow theory was never meant to be a "timing tool." In fact, William Peter Hamilton, who worked for Mr. Dow and carried his methods forward for 20 plus years after Dow's death, equated the Dow theory to a barometer. In fact, Hamilton termed it "The Stock Market Barometer" and explained that it was meant to forecast business and economic conditions. Of course, the stock market ebbs and flows with those business and economic conditions. However, business and economic conditions can be pretty bad before it is reflected in stock prices. Therefore, there can be a lag between the Dow theory, business and economic conditions and stock prices. The same is also true at bottoms in that the Dow theory will often give an all clear signal well ahead of an obvious economic recovery. So, when we understand this, Dow theory is in fact a very valuable tool in that it looks ahead, sort of like looking at a radar. Just because the sun is shining it doesn't mean that the storm front shown on the radar doesn't exist or isn't coming.
My approach with Dow theory is that it gives us the big picture. Then, within the context of that big picture back drop, I use the cyclical movements and their associated statical meanings to work both ends to the middle. In other words, while the big picture develops, the trend quantification techniques that cycles offer gives us the tools to follow the market as the big picture unfolds and evolves. As was the case with the 2000 and 2007 tops, the Dow theory sent its warning first. It was then the cyclical structure and the associated statistical implication of that structure which was used to identify the setup in association with those tops.
The same thing is currently true. I have said ever since the rally out of the 2009 low began that according to the longer-term Dow theory phasing it is a counter-trend rally that should ultimately prove to separate phase I from phase II of a much longer-term secular bear market. But, within that bigger picture back drop I have also said this rally would continue until the cyclical and statistical based DNA Markers appeared. This has not changed. The big picture Dow theory non-confirmation and ongoing primary bearish trend change continues to warn and unless/until this is mended, the warning stands. At present, we are seeing other developments as well. But, I also maintain that until our structural DNA Markers that have been seen at every major top since 1896 are in place, the setup and slow erosion will continue. All the while, just as I said as the 2009 low was made, the longer the rally lasts, the more convincing it becomes and therefore, the more dangerous it becomes. The bottom line is this: If my structural DNA Marker appears before the ongoing Dow theory primary bearish trend change and non-confirmations are corrected, then the bearish die will be cast and there will be nothing the powers that be can do to stop the inevitable as the decline into the phase II low should then be at hand. On the other hand, if these negative Dow theory developments should be mended before my structural DNA Marker appears, then at that time we will have an all clear signal. The key is the appearance of the structural DNA Marker that has been seen at every major top since 1896. The specifics on Dow theory, the applicable levels, the DNA Markers, my cycles work and the associated statistical data are all covered in my monthly research letters as those developments occur.
I have begun doing free audio market commentary that is available at www.cyclesman.net so please begin joining me there. The December issue of Cycles News & Views will be out soon and in it I give detailed analysis of the current situation from a cyclical and a Dow theory perspective as well as a look at the currently applicable statistics and the DNA Markers. A subscription includes access to the monthly issues of Cycles News & Views, which included Dow theory, a very detailed statistical based analysis covering not only the stock market, but the dollar, bonds, gold, silver, oil and gasoline along with short-term updates 3 times a week.