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So far, the
high for the year occurred on May 2nd at 12,876 on the Industrials and on
July 7th at 5,627.85 on the Transports. In turn, this left an upside
non-confirmation in place and on August 4th both the Industrials and the
Transports closed below their previous secondary low points. This was the
first time since the March 2009 low that this has occurred. In doing so the
primary trend turned bearish in accordance with Dow theory. Also in
accordance with Dow theory, once a primary trend change is established, that
primary trend is considered to be intact until it is authoritatively
reversed. In this case, such a reversal requires a move above the previous
secondary high points, which has not occurred. Therefore, according to
orthodox Dow theory, the bearish primary trend change remains intact. The
current Dow theory chart is included below.
 
However, in
spite of this orthodox bearish Dow theory trend change, history also shows
that not all Dow theory trend changes are created equally. Point being, while
all major down turns in the market have been accompanied by a Dow theory
trend change, not all trend changes have been accompanied by a major
downturn. So, to say that just because we have seen a Dow theory trend change
and that a major turn has occurred is a bit misleading. Therefore, in my
studies I have looked a
ALL Dow theory trend changes at both tops and bottoms going back to 1896. In
this case we are concerned about potential tops so the context of this
article will be with tops in mind. Anyway, what I have found is that while no
Dow theory trend change should be taken lightly, including the current one,
there are distinguishing differences.
My studies
have also shown me that as the secular bull and bear market periods grew, we
began to see Dow theory trend changes occur within the context of the
longer-term trend. This was first seen in 1946. This also occurred in 1948,
1951, 1953, 1956, 1960, 1962 and 1965. Sure, these were important tops in the
market, but none of them marked THE top of the secular bull market. The
leading Dow theorist of that time was E. George Schaefer and he recognized
that the secular bull market had stretched in duration. As a result, Mr.
Schaefer explained that he used his other technical studies, outside of
traditional Dow theory, to filter these Dow theory trend changes.
I want to add
that during the secular bull market period that ran between 1974 and 2007, there were also a number of traditional Dow theory
trend changes. Such trend changes were seen in 1977, 1981, 1984, 1987, 1990, 1998 and as it turns out, even the trend change that
occurred at the 2000 top proved to have occurred within the context of the
longer-term secular bull market, which appears to have finally peaked in
2007. Again, these were all important tops. But, none of them prior to the
2007 top were THE top. Thus, history clearly shows that Dow theory trend
changes are not always ominous nor do they always set the longer-term trend
for the market.
With this all
said, my long-term view has definitely not changed
as I continue to believe that the rally out of the March 2009 low is a bear
market rally that will ultimately separate Phase I from Phase II of a much
longer-term secular bear market. I also continue to believe that the Phase II
decline will be much more devastating than the Phase I decline seen between
October 2007 and March 2009. However, as with Mr. Schaefer, based on my other
technical studies, I have found that every major top since 1896 has been
accompanied by unique DNA markers. It is because these DNA markers were
missing in conjunction with the recent Dow theory trend change that I have to
question this trend change. I also believe that this Dow theory trend change
will ultimately be part of a much more meaningful setup and that once the DNA
Markers do appear, all financial hell will break loose. The details of these DNA Markers and their development is
covered in my monthly research letters. Until such time as they appear, the
overall technical data suggests that a much larger trap for both the bull and
bear alike is likely being set.
Tim Wood
Editor, Cyclesman.com
Copyright © 2004-2008 by Tim W. Wood. All rights reserved.
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