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According to
orthodox Dow theory, once a primary trend change is set into motion by a
joint close above a previous secondary high point or below the previous
secondary low point, which ever the case may be,
that trend change must be considered to be in force until it is
"authoritatively reversed" by an opposing joint close above or
below the previous secondary high or low point. As the market declined in
August 2011 both averages moved below their previous secondary lows points
and in doing so a primary bearish trend change occurred. The current Dow
theory chart can be found below. It is because both averages have not jointly
bettered their previous secondary high points since the advance out of the
October 2011 secondary low was made that a primary bullish trend change never
occurred. Yes, I realize that many erroneously viewed the move above the
October 2011 highs as a primary bullish trend change. This was incorrect as
that high did not qualify as a secondary high point. The advantage I have
with my statistical based trend quantification work is that it allows us to
identify secondary high and low points more precisely because rather than
guess whether a secondary high or low has occurred, I have statistics to
guide me.
Anyway, going
back to the advance out of the October 2011 low, both averages stretched up
into their last joint high, which occurred in February, at which time the
Transports peaked. From this joint high, the Transports moved down into their
March secondary low point. However, the Industrials continued higher finding
their corresponding secondary high point on April 2nd and from there the
Industrials moved down into their corresponding secondary low point, which occurred
on April 10th. As a result of the continued advance by the Industrials into
their April high and the lagging Transports, a Dow theory upside
non-confirmation was born. With the Transports making their secondary low
point ahead of the Industrials, the averages were not in perfect sync.
Nonetheless, the important thing is the price action that followed these
secondary low points. As the Transports advanced out of their February low,
they peaked with their March 19th close. Yet, as the Industrials advanced out
of their corresponding April secondary low they were able to move above their
April 2nd secondary high point with their most recent secondary high
occurring on May 2nd. Because the Transports were not able to follow suit,
the non-confirmation that began in February continued to grow. Then, with the
move in May below the March/April secondary low points, the existing primary
bearish trend change that occurred in August 2011 was reconfirmed.
Given that
orthodox Dow theory is centered around the movement of the averages above and
below previous secondary high and low points, it is the non-confirmation that
has occurred since February that is key. However, it's probably also worth
noting that while the Industrials were able to better their 2011 highs, the
Transports were not. Therefore, we can make the argument that we also have a
higher degree non-confirmation in place as well. In light of these
non-confirmations I would like to share a few quotes with you from our Dow
theory founding fathers.
William Peter
Hamilton - "The movement of both the railroad and industrial stock
averages should always be considered together. The movement of one price
average must be confirmed by the other before reliable inferences may be
drawn. Conclusions based upon the movement of one average, unconfirmed by the
other, are almost certain to prove misleading."
William Peter
Hamilton - "Dow's theory stipulates for a confirmation of one average by
the other. This constantly occurs at the inception of a primary movement, but
is anything but consistently present when the market turns for a secondary
swing."
William Peter
Hamilton - "When one breaks through an old low level without the other,
or when one establishes a new high for the short swing, unsupported, the
inference is almost invariably deceptive."
William Peter
Hamilton - "Indeed it may be said that a new high or a new low by one of
the averages unconfirmed by the other has been invariably deceptive. New high
or low points for both have preceded every major movement since the averages
were established."
William Peter
Hamilton - "The two averages may vary in strength, but they will not
vary materially in direction especially in a major movement. Throughout all
the years in which both averages have been kept, this rule has proved
entirely dependable. It is not only true in the major swings of the market,
but it is approximately true of the secondary actions and rallies. It would
not be true of the daily fluctuations, and it might be utterly misleading so
far as individual stocks are concerned."
Robert Rhea -
"The most useful part of the Dow theory, and the part that must never be
forgotten for even a day, is the fact that no price movement is worthy of
consideration unless the movement is confirmed by both averages."
Robert Rhea -
"The Dow theory deals exclusively with the movement of the railroad and
industrial stock averages, and any other method would not be Dow's theory as
expounded by Hamilton."
Robert Rhea -
"A wise man lets the market alone when the averages disagree."
Robert Rhea -
"When the averages disagree they are shouting 'be careful.'"
I wrote here
last August, when the bearish primary trend change occurred, that not all
trend changes are created equally. Point being, last August when the primary
bearish trend change occurred, I reported then that the market was moving
into a secondary low point and that once that low was made the market should
move above the May 2011 high. I was able to make this call because of my
statistical based research and the associated DNA Markers. Therefore, this
statistical based work not only gives me a way to more accurately identify
secondary high and low points, it also gives us a method to
"filter" primary trend changes. This also goes for
non-confirmations as well. The key at this point is the technical setup and
our statistical based DNA Markers. This is an ongoing development that is
covered in my research letters and short-term updates at Cycle News &
Views. As was the case at the 2000 top and the 2007 top, in spite of the efforts
by the Fed, once the proper technical setup is in place, the secular bear
market will resume in association with the decline into the Phase II low.
Tim Wood
Editor, Cyclesman.com
Copyright © 2004-2008 by Tim W. Wood. All rights reserved.
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