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The rally
out of the March low lives on. Cyclically, this is a higher degree move that
is, thus far, still intact. From a Dow theory perspective, there was a
short-term non-confirmation in place the week of November 13th, but this last
week that was corrected and the uptrend was reconfirmed. However, the
longer-term data has not changed. From a longer-term perspective, this rally
still must be viewed as a counter-trend affair or a cyclical bull within an
ongoing secular bear market.
The danger
of this rally is that the longer it lasts the more believable it becomes that
a long-term bottom has been made. One thing I've learned in this business is
that people have short memories and even shorter attention spans. What I'm
trying to say is that it is easy to look at the rally and lose site of the
bigger picture. It is for this reason that I operate in a three dimensional
world. At present, we are seeing a short-term correction, which cyclically is
no surprise. Intermediate-term, the advance is still intact. Anytime a
short-term correction occurs, it can evolve into a short-term sell signal or
even an intermediate-term sell signal. It is for this reason that I monitor
the short-term structure, the statistics and the intermediate-term Cycle Turn
Indicator for guidance at this level. Longer-term, the Dow theory phasing and
valuation still suggest that this is likely the rally separating Phase I from
Phase II of the ongoing secular bear market.
The best
historical example of this I can point to is the 1966 to 1974 period. In the
event you are not familiar with the events of that bear market, I have
included a chart below. The great bull market that began in 1942 ran
throughout the 1950's and into the 1966 secular bull market top. There were,
no doubt, serious corrections along the way, particularly the 1957 and 1962
corrections. However, E. George Schaefer, the leading Dow theorist of that
era, used the Dow theory to guide him. It was because he understood that the
bull and bear market periods had grown in duration along with his
understanding of the phasing aspects of Dow theory that he was able to
successfully navigate the markets of his time. In a quote from Mr. Schaefer
he wrote, ".... the only reason why I am the only Dow Theorist
publishing a weekly service who remained bullish at the lows in 1949, in
1951, in 1953, in 1957, in 1960 and again in 1962 is because my studies told
me that the primary trend of the market remained upwards, regardless of the
news and depth of the reactions encountered."
Moving
back to the first chart below, the first leg down on the bear market is noted
in blue. From that low in the fall of 1966 the rally separating Phase I from
Phase II of the bear market began. This rally is marked in green and in this
case carried the Industrials up 26 months into the December 1968 bear market
rally top. From that peak, the Phase II decline began and new lows were seen
into the Phase II low in May 1970. This decline is noted in yellow. Then,
came the rally separating Phase II from Phase III of the ongoing secular bear
market. This advance is also marked in green and this time around it lasted
32 months and even carried the market to a new high. But, in the bigger
picture, the bear market was not over and ultimately new lows were once again
seen as the market moved down in conjunction with the Phase III decline.
My
longer-term work tells me that we are dealing with the exact opposite
situation as E. George Schaefer dealt with. Where he was seeing wild swings
to the downside that scared people out of the secular bull market, we are
seeing wild swings to the upside that is serving to convince people that the
secular bear market is over and that a new secular bull market has begun.
Again,
the best example of this bull market top and the rally we are seeing is the
1966 to 1974 period. I believe that the ongoing rally is synonymous with the
1966 to 1968 bear market rally, which should ultimately prove to separate
Phase I from Phase II of the ongoing secular bear market. I have analyzed the
Dow Jones Industrial Average since its inception in 1896 and I have
discovered a common thread that has occurred at major market tops, in both
bull and bear markets. Based on that discovery, I know what this top will
ultimately look like because I have the statistical parameters to identify
it. That data is not something that I can make public, as this is data that
is only available in my monthly research letters. However, I can tell you
that nothing has developed to change my perspective about the bigger picture.
To clarify a point , please understand that I'm not saying this rally will
last as long as the bear market rallies during the 1966 to 1974 period did. It
could last longer, or it could end much sooner. But, I am confident that in
having identified the common thread of all major market tops, that I will be
able to identify the top as it develops. My market research also continues to
tell me that this is a bear market rally. I also know that the longer this
rally last, the more convincing it will become to more and more people. As a
result, the longer this rally last, the more dangerous and further reaching
the Phase II decline is likely to be. I have included the current chart of
the Industrials and the Transports below.
I have
begun doing free Friday market commentary that is available at www.cyclesman.info/Articles.htm so
please begin joining me there. The specifics on Dow theory, my statistics,
model expectations, and timing are available through a subscription to Cycles
News & Views and the short-term updates. I have gone back to the
inception of the Dow Jones Industrial Average in 1896 and identified the
common traits associated with all major market tops. Thus, I know with
a high degree of probability what this bear market rally top will look like
and how to identify it. These details are covered in the monthly research
letters as it unfolds. I also provide important turn point analysis using the
unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold,
silver, oil, gasoline, the XAU and more. A subscription includes access to
the monthly issues of Cycles News & Views covering the Dow theory, and
very detailed statistical based analysis plus updates 3 times a week.
Tim Wood
Editor, Cyclesman.com
Also
by Tim Wood
Copyright
© 2004-2008 by Tim W. Wood. All rights reserved.
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