In late December and early January as the market was performing its levitation act to lure as many people into the market as it could, I had a number of phone calls from people who had "missed the rally" and were calling seriously questioning my analysis. I had been telling subscribers that the price action in December and January was an ending move of the current intermediate-term cycle and not a beginning move with a new cycle. Cyclically and statistically, there was a clustering of cycles due to peak and that is what has happened. Yet, the short-term price action that was appearing late in the cycle did its job perfectly by sucking every last participant it could into the market before it cracked and in the first three down days of this decline some ten weeks of advance vanished. In doing so, those late arrivals to the party were once again left holding the bag. This in and of itself is a cycle that I see over and over again.
Back in February 2009 I warned that there was a clustering of cycle lows coming due, yes, this is in print, and I said then that the longer this rally lasted, the more dangerous it would become. Reason being, people have short memories, they are greedy and the longer the rally lasts the more convincing it becomes. Well, I can tell you now that the Bear has a few more luring tricks up his sleeve. My cycles work tells me that there will be a rebound rally on both a short and an intermediate degree ahead. The short-term rebound will serve to convince a few more that the decline is over and again they will reenter and just when all the sheep are pulled back in, the Bear will make another sneak attack. This will in turn give us a bit more of a wash out and then once the market begins to move back up with the intermediate degree bounce, Kudlow, Cramer and the gang will be screaming that we have now seen a healthy and needed correction and that we are once again back on the road to prosperity. But, the cycles work suggests otherwise and again, that intermediate-term rebound will serve to suck every last drop of cash it can back into the market. Then, depending on how the next rally of intermediate degree sets up that will likely set the stage for the Bear to return with full vengeance.
Understanding the proper degree of the cyclical movements and the implications of how they unfold will be key. 2010 should prove to be a transitional year for many markets. By understanding and remaining focused on the cyclical lay of the land and the underlying statistics one can be prepared for the hazards that lie ahead. I see cyclical events ahead that will put the great inflationary/deflationary debate to bed. The CRB is approaching a cyclically important juncture in 2010 as is the dollar and gold, not to mention the equity markets. The timing of these cyclical events is also key and from a cyclical perspective, 2010 will be a very important year.
From a Dow theory perspective we now have a short-term non-confirmation in place. Reason being, the closing high for the Transports occurred on January 11th, while the closing high for the Industrials occurred on January 19th. The current Dow theory chart can be found below.
I want to explain that according to Dow theory the previously established trend is considered to be in force until it is authoritatively reversed. For the benefit of newer readers the primary trend, in accordance with classical Dow theory, remains up. But, also understand that this uptrend is within the context of a much longer-term secular bear market. In other words, this is a large scale counter-trend advance. Now, with that being said, non-confirmations are not authoritative reversals of the previously established trend. An authoritative reversal in accordance with classical Dow theory will require more price action and I will cover that when the time comes. Non-confirmations are however warnings.
Here are a few quotes from our Dow theory founding fathers on non-confirmations.
Robert Rhea - "A wise man lets the market alone when the averages disagree."
Robert Rhea - "When the averages disagree they are shouting 'be careful.'"
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."
William Peter Hamilton - "In the study of the price movement, based upon Dow's theory, so successfully applied in The Wall Street Journal for the last twenty years or more, it has been repeatedly found that the two averages must confirm each other to give an authoritative prediction."
William Peter Hamilton - "Independent movements on previous experience are usually deceptive, but when both averages advance or decline together, the indication of a uniform market movement is good."
William Peter Hamilton - "A new low or a new high made by the one (average) but not confirmed by the other, is almost invariably deceptive. The reason is not far to seek. One group of securities acts upon the other; and if the market for Railroad stocks is sold out, it cannot lift the whole list with it if there is a superabundant supply of the Industrials."
William Peter Hamilton - "It seems a clear inference in a movement where the averages do not confirm each other that uncertainty still continues as concerns the business outlook."
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."
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