The price action earlier this month was no doubt an extreme and I'm still seeing and hearing discussion about whether or not it was "real." Personally, I think it was and as a technician I take the price action at face value. Ultimately, this could prove to be the beginning of the end of the bear market rally that began at the March 2009 low. From a Dow theory perspective, the bullish trend change that occurred in association with the counter-trend move out of the March 2009 low still remains intact. Cyclically, I'm beginning to see some troublesome hints developing. However, I've identified very specific DNA Markers that have occurred at every major market top since 1896 and it is the setup surrounding these markers that is key along with the cyclical structure of the market, all of which is covered in detail in Cycles News & Views.
I have included the current Dow theory chart below. The latest development here is the formation of a minor non-confirmation in conjunction with the most recent high. My research shows me that since 1896 a large percentage of the annual cycle tops have occurred in conjunction with a Dow theory non-confirmation. However, non-confirmations do not mean that a market top is inevitable. This merely serves as a warning. In the meantime, according to Dow theory, we must consider the primary trend to be in force until it is properly reversed and that requires a movement below a previous secondary low point.
As for non-confirmations, I've once again included a few quotes from our Dow theory founding fathers.
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.'"
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 - "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."
For those of us who understand market history and can apply the lessons of the past, we can use not only Dow theory, but cycles and the statistical data that I have developed to guide us as the longer-term secular bear market and its counter-trend moves unfold. I said all throughout the 2002 to 2007 advance that we were dealing with a stretched 4-year cycle advance and that the manipulative efforts would only serve to make matters worse and that it did. Understanding market history, Dow theory, cycles and the statistical data that I've data mined over the years allowed me to confidently stick to my calls during this time frame. I don't think anyone will argue that the decline out of the October 2007 top into the March 2009 low was indeed much worse than the decline into the 2002 low. Well, this same market history, the Dow theory, cycles and my statistical data continues to tell me that the advance out of the 2009 low has been a bear market rally separating Phase I from Phase II of a much longer-term secular bear market. However, just as with the rally into 2007, few listened.
I have next included a chart of the Shanghai Index. Here too, this market peaked in late 2007 and collapsed into late 2008. It has since also been in what I believe has been a bear market rally. The developments seen here over the last few months have been not been positive and we could begin to see similar weakness develop in US markets if the statistical DNA Markers that have occurred at every major top in stock market history are seen.
I also included a chart of the Hang Seng below. In this case it bottomed in 2003 and also moved up into its bull market top in late 2007. Like the Shanghai, that top was then followed by a decline into late 2008. Again, I believe that the rally out of that low has been a bear market rally.
Next I've included a chart of the German DAX . It bottomed in 2003 and also moved up into its bull market top in late 2007. Like the US, that top was then followed by a decline into the March 2009 low. Again, I believe that the rally out of that low has been a bear market rally and that the Phase II decline lurks.
My point in including the charts of these other markets is to show that this truly is a global matter. Furthermore, the markets are all similarly structured and when the house of cards that has been created begins to crumble again, and it will, the effects will reach far and wide. We are still operating within a much longer-term secular bear market and the Phase II decline is still ahead of us. According to history, the Phase II decline is the most devastating. Those that understand market history, the Dow theory and cycles can use that knowledge to guide them. The bottom line is that the evidence suggests that the 2008/2009 lows were not the bear market bottom. Please also see the last posting here for a further explanation of the bear market rally.
I have begun doing free market commentary that is available at www.cyclesman.info/Articles.htm 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.