The bearish Dow theory primary trend change that occurred in August remains intact. As price moved into that low, and the October low that followed, bearish sentiment was at levels not seen since 2008. However, I said then, in articles written here, that not all Dow theory trend changes were created equally. I explained that rather than a meltdown, my work was suggestive of a low and that higher prices would follow. This has all proven correct. I also said then that this was all part of a much larger trap for both the bull and bear alike. In light of the volatility seen following the August/October lows, this has been proven correct as well. But, I also continue to believe that there is still a trap being set on an even larger scale, which has yet to be proven correct. What I mean is, the higher the rally out of the August/October low has gone, the more comfortable the masses have become with the rally. We are now seeing a sense of optimism and people have by and large forgotten about the pain and fear they experienced into October. All the while, they do not realize that its all really part of a bigger setup.
As I listen to the mainstream commentators, the public conversations around town, and even my local news, it is obvious that optimism is high and that the masses are completely clueless. William Peter Hamilton, the great Dow theorist who followed in the footsteps of Charles H. Dow, warned against allowing "the wish to father the thought." I have listened closely to the public, reporters and interviewees on the news and there is no doubt that their optimism is allowing "the wish to father the thought." Wishing and optimism has no more of a basis for sound analysis than does fear or pessimism. Also, what someone thinks, how the public feels, what some bogus reports say, or the latest jobs or Fed announcement is simply noise. None of this matters. It has been sound technical and statistical studies that have allowed us to successfully navigate the financial waters of the past and that will allow us to navigate the financial waters of the future.
Long-term, the evidence continues to suggest that we are still operating within a secular bear market, which began at the 2007 top. Based on all historical measures, the bottom likely did not occur in March 2009. Rather, the evidence suggests that the phase I low of the bear market occurred at the March 2009 low and that the rally separating phase I from phase II has been underway ever since. According to Dow theory, secular bull and bear markets alike unfold in three phases. It has been the continuance of this rally that has served to lull the pubic back to sleep and the continuance out of the August/October lows was simply a part of this process. The average person sees that the markets are rising and they naturally think that the worst is behind us and I understand that. However, this lack of understanding of the big picture setup that is unfolding, the false optimism and the wish that the worst is behind us is ultimately going to cost the average investor dearly once this larger counter-trend move concludes. It is for this reason that I continue to warn and if one wants more detail on this ongoing financial disaster and how this setup is apt to conclude, that research is covered in great detail in my research letters. Fact is, the financial reporters on CNBS did not warn of the 2010 decline, or of the 2007 top and what was to follow, or of the 2000 top, or of the top in housing in 2005. Fact is, Cycles News and Views did know because of my research. Furthermore, even if the mainstream reporters did know and understand what was occurring they would not tell us because they couldn't. I'm telling you, based on the statistics, this bear market is likely not over and once the proper setup is in place, there is more financial trouble to come.
Gold is up some 16% since its late December low. The Industrials have moved up some 24% since the October low. The NDX is also up some 24% as is the broad based Wilshire 5000. Gasoline is up some 20% since the October low and crude oil is up 38%. No doubt, these are not bad moves for such a short period of time. Interestingly enough, this has all occurred in the wake of the Dow theory bearish primary trend change and an even longer-term bear market rally. Point being, it has been moves like this that have continuously lulled most to sleep and allowed the "wish to father the thought" while the bigger trap is being set. I have identified a common technical setup that has been seen at every major top since 1896. Odds are, this same setup will cap the bear market rally that began at the 2009 low and when it does, the risk to the market will be far greater than most anyone expects. Trouble is, it will begin like any other correction and people will think that it's just another decline like we saw into October. As a result, they hang on. The deeper the decline goes, the more convinced they become that the bottom is near. But, it won't be and that is how the bear sets people up for a much larger trap and in the end, there is a climatic panic as the wash out into the bottom is seen. Unfortunately, once the realization occurs, it will then be far too late.
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