Classic Dow Theory and Cycles News and Views by Tim Wood

The classic Dow theory and Cycles News and Views analysis by Tim Wood provides a very in-depth look at the cycles and movements in equities, gold, bonds and the U.S. dollar. Tim just released his March research letter, which he updates through each week and weekend via his Cycles News & Views services (which you can get more info on at his site, always included in the "other sites of interest" at the right side of this page). Dow Theory is sometimes called the predecessor to Elliott Wave theory. It's been around longer, and it is still well respected although there aren't many classic Dow Theorists left - so it's refreshing to get this input from Tim. In addition, he also conducts classic cycles analysis not only in the Dow Jones Industrial Average and S&P500, but also in bonds, the dollar and gold. Cycles analysis is different and separate from Dow Theory, but is a good complement and helps fill in to shape predictions about what's likely in the days and weeks ahead. It's on the cycles basis that Tim keeps subscribers updated about his short-term and long-term trading and investment signals in these markets.

Of course Tim's detailed work is reserved for subscribers, but I'd like to introduce the readers of this blogspot to Tim's work. His cycles work is different from ChartsEdge in the sense that he shares the detail on the short-term and long-term cycles. Also, ChartsEdge provides forecasts which are fascinating, whereas Tim provides commentary and shows how his indicators and levels signal either confirmation or non-confirmation of market movements within cycle trends. Now - I decided to share excerpts from one of his public articles that he posts each week at Financial Sense Online (his "corner" of that is at http://www.financialsense.com/Market/wood/main.html). Here's an excerpt of what he posted there on February 20 - it's about Dow Theory rather than cycles, but maybe that's just as well since Dow Theory isn't often addressed so it gives you a rare insight:

Is This March 2003? Dow Theory Says NO

Of late I have heard the argument made that the November 2008 to February 2009 period is like the October 2002 to March 2003 time period. Of course, the basis for drawing this alleged parallel is that the market has bottomed. Well, according to Dow theory, this is not like March 2003.

Ever since the short-term non-confirmation was first born on January 20, 2009, when the Transports closed below their November 20, 2008 closing low, there has been talk of the potential bullishness of that non-confirmation. As explained in my last posting here on February 6th, non-confirmations are mere warnings of a possible trend change and in accordance to traditional Dow theory the previously established trend must be considered to still be in force until it is authoritatively reversed. In the current case, the previously established primary trend change occurred on November 21, 2007 when both the Industrials and the Transports jointly closed below their previous secondary low point. In spite of many misrepresented or misunderstood views on Dow theory, nothing has occurred to invalidate the now 15-month old primary bear market. In fact, the price action on February 19, 2009 carried both the Industrials and the Transports down to new joint closing lows. In doing so, the Industrials closed below their November 20, 2008 secondary low point. As a result, the primary bear market has been reconfirmed once again.

Now I want to turn to the charts. In the first chart below I have included a chart of the 2002/2003 bottom. Note that the averages both made a joint low at the October 2002 secondary low point. From that low the averages rallied into their November/January secondary high points. From these high points the averages moved down into the joint March secondary low points. At that time the Industrials held above their November low as the March secondary lows were formed. As a result, a non-confirmation was born. Then, from that non-confirmation price moved up, and in June both averages bettered their previous secondary high points. In doing so, a new primary bullish trend was authoritatively established.

Now let’s turn to the current chart that I have included below. As you can see the non-confirmation that was born on January 20th was blown out of the water this past Thursday with the new joint closing low that carried the Industrials below their November secondary low point. Thus, the current Dow theory picture is not even remotely similar to that of the 2002/2003 bottom.

Now, this is not to say that short-term bounces aren’t possible, because they are - and I am watching my indicators very closely to tell me when such a bounce takes root. Once this occurs we will hear talk of a double bottom and that the Dow theory gave us a “false” signal. But once my short-term indicators turn back down triggering another sell signal, that is assuming we get a short-term bounce along in here, then the stage will be set to clobber the unsuspecting “double bottom we have a false Dow theory signal it’s all going to be okay” crowd.

It is important to understand that Wall Street and the politicians are the ones that created the economic mess we are in. The politicians did not see this coming, they do not understand this problem and they are not going to be able to fix it. From my seat, it is actually comical, but sad, to watch these guys in action. I honestly believe they are clueless. For the record, I warned about the extended 4-year cycle advance all throughout 2005, 2006 and 2007. It was then at the 2007 New Orleans Investor Conference that I first revealed the possibility of a 1930 to 1932 style setup occurring following that extended 4-year cycle advance. Don’t buy the current hype.

Tim W. Wood

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Folks, remember that this was posted February 20, but since it conveys big-picture information on the markets it's still very relevant. Now, I don't know that I'll always be able to post up current excerpts from Tim's weekly articles, so you can follow them as they are published publicly at FinancialSenseOnline.com. (Or consider a subscription for his detailed presentations about the equities, gold, bonds and U.S. dollar market movements.) Now - I'm off to read his March research letter!