Big-picture view of the long-term market perspective: Dow Theory for the Dow Jones Industrial Average and Transports

We're reviewing the big-picture, very long-term outlook for various markets this weekend; here are some clues from Dow Theory. Dow Theory is a classic analytical method from which Elliott Wave analysis is a derivative. It looks at the relationships between the Dow Jones Industrial Average and the Dow Transportation Average. I've come to respect this a great deal, because when you think about it, the transportation sector is very susceptible to upturns - and downturns - in economic activity. According to Dow Theorist Tim Wood, of Cycles News & Views (one of the sites listed in the "other sites of interest" at the right side of the page here), Dow Theory doesn't tell us that "the bottom" is in and we can now look forward to marching on to new highs. Tim has just written A Brief Update on the Markets and Dow Theory, publicly published at FinancialSenseOnline. Here's a quote from his article:

The primary bearish trend change that occurred on November 21, 2007 still remains intact in accordance with classical Dow theory. However, in accordance with my cycles work the March low was indeed expected and my model immediately triggered a short-term buy signal that quickly evolved to the point at which an intermediate-term buy signal was also triggered. Thus, we have a cyclical advance within the context of an ongoing primary bear market.

In the meantime, I’m being asked how long this rally will last. The answer to this is actually quite simple. In my world, this rally will continue to advance until my intermediate-term Cycle Turn Indicator confirms a top. To say that this will occur next week or next month or in 3 months would be a bit on the bold side. Anyone that tells you they have such an answer it wrong because the reality is, they don’t know exactly. I have learned to let the statistics and cycles help me to anticipate the phasing in which turns are probable, but ultimately it is the intermediate-term Cycle Turn Indicator that identifies the appropriate turns. In the meantime, all I can tell you is that based on the statistics, the bear market is not over and that this is a bear market rally.

....The old time Dow theorists wrote that once the trend was established, as was the case on November 21, 2007, that trend is considered to still be in force until it is authoritatively reversed in accordance with Dow theory. To date, that has not occurred. Also in accordance with classical Dow theory, any price action between a secondary high point and secondary low point is of no forecasting value. In the current case, price is still operating within the boundaries of the last secondary high and low points. The current Dow theory chart can be found below.

While I won't presume to speak for Tim, it does look like the January 6 highs (3737 in the Dow Transports (and perhaps the .786 retrace level of 3394, corresponding to our .786 retrace level of 884-885 in the S&P 500)), and then the October/November 2008 highs, will be important in assessing the strength of the bear market rally. Put another way, those levels are also likely to provide resistance levels that the rally may have a difficult time surmounting. And we already know that the current level around 3000 in the Dow Transports will really be critical, based on the long-term moving averages as well as the near-term supply overhand we discussed here recently. In fact, here's another look at that near-term daily chart showing that supply overhand in terms of the volume-by-price.

If above 3000, then the 3300 becomes a very interesting level, based partly on the above Fibonacci retrace level and also the additional moving averages you can see in my monthly chart of the Dow Transports in the prior post I provided here a short while ago this morning; as well as the down-sloping 200-day moving average which will be there soon; and the broken .618 Fibonacci retrace level on my other monthly chart of the Dow Transports (the chart at the bottom of this post). I'm not so much trying to point out potential rally target highs for the bear market rally, but trying to point out that the rally has significant resistance, and then the longer-term downtrend is likely to drag these indices to much lower levels.