Dow Theory reminds us to stay bearish unless the Dow betters its January high (and now, the lower June high is resistance); also market cycles views

Here's a way to look at the basics of the equity market "big picture" now (especially with my charts at the bottom of this post). And, students of market cycles, take note: Financial Sense Newshour this weekend is featuring cycles, including having Tim Wood as the advisory technician during the first audio segment (and there's another cycles analyst featured during the second audio segment, Stephen J. Puetz, author of "The Unified Cycle Theory: How Cycles Dominate the Structure of the Universe and Influence Life on Earth" including electromagnetic influences) - at FinancialSense.com weekend audio. UPDATE - Schaeffer's Research has issued their Monday Morning Outlook: Traders Raising the Bar for Earnings, Economic News -SPX breaches one support level; others at risk, by Todd Salamone (7/12/09). As Schaeffer's summarizes this article:

The initial excitement about a potential second stimulus package evaporated when Wall Street realized that the need for such a package might mean that the U.S. economy is further away from a second-half rebound than originally thought. Confirming those fears, last week was riddled with shaky economic data, which helped to overshadow the emergence of a major Detroit automaker from bankruptcy protection. Looking ahead to next week, Todd Salamone, Senior Vice President of Research, examines support and resistance levels for the S&P 500 Index (SPX), as well as potential concerns on the sentiment front and the SPX's 20-day historical volatility. Then, Senior Quantitative Analyst Rocky White takes a closer look at Bollinger Bands, the SPX's current 80-day streak of trading between them, and what an eventual breakout in one direction or another could mean for the market. We wrap up with a look at some key economic and earnings reports slated for release this week. Continue reading...

Tim Wood featured at FinancialSense is the cycles master who also applies Dow Theory, McClellan Oscillator and other technical indicators in his coverage of stock indices, gold, oil, bonds and the dollar at Cycles News and Views (link in the other sites of interest at the right side of the page here). He occasionally posts public articles at Financial Sense (he's the one I mention because I consider his work consistently reliable), and this audio feature at FinancialSense.com weekend audio is another way for non-subscribers to get a glimpse into - listen to - what he is seeing.

Now Bud, this one is for you! You challenged me to make one clear-stated explanation why we should be bearish. One of the plain and simple points that I will borrow from Tim Wood is, as Tim repeatedly states to explain being bearish, is also based on classic, good old-fashioned Dow Theory. Specifically, that the Dow Jones Industrial Average (the Dow) remains in bearish mode so long as it remains under its January high! Despite all the conflicting information out there, this fact is simple, clear and important - the Dow has never yet pushed above the highest point it reached in January, half a year ago. In fact, that is true not only for the standard Dow (Dow Industrials), but even for the Dow transports.

Notice that the Dow high last month did not go above the Dow January high. And now, the Dow even has to go above its June high to give some hope of being bullish again! So keep your eye on that - the Dow must be viewed as a "sell" unless and until:
1. if it can get above last month (June) high
2. AND then, above the high of 6 months ago, back in January.

The basic rule is that bearish is lower lows and lower highs. After the high of January, the Dow plunged to a new low at about 6469. The only thing that can break the cycle of lower highs and lower lows, is a higher high - higher than January in the Dow. So unless and until that happens, it remains bearish and another new low remains possible.

It is possible to make the analysis more complicated. But that really is not necessary, and can be too distracting. Actions speak louder than words. So we will let the Dow prove to us whether - or not - it can make these higher highs. And meantime we will remain bearish (especially if the Dow loses the 8,000 level, and then doesn't get back over 9,000).

Here are my two charts - the first a daily chart to illustrate the basic point of Dow Theory; the next a monthly chart with 20 years of the Dow to show graphically the tenuous position it is in (click on an image to see it larger/more clearly):