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THE DOW REPORT
Range Bound

August concluded the 21^st month in which the Industrials have been bound within approximately a 600 point trading range with false breaks to both the upside and the downside of this range. The Industrials are still at the same levels they were in December 2003. August also concluded the 10th month in which the Transports have been bound within a 275 point range with false breaks and they close this month at the same levels seen in late November 2004.

I wrote about this in early August as the market approached the upper boundary of this range. That rally failed to better this upper boundary line and has since been repelled from that level. All the while the market still sits with a Primary Dow theory sell signal in place. Investor’s Intelligence has recorded 148 consecutive weeks of more bulls than bears with the all time record occurring back at the 2000 top with a count of 152 consecutive weeks of more bulls than bears. So, it seems by these numbers that the buy-the-dip mentality remains firmly entrenched.

Looking beneath the surface we find supportive evidence of the warning that the Dow theory has continuously been sending. Below is a chart of the Industrials and I have plotted the McClellan Summation Index in the upper window. This is a breadth based indicator and the fact that it has and continues to form lower and lower peaks serves as further evidence that this 21 month range is a huge distribution top rather than an accumulation at a bottom.

Below is the same chart of the Industrials with the McClellan Volume Summation Index plotted in the upper window, and it too has formed a series of lower highs. So, we have the Dow theory that has continued to warn of an unhealthy market as the Primary bear market sell signal still stands and we have continued deteriorating internals. We also have the Dow theory phasing that continues to suggest that this now 21 month consolidation period is part of the topping process of the giant bear market rally separating Phase I from Phase II of a much larger bear market. Yet, we have record bullishness and extreme complacency by the masses.

As an example of this bullishness and extreme complacency I continue to hear reasons why the Dow theory is no longer relevant. Well, as I read history I also find that these same claims have been made time and time again. But, in the end the Dow theory has been proven correct. Furthermore, the Dow theory worked and warned beautifully as it gave its signal in September 1999. I want to remind you that the market spent 29 months in a similar trading range between early 1999 and late 2001. Surely, we can all remember what followed into 2002. Or, can we?

Yes, during that 29 month topping process people also said that the Dow theory was no longer applicable. I was told that the cycles no longer mattered. We were in a new era and the stock market was “going to 36,000.” Well, the Dow theory told me that the market was sick and that 36,000 was a pipe dream. My cycles work, as documented in a 2001 article in Technical Analysis of Stocks and Commodities Magazine told me that the Industrials were going to 7,400 and that this would happen in the fall of 2002. Guess what? The Dow theory was correct and so were my cyclical projections.

Nothing has changed since 2002 to suddenly invalidate the Dow theory or cycles analysis. It is simply a necessary part of the “cycle” so-to-speak, that the masses think this way. William Peter Hamilton described Dow’s theory as “The Stock Market Barometer” because it looks forward at what is to come rather than back at what has already happened. The problem with the masses is that all they can see is what has already happened. Furthermore, the masses never have and never will truly understand the Dow theory, because that takes time and energy to learn. No, human nature is such that the masses always want to think that “this time is different” and that as a result the tried and true methods are no longer applicable because once again all they can see is what has happened and not what the “Barometer” is telling them.

I realize that as a result of the now 21 month range that most people are once again bored with or doubtful of the story that the Barometer is telling. But, this still does not change the Barometer’s forecast. Please, listen to these warnings.

Tim W. Wood

If you would like more detailed analysis, including short and intermediate term timing tools,
then I encourage you to consider Cycles News & Views as that source.

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