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THE DOW REPORT
A Partial Resolution

The year 2005 will be remembered for many things. For one, it will be remembered as a year that twisted, stretched and broke many statistical relationships and historical norms on both the bullish and the bearish sides of the equation. For example, a bullish statistic that has held true since 1896 was broken. That statistic showed that since the inception of the Industrials, every year ending in a 5 had been an up year. That was until 2005, which broke that record as the Industrials did finish the year marginally negative. Also, a bearish relationship that ultimately proved to be invalid came with the break into the April lows as both averages confirmed each other by breaking below their January Secondary lows. This put both averages in gear to the downside, yet this break was later corrected and the averages moved higher. I could go on and on with more examples, but the point is that 2005 was marked by both failed bullish advances as well as failed bearish breaks, and in the process, many of the historical relationships and norms were either out right violated or stretched.

Thus far, 2006 has come in with a bang. In the process the Dow theory Secondary non-confirmation has been corrected. This non-confirmation came to be in November when the Transports bettered their March highs without the Industrials following suit. The January advance has now corrected this Secondary non-confirmation and can be seen in the chart below. Therefore, with both averages now above their previous Secondary highs, according to Dow theory, the Industrials are now clear to retest their old highs.

Also according to Dow theory, the Primary non-confirmation remains intact and as a result of the move above the previous Secondary highs, this non-confirmation is now slated for testing.

We have been following the Retailers for several months now and I want to look at them here again. Understand that the Retailers have nothing to do with Dow theory, but that this relationship has historically been significant. You will find in the chart below that when the Retailers are not in gear with the Industrials, it has typically spelled trouble. At present, the Retailers have not bettered their previous Secondary high point, which occurred back in November. This is illustrated by the last blue line on the right of the chart below. The Industrials made their last important recovery high in March, while the Retailers made theirs in July. Notice that the Retailers have not bettered that high, but again the Industrials have cleared the hurdle. Also notice that each of the non-confirmations, as is marked in blue, have historically resulted in market corrections of intermediate degree. The fact that the Industrials and the Retailers are currently not in gear is indeed a warning to the market. So, the thing that we need to watch for now is to see if the non-confirmation between these two averages can be corrected before the intermediate-term cycle top is made. If so, great, and the advance into the 4-year cycle top will be set to press even higher. But if not, then perhaps this too was just another false break and the resulting non-confirmation could be the one that leads the market into the Phase II lows.

The January issue of Cycles News & Views is now available. In this issue I give specific market expectations based on this break. These expectations are based on over 100 years of market history. This history gives us a 91.5% probability of the expected outcome for the market over the next several months. A subscription to Cycles News & Views also comes with access to the subscriber-only web page, the Cycle Turn Indicator as is used for identifying short and intermediate-term market turns and intra-week postings that are done three times a week. For more information, please visit www.cyclesman.com.

Tim W. Wood

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