As I was watching CNBC earlier this week, they had a poll question asking people what they were most worried about. That being, corporate results, no debt deal, Europe, or nothing because they’re a Cramer bull. I’ve also received a few e-mails asking how these issues could affect my cycles work and even Dow theory. It may be a hard concept to grasp, but from a technical perspective, be it cycles, Dow theory or whatever, none of these issues matter. Reason being, technical analysis is nothing more than the study of price movement and with technical analysis we do not concern ourselves with what is driving price. Rather, we simply study the price action itself. Think about it. We can’t guess how any of these or any other issue will impact the market. There are times when bad news does not have the impact one would think and then there are times that the impact is greater than one may think. There are times when good news doesn’t seem to matter and there are times that bad news doesn’t seem to matter. Worrying and guessing about events like this is a stressful, and by and large, impossible undertaking. From a technical perspective, what will be will be and there is no need to guess or to stress over it. We simply let nature takes its course and interpret the meaning of the price action as it unfolds.
Let me give you a few examples. I knew at the 2000 top that since 1896 every time a 4-year cycle had peaked with the structural characteristics, which appeared in association with that top, the market had moved below the previous 4-year cycle low. In that case, this meant that a move below the 1998 4-year cycle low was likely and that is exactly what happened. From a Dow theory perspective, there was a non-confirmation associated with the 2000 top that was followed by a joint move below the previous secondary low points, which triggered a Dow theory primary trend change. So, both the cycles work and the Dow theory were telling me, ahead of time, that the market was going down and I remember the talk about the economy and all the reasons that everything would be fine. None of this mattered. All that mattered was the technical setup that occurred at that top and until that setup was fulfilled with the formation of the 2002 4-year cycle low, none of the efforts to stop the decline mattered either.
The same thing was true at the 2007 top. I knew, based on history, that the 4-year cycle advance that began at the 2002 low had stretched. But, once the DNA Markers that have appeared at every major top since 1896 were seen, I knew that that top was finally in place as well. From a Dow theory perspective, the 2007 top was also made with a non-confirmation that was followed by a decline below the previous secondary low points. In doing so, a primary trend change was signaled in conjunction with the cyclical DNA Markers. Again, nothing mattered as price moved up into that top. The market advanced relentlessly until these technical factors marking that top appeared. But, once price action set the stage with these technical factors in place, nothing mattered as the market moved down in association with the worst financial disaster since the Great Depression. Then, once the decline into the 4-year cycle low had expressed itself, the 2009 low was in place and, based on the cycles work, this low was identified in real time as it was occurring. Also, this low was soon associated with a bullish Dow theory trend change.
So here too, as I have said in these updates for months now, the primary trend change that occurred in association with the advance out of the 2009 low still remains intact from a Dow theory perspective. From a cyclical perspective, it will be the appearance of the DNA Markers, that have been seen at every major top since 1896, that will ultimately appear to mark the top of this rally as well. Until such time, nothing else matters, not even a deal on the debt ceiling, the troubles in Europe or corporate earnings. As a technician, I’m not the least bit worried about the news headlines or events. All I have to do is watch the price action and apply the knowledge of Dow theory, cycles and the associated statistical data and that is what I do at Cycles News & Views. The study of price action itself is not a new concept as it was price action that Charles H. Dow began using in the late 1800’s to successfully call the markets in his articles in the Wall Street Journal. Mr. Dow’s concept of price analysis is the basis of all technical analysis and was successfully used by his followers William Peter Hamilton and Robert Rhea well into the 1930s as Mr. Dow’s methods became known as Dow theory. In fact, William Peter Hamilton used Dow theory to call the 1929 top. Robert Rhea then used Dow theory to call the 1932 bear market bottom as did Richard Russell in 1974. The basic point I’m trying to make in this article is that fundamental events cannot be used in a quantifiable manner to call major turning points in the market, so why worry about them? But, with technical analysis we do have quantifiable means of calling major market turns as well as intermediate and short-term term turning points without the worry of some event. The other point I want to make here is that just as technical analysis has been used to call other major tops and bottoms for years, it is just as applicable today. Also, technical analysis is applicable not only with stocks, but also commodities and I even used it to identify the top in housing back in late 2005. So, no, nothing has changed in a way to invalidate these same technical, statistical and quantifiable methods because technical analysis is based on price movement and it does not matter any more or less today than it has in the past, regardles of what the news behind that price movement is.
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