Dow Theory Update

When it comes to Dow theory, there seems to be no shortage of opinion, but most often, that opinion is wrong. This is largely because of the fact that very few people have actually read and studied the original material by Charles H. Dow, William Peter Hamilton and Robert Rhea. Without that background, one cannot truly understand Dow theory.

Of late I have been asked whether or not the bettering of the April highs triggered a so-called "Dow theory buy signal." Before I answer this question, it deserves a full explanation.

First let me say that in accordance with orthodox Dow theory, there is no "buy" or "sell" signal. That's right. Contrary to popular belief, there is no such thing. The Dow theory founding fathers would anticipate trend changes just like we do. They would use minor negative non-confirmations and negative structural developments that hinted of a trend change as "Sell Spots." At bottoms they would do the exact opposite using minor positive non-confirmations and positive structural developments that hinted of an upward trend reversal as "Buy Spots."

They then looked for the Industrials and what was then the Rails, to close above their previous "Secondary High Point" in the case of a bottom, or the previous "Secondary Low Point" in the case of a top, in order to confirm that a "Primary Trend Change" had occurred. It is clear from reading the original writings that they did not wait for these Primary Trend Changes to occur before establishing positions. The problem with the interpretation today is that people do not understand what constitutes a secondary high or low point and they erroneously interpret moves above and below what is perceived as a secondary high or low point to be a "Dow theory Buy or Sell signal." Fact is, there is no such thing as a "Dow theory Buy or Sell signal." According to the original writings, there were Buy and Sell Spots, which were based on minor structural developments, in anticipation of turns and there are Primary Trend changes.

Now, I want to discuss the current situation with Dow theory. Fact is, the most recent Secondary low point occurred at the July low. Please refer to the first chart below. In typical fashion, most everyone was calling the move into early July a "Dow theory sell signal" because of the move below the May and June lows, which were erroneously perceived as having marked the previous Secondary Low Point. I explained to my subscribers as price was moving down into the July low that this was NOT a "sell signal" nor was it a Dow theory Primary Trend change and that price was in fact making a Secondary Low Point. As price moved out of that low it bettered the June high and I then received questions as to whether or not a "buy signal" had occurred. The same was also true when the August high was bettered. Now that the April high has been bettered I'm seeing the same thing. The best way to stay abreast of the Dow theory developments in real time and even to know ahead of time what we are expecting and what a particular move means is through my monthly research letter and short-term updates. Anyway, the bettering of the April high merely served to reconfirm the already existing bullish Primary Trend change, which has been intact in association with the upturn out of the March 2009 low, for well over a year now.

I have stated in every article posted here since the rally out of the March 2009 low began that this is a bear market rally. I have stated here in every article since the bullish Primary Trend change in July 2009 occurred that the Primary Trend in accordance with Dow theory has been bullish. That has not changed. I have also stated here, ever since the rally out of the 2009 low began, that, based on the phasing aspects of Dow theory, this rally should ultimately prove to be the rally separating Phase I from Phase II of a much longer-term secular bear market. This view has not changed either. So, to clarify, on one hand we have had and continue to have a bullish Primary Trend in accordance with Dow theory and the bettering of the April high only reconfirmed the existence of that trend. But, in the bigger picture, the Dow theory phasing tells us that this rally is in all likelihood a bear market rally within a much longer-term secular bear market.

I have included a chart below of the 1966 to 1974 bear market period. The decline into the Phase I low is noted in red. The bear market rally that separated Phase I from Phase II is noted in green and carried the averages up for some 26 months into that top. In the process of this advance, a Dow theory bullish Primary Trend change occurred, just as we have seen with the current advance. But, ultimately the phasing proved correct and the Phase II decline carried the averages to new lows. Those that understood the value and phasing aspect of Dow theory would have understood what was occurring.

Then, from the Phase II low, the averages advance some 32 months. This rally was also a bear market rally separating Phase II from Phase III of the bear market and this time around the Industrials were able to move to a new all time high. In the process there was of course, another Dow theory bullish Primary Trend change. However, the phasing aspect of Dow theory was again correct and once this rally ran it course, the averages again headed lower. Note that this decline carried the Industrials to new lows, but not the Transports. As a result, a Dow theory non-confirmation occurred in conjunction with the Phase III low and great values.

So, the moral of the story is that the bettering of the April high was not a so-called "Dow theory Buy signal." In reality it only served to reconfirm the existing bullish Primary Trend change. Also, I continue to believe that we are in a similar pattern to that of the 1966 to 1974 period. I believe that the rally out of the 2009 low is synonymous with the advance out of the 1966 low. One difference now is that the bull market period that preceded the 1966 top was only 24 years and the bear market period ran 8 years, which was the historical one-third the duration of the preceding bull market. In this case, the preceding bull market ran 33 years. Therefore, we should be dealing with a bear market of approximately 11 years. So, the unwinding of this bear market should have much further to go. Perhaps, QEII will keep this rally going a while longer. But, I don't think that QEII or QEIII or even QEIV will ever be able to ultimately save the market from the natural forces. All these efforts are doing are making matter worse and if anything, postponing the inevitable.

I have begun doing free market commentary that is available at www.cyclesman.info/Articles.htm The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates. I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified the common traits associated with all major market tops. Thus, I know with a high degree of probability what this bear market rally top will look like and how to identify it. These details are covered in the monthly research letters as it unfolds. I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.

Tim Wood 

Editor, Cyclesman.com

Copyright © 2004-2008 by Tim W. Wood. All rights reserved.

View the original article here

Gold Market Update

The Fed crossed the Rubicon last week with its announcement of another massive tranche of QE (Quantitative Easing or in common parlance money printing), known as QE2. It is thus clear that what is now known as QE1, which was portrayed at the time as "one off rescue of the financial system" was nothing of the kind, but represented instead the bursting of a dam that can never be put back together again. The junkie has graduated to another level, from that of being merely a chronic debtor, unable to live within its means and sponging on the rest of the world, to selling its own future down the river in order to maintain its voracious consumption habits in the present.

One thing we can be sure of is that the rest of the world is "not going to take this lying down" - what is sauce for the goose is sauce for the gander, so we can expect this new fashion for massively ballooning the money supply to catch on increasingly around the world, as various countries seek to maintain adequate liquidity and remain competitive in global trade by taking the same proactive hands on approach to manipulating their currencies in a downward direction as the US.

So let's now be crystal clear about what we are talking about and looking at here - we face the prospect of massive global across the board currency debasement and inflation resulting from same. Where does hot money go in such circumstances? - it goes into tangibles, commodities, collectibles and the like - and especially into the Precious Metals - anything which provides a bulwark against the ravages of inflation. Sure - there are massive deflationary forces out there, but since politicians and business leaders like to make money and be popular for as long as possible, they are going to keep these forces at bay for as long as possible, regardless of the future consequences. A deflationary collapse means riots and politicians being chased through the streets and being strung up from lamp posts etc. That collapse must come, and come it will but hard on the heels of a massive hyperinflationary episode that leave the broad swath of the middle and working classes destitute and ruined. The upper classes and elites will by then have fled to their tax havens where they can sell the gold bars they have stashed away and continue to live lives of ease and comfort, far from the madding crowd, who will set about cannibalising each other in conditions of anarchy and mayhem. This will be the time of "the great global reset" when the absurdly astronomic debts and derivative pyramids etc will be completely wiped clean by the simple expedient of being rendered totally worthless. If you are a creditor at this time tough luck - you won't get enough back to buy yourself a pretzel. This will also be the time when a new generation of leaders will rise up who have galvanised and harnessed the energy of the mob and go on to become future politicians who will reinstate some kind of gold standard and a new order will rise up from the ashes of the old. At this point former political leaders who may be getting bored with island life, however comfortable, would be well advised to avoid a premature attempt to go back and do a Mrs Gandhi or Mrs Aquino, as they might come to an untimely and sticky end.

Even without the benefit of hyperinflation, most major bullmarkets end with a parabolic blowoff move, so it is clear that if we do end up with hyperinflation - and all the signs are pointing to that - the parabolic acceleration in gold, which our long-term chart shows has not even started yet is going to be that much more pronounced and it could rise to levels which would seem to many now to be insane. Here we should note that while gold's rise will of course be real money, which is what gold is, simply moving to compensate for the loss in value of fiat, it should actually be gaining in real value as gold becomes a magnet for hot money seeking speculative gains, which will be an important driver for the final vertical ramp that is expected to mark the end of the bullmarket.

What would such a parabolic blowoff move look like? To get an idea we need look no further than the parabolic blowoff that ended the tech bubble 10 years ago. While the acceleration is dramatic and pronounced on an arithmetic chart, it is obvious even on a log chart, which tends to squash down higher values, and referring back to the long-term gold chart and comparing it with this Nasdaq chart, it is quite clear that gold hasn't even begun the parabolic acceleration phase yet, which fits with the fact that even after 10 years of a strong steady bullmarket, the broad investing public are only now starting to sniff around and get interested in gold.

We haven't looked at a long-term chart for the dollar index for a long time so it is worth doing so now. Our chart going back 11 years shows that overall the dollar index has not lost all that much ground since its late 2004 low, which is rather surprising given the abuse that the dollar has been subjected to in recent years. However, the key point to focus on here is that if all currencies have been "going down the gurgler" more or less together, then gold should have been rising against most or all of them, which it has, and referring back to our 11-year chart for gold in dollars, we can readily see that the relentless advance is a symptom of the general malaise of fiat. So even if the dollar index stages a technical bounce here from the support shown on the chart, it is unlikely to stop gold.

The reaction in gold in recent weeks was not as deep or as long as we had expected. Our 6-month chart shows that the Fed announcement last week "lit a fire" under gold which rose very strongly to break out to new highs on Thursday. This very positive action is believed to mark the start of an accelerated growth phase, even if we do see a minor reaction first.

There is good news for the many PM stock investors who have been perplexed by the the refusal of many PM stocks, especially the larger ones, to perform well given the continued ascent of gold and silver. Last week's surge in gold saw the large gold and silver stock Philadelphia XAU index break out to clear new highs for the 1st time. This was the last piece missing in our jigsaw - now everything is in place for a thumping great rally in PM stocks across the board. You can see this breakout on our 4-year chart for thisd index below.

We will close with a word about tactics with regards to PM stocks. There are few things worse than watching an entire sector take off higher, and finding yourself stuck with a bunch of lemons that hardly do anything. The way to avoid this is to go for, or redeploy into, stocks that are in established steady uptrends, or look like they are just entering into such uptrends, provided that they have not gone up a lot already or are otherwise showing signs of topping out, like very heavy volume.

Clive Maund

Diploma Technical Analysis
support@clivemaund.com
www.clivemaund.com

Trading the precious metals and Energy

Www.CliveMaund.com is a site dedicated to serious investors and traders in the precious metals and energy sectors. It offer my no nonsense, premium analysis to subscribers. Our site is 100% subscriber supported. We take no advertising or incentives from the companies we cover. If you are serious about making some real profits, www.CliveMaund.com is for you! Happy trading.

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

View the original article here

Gold Market Update

The Fed crossed the Rubicon last week with its announcement of another massive tranche of QE (Quantitative Easing or in common parlance money printing), known as QE2. It is thus clear that what is now known as QE1, which was portrayed at the time as "one off rescue of the financial system" was nothing of the kind, but represented instead the bursting of a dam that can never be put back together again. The junkie has graduated to another level, from that of being merely a chronic debtor, unable to live within its means and sponging on the rest of the world, to selling its own future down the river in order to maintain its voracious consumption habits in the present.

One thing we can be sure of is that the rest of the world is "not going to take this lying down" - what is sauce for the goose is sauce for the gander, so we can expect this new fashion for massively ballooning the money supply to catch on increasingly around the world, as various countries seek to maintain adequate liquidity and remain competitive in global trade by taking the same proactive hands on approach to manipulating their currencies in a downward direction as the US.

So let's now be crystal clear about what we are talking about and looking at here - we face the prospect of massive global across the board currency debasement and inflation resulting from same. Where does hot money go in such circumstances? - it goes into tangibles, commodities, collectibles and the like - and especially into the Precious Metals - anything which provides a bulwark against the ravages of inflation. Sure - there are massive deflationary forces out there, but since politicians and business leaders like to make money and be popular for as long as possible, they are going to keep these forces at bay for as long as possible, regardless of the future consequences. A deflationary collapse means riots and politicians being chased through the streets and being strung up from lamp posts etc. That collapse must come, and come it will but hard on the heels of a massive hyperinflationary episode that leave the broad swath of the middle and working classes destitute and ruined. The upper classes and elites will by then have fled to their tax havens where they can sell the gold bars they have stashed away and continue to live lives of ease and comfort, far from the madding crowd, who will set about cannibalising each other in conditions of anarchy and mayhem. This will be the time of "the great global reset" when the absurdly astronomic debts and derivative pyramids etc will be completely wiped clean by the simple expedient of being rendered totally worthless. If you are a creditor at this time tough luck - you won't get enough back to buy yourself a pretzel. This will also be the time when a new generation of leaders will rise up who have galvanised and harnessed the energy of the mob and go on to become future politicians who will reinstate some kind of gold standard and a new order will rise up from the ashes of the old. At this point former political leaders who may be getting bored with island life, however comfortable, would be well advised to avoid a premature attempt to go back and do a Mrs Gandhi or Mrs Aquino, as they might come to an untimely and sticky end.

Even without the benefit of hyperinflation, most major bullmarkets end with a parabolic blowoff move, so it is clear that if we do end up with hyperinflation - and all the signs are pointing to that - the parabolic acceleration in gold, which our long-term chart shows has not even started yet is going to be that much more pronounced and it could rise to levels which would seem to many now to be insane. Here we should note that while gold's rise will of course be real money, which is what gold is, simply moving to compensate for the loss in value of fiat, it should actually be gaining in real value as gold becomes a magnet for hot money seeking speculative gains, which will be an important driver for the final vertical ramp that is expected to mark the end of the bullmarket.

What would such a parabolic blowoff move look like? To get an idea we need look no further than the parabolic blowoff that ended the tech bubble 10 years ago. While the acceleration is dramatic and pronounced on an arithmetic chart, it is obvious even on a log chart, which tends to squash down higher values, and referring back to the long-term gold chart and comparing it with this Nasdaq chart, it is quite clear that gold hasn't even begun the parabolic acceleration phase yet, which fits with the fact that even after 10 years of a strong steady bullmarket, the broad investing public are only now starting to sniff around and get interested in gold.

We haven't looked at a long-term chart for the dollar index for a long time so it is worth doing so now. Our chart going back 11 years shows that overall the dollar index has not lost all that much ground since its late 2004 low, which is rather surprising given the abuse that the dollar has been subjected to in recent years. However, the key point to focus on here is that if all currencies have been "going down the gurgler" more or less together, then gold should have been rising against most or all of them, which it has, and referring back to our 11-year chart for gold in dollars, we can readily see that the relentless advance is a symptom of the general malaise of fiat. So even if the dollar index stages a technical bounce here from the support shown on the chart, it is unlikely to stop gold.

The reaction in gold in recent weeks was not as deep or as long as we had expected. Our 6-month chart shows that the Fed announcement last week "lit a fire" under gold which rose very strongly to break out to new highs on Thursday. This very positive action is believed to mark the start of an accelerated growth phase, even if we do see a minor reaction first.

There is good news for the many PM stock investors who have been perplexed by the the refusal of many PM stocks, especially the larger ones, to perform well given the continued ascent of gold and silver. Last week's surge in gold saw the large gold and silver stock Philadelphia XAU index break out to clear new highs for the 1st time. This was the last piece missing in our jigsaw - now everything is in place for a thumping great rally in PM stocks across the board. You can see this breakout on our 4-year chart for thisd index below.

We will close with a word about tactics with regards to PM stocks. There are few things worse than watching an entire sector take off higher, and finding yourself stuck with a bunch of lemons that hardly do anything. The way to avoid this is to go for, or redeploy into, stocks that are in established steady uptrends, or look like they are just entering into such uptrends, provided that they have not gone up a lot already or are otherwise showing signs of topping out, like very heavy volume.

Clive Maund

Diploma Technical Analysis
support@clivemaund.com
www.clivemaund.com

Trading the precious metals and Energy

Www.CliveMaund.com is a site dedicated to serious investors and traders in the precious metals and energy sectors. It offer my no nonsense, premium analysis to subscribers. Our site is 100% subscriber supported. We take no advertising or incentives from the companies we cover. If you are serious about making some real profits, www.CliveMaund.com is for you! Happy trading.

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

View the original article here

Gold Market Update

The Fed crossed the Rubicon last week with its announcement of another massive tranche of QE (Quantitative Easing or in common parlance money printing), known as QE2. It is thus clear that what is now known as QE1, which was portrayed at the time as "one off rescue of the financial system" was nothing of the kind, but represented instead the bursting of a dam that can never be put back together again. The junkie has graduated to another level, from that of being merely a chronic debtor, unable to live within its means and sponging on the rest of the world, to selling its own future down the river in order to maintain its voracious consumption habits in the present.

One thing we can be sure of is that the rest of the world is "not going to take this lying down" - what is sauce for the goose is sauce for the gander, so we can expect this new fashion for massively ballooning the money supply to catch on increasingly around the world, as various countries seek to maintain adequate liquidity and remain competitive in global trade by taking the same proactive hands on approach to manipulating their currencies in a downward direction as the US.

So let's now be crystal clear about what we are talking about and looking at here - we face the prospect of massive global across the board currency debasement and inflation resulting from same. Where does hot money go in such circumstances? - it goes into tangibles, commodities, collectibles and the like - and especially into the Precious Metals - anything which provides a bulwark against the ravages of inflation. Sure - there are massive deflationary forces out there, but since politicians and business leaders like to make money and be popular for as long as possible, they are going to keep these forces at bay for as long as possible, regardless of the future consequences. A deflationary collapse means riots and politicians being chased through the streets and being strung up from lamp posts etc. That collapse must come, and come it will but hard on the heels of a massive hyperinflationary episode that leave the broad swath of the middle and working classes destitute and ruined. The upper classes and elites will by then have fled to their tax havens where they can sell the gold bars they have stashed away and continue to live lives of ease and comfort, far from the madding crowd, who will set about cannibalising each other in conditions of anarchy and mayhem. This will be the time of "the great global reset" when the absurdly astronomic debts and derivative pyramids etc will be completely wiped clean by the simple expedient of being rendered totally worthless. If you are a creditor at this time tough luck - you won't get enough back to buy yourself a pretzel. This will also be the time when a new generation of leaders will rise up who have galvanised and harnessed the energy of the mob and go on to become future politicians who will reinstate some kind of gold standard and a new order will rise up from the ashes of the old. At this point former political leaders who may be getting bored with island life, however comfortable, would be well advised to avoid a premature attempt to go back and do a Mrs Gandhi or Mrs Aquino, as they might come to an untimely and sticky end.

Even without the benefit of hyperinflation, most major bullmarkets end with a parabolic blowoff move, so it is clear that if we do end up with hyperinflation - and all the signs are pointing to that - the parabolic acceleration in gold, which our long-term chart shows has not even started yet is going to be that much more pronounced and it could rise to levels which would seem to many now to be insane. Here we should note that while gold's rise will of course be real money, which is what gold is, simply moving to compensate for the loss in value of fiat, it should actually be gaining in real value as gold becomes a magnet for hot money seeking speculative gains, which will be an important driver for the final vertical ramp that is expected to mark the end of the bullmarket.

What would such a parabolic blowoff move look like? To get an idea we need look no further than the parabolic blowoff that ended the tech bubble 10 years ago. While the acceleration is dramatic and pronounced on an arithmetic chart, it is obvious even on a log chart, which tends to squash down higher values, and referring back to the long-term gold chart and comparing it with this Nasdaq chart, it is quite clear that gold hasn't even begun the parabolic acceleration phase yet, which fits with the fact that even after 10 years of a strong steady bullmarket, the broad investing public are only now starting to sniff around and get interested in gold.

We haven't looked at a long-term chart for the dollar index for a long time so it is worth doing so now. Our chart going back 11 years shows that overall the dollar index has not lost all that much ground since its late 2004 low, which is rather surprising given the abuse that the dollar has been subjected to in recent years. However, the key point to focus on here is that if all currencies have been "going down the gurgler" more or less together, then gold should have been rising against most or all of them, which it has, and referring back to our 11-year chart for gold in dollars, we can readily see that the relentless advance is a symptom of the general malaise of fiat. So even if the dollar index stages a technical bounce here from the support shown on the chart, it is unlikely to stop gold.

The reaction in gold in recent weeks was not as deep or as long as we had expected. Our 6-month chart shows that the Fed announcement last week "lit a fire" under gold which rose very strongly to break out to new highs on Thursday. This very positive action is believed to mark the start of an accelerated growth phase, even if we do see a minor reaction first.

There is good news for the many PM stock investors who have been perplexed by the the refusal of many PM stocks, especially the larger ones, to perform well given the continued ascent of gold and silver. Last week's surge in gold saw the large gold and silver stock Philadelphia XAU index break out to clear new highs for the 1st time. This was the last piece missing in our jigsaw - now everything is in place for a thumping great rally in PM stocks across the board. You can see this breakout on our 4-year chart for thisd index below.

We will close with a word about tactics with regards to PM stocks. There are few things worse than watching an entire sector take off higher, and finding yourself stuck with a bunch of lemons that hardly do anything. The way to avoid this is to go for, or redeploy into, stocks that are in established steady uptrends, or look like they are just entering into such uptrends, provided that they have not gone up a lot already or are otherwise showing signs of topping out, like very heavy volume.

Clive Maund

Diploma Technical Analysis
support@clivemaund.com
www.clivemaund.com

Trading the precious metals and Energy

Www.CliveMaund.com is a site dedicated to serious investors and traders in the precious metals and energy sectors. It offer my no nonsense, premium analysis to subscribers. Our site is 100% subscriber supported. We take no advertising or incentives from the companies we cover. If you are serious about making some real profits, www.CliveMaund.com is for you! Happy trading.

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

View the original article here