Tim Wood's Blog

As a result, of the decline below the April 10th lows, many articles on Dow theory surfaced saying that a so-called Dow theory sell signal was triggered. This is not exactly correct. In fact, most articles written on Dow theory are erroneous.

In the first chart below I have included a weekly chart of the Nasdaq 100. Beginning at the 4-year cycle low that occurred in October 1998, we can see that price rose sharply into February 1999. In fact, in that 4 month period this index moved from a low of 1,063.74 up to 2,150.83.

The price action earlier this month carried the Dow Jones Industrial Average above its May closing high. This has occurred in the wake of the so-called “Dow theory sell signal” from back in August when the averages closed below their June lows. How could this be? Is Dow theory no longer valid? Is Dow theory no longer useful? What went wrong?

I first reported publicly on October 28, 2005 that the housing market was at risk of having completed a long-term cyclical top. At that time I posted a couple of housing indexes, gave the key levels to watch and said that any such break would be a major indication that the housing market had indeed topped.

From a Dow theory perspective, the primary bearish trend change that occurred in August in conjunction with the decline into the October low remains intact. But, as this low was being made, I stood alone in saying, in the articles posted here at that time, that not all bearish primary trend changes were created equally and that what we were seeing was a cyclical and secondary low point being made rather than the beginning of a melt-down as was the general consensus at the time.

I turned CNBC on this morning just to see what the “squawk on the street” was. The primary concern as I listened was over the Fed meeting and whether or not we get a QE 3 in early 2012. A few months ago, as the August/October lows were being made the worry was all about Europe.

The powers that be cannot manipulate the entire world out of the natural forces and cyclical events that have to play out. At $600 billion, QE 2 only represented 1.2% of the global stock market. So, if they do come out with QE 3 it'll amount to no more than peeing on a forest fire.

In accordance with Dow Theory, once a primary trend change is established, that primary trend is considered to be intact until it is authoritatively reversed. In this case, such a reversal requires a move above the previous secondary high points, which has not occurred.

Based on my long-term studies of both Dow theory and cycles, the evidence continues to suggest that the 2007 top marked the top of a 33 year secular bull market and that we have since been operating within the context of a secular bear market.

On August 4th both the Industrials and the Transports closed below their previous secondary low points. This is the first time since the March 2009 low that this has occurred and in doing so the primary trend turned bearish in accordance with Dow Theory.