Dow Theory Stocks Bear Market Rally Update

Stock-Markets / Stocks Bear Market
Mar 28, 2010 - 05:57 AM

By: Tim_Wood

As the averages advanced out of the February lows, it was the Transports that beat the Industrials back above the January highs. As a result, a Dow theory non-confirmation was born earlier this month. At the time of my last article posted here, I had received numerous e-mails about that non-confirmation as it seemed to draw a lot of attention and many were viewing it as a death sentence for the market. I warned that this non-confirmation was not necessarily as negative as it was being made out to be and that jumping to conclusions just because one average beat the other one back above its previous closing high was premature.

I went on to explain that the non-confirmations are warnings of caution and that it is what develops from that point that would serve to either validate or invalidate the non-confirmation. As it turns out, that non-confirmation was in fact invalidated. In doing so, the bear market rally, which should prove to separate phase I from phase II of the longer-term secular bear market, lives on.

I have again included a chart of the Industrials and the Transports below. As of this writing we again have another Dow theory non-confirmation and this time it does not seem to be drawing any attention. That in and of itself may give it more weight. On March 18th both the Industrials and the Transports closed at new recovery highs. The averages declined into March 19th and on March 22nd the Industrials closed at yet another new recovery high. On March 23rd another recovery high was made by the Industrials, but the Transports continued to lag. In doing so, another non-confirmation has been put into motion and is noted by a small blue line on the chart below. Again, this non-confirmation is only a warning and it is what develops from here that is important. If the averages begin to breakdown from this point and it becomes much more apparent that this non-confirmation is going to stand, then at that time it will serve to give more merit to any such downturn. On the other hand, if this short-term non-confirmation is invalidated, then that will serve to reconfirm the ongoing bear market rally.



I have recently been asked by some of the readers here why I continue to say that this is a bear market rally. There are a number of reasons behind my belief that this is a bear market rally, one of which has to do with bull and bear market relationships.

I’ve covered this here before, but it has been a while so for the benefit of newer readers I will cover one of several reasons here again. The definitions of bull and bear markets differ from person to person. My definition is based on the works of the great Dow theorists, Charles H. Dow, William Peter Hamilton and Robert Rhea. As a result of my study of Dow theory combined with my study of cycles, which are not a part of Dow theory, I have drawn some very obvious conclusions about the nature of bull and bear markets.

As I studied the bull and bear markets of the late 1800’s and very early 1900’s, it became apparent that the bull markets Dow, Hamilton and Rhea wrote about were the upward movements of the 4-year cycle and the bear markets were the downward movements of the 4-year cycle. As our country grew, more and more people began investing and as a result the bull and bear market periods became longer. As a result, bull and bear markets evolved into a series of multiple 4-year cycle periods. For example, the first bull market to consist of multiple 4-year cycles ran from 1921 to 1929 and consisted of two 4-year cycles. The low in November 1929 was a 4-year cycle low. The rally, or “Secondary Reaction,â€