Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Another Look at Dow Theory and Cycles

InvestorEducation / Cycles Analysis Jan 24, 2007 - 07:09 PM GMT

By: Tim_Wood

InvestorEducation

I continue to receive e-mails asking about the 4-year cycle and the ongoing Dow theory non-confirmation. In order to address this topic I have decided that it would be best to simply use a piece that I wrote before.

I have virtually every scrap of material written by Charles H. Dow, William Peter Hamilton and Robert Rhea and I want to confirm that cycles are definitely not a part of the Dow theory. I'll also add that head and shoulder formations, rising wedges, symmetric triangles and other technical patterns are not a part of the Dow theory. The McClellan oscillator, stochastics, RSI nor any other oscillator, for that matter, is a part of the Dow theory. Nor is gold, the dollar, bonds or individual stock analysis a part of the Dow theory.


My use of cycles simply allows me to quantify the moves within the broad context or framework of Dow theory. On page 42 of The Stock Market Barometer, William Peter Hamilton gives the dates and directions of the "Primary Trend." These dates correspond exactly with the price action of the "4-year cycle." In The Story of the Averages, Robert Rhea quantifies each "Primary Swing" and "Secondary Reaction" throughout this entire 200 page document. These dates also correspond with 4-year, seasonal and 22-week cycle highs and lows. So, regardless of the label we pin on these movements, these price movements are one in the same. The cycles work is simply another, completely separate, discipline that allows me to quantify the movements regardless of their names. Cycles allow for the development of expectations based on the quantification of prior moves of the same degree. Cycles allow one to look at the market in several dimensions and apply the historical quantifications in order to develop future expectations.

For the record, Dow, Hamilton and Rhea also spoke of the market having "three well defined movements" or dimensions. Hamilton said, "There are three movements of the averages, all of which may be in progress at one and the same time. The first, and most important, is the primary trend: the broad upward or downward movements known as bull or bear markets, which may be of several years' duration. The second, and most deceptive movement, is the secondary reaction: an important decline in a primary bull market or a rally in a primary bear market. These reactions usually last from three weeks to as many months. The third, and usually unimportant, movement is the daily fluctuation." Cycles are simply another way of looking at these movements.

As an example, the diagram below was taken from The Story of the Averages by Robert Rhea. Notice that Mr. Rhea labels the move from Point A to Point J as the Primary Bull Market and the move from Point J down to Point Q as a Primary Bear Market. From a cyclical perspective, the move from Point A to Point J was the move from the 4-year cycle low to the 4-year cycle top. The move from Point J down to Point Q was the move from the 4-year cycle top into the 4-year cycle low and the complete move from Point A to Point Q was one complete 4-year cycle. From a cyclical perspective the moves from Points A to C and from C to E were the movements of the short term trading cycle. Movement G to I was a 22-week cycle while the movement from Point E to Point I constituted one complete seasonal cycle.

Rhea labels the movement H to I as a "Secondary Reaction" in the Bull market. If I put my cycles hat on, that same movement becomes the downside piece of both a 22-week and a seasonal cycle. Movements from Point K to Point L and M to N were both "Secondary Reactions" in the Bear market. I might add that this advance from K to L topped out in only 3 months and there was a slight Dow theory non-confirmation at this top. From a Dow theory perspective, this non-confirmation was a warning and when the movement from Point L to M violated the Point K lows, the bear market was confirmed. Through my eyes as a cycles analyst, the upside piece of this move from Point K to L was both a 22-week and a seasonal cycle advance that topped in on 3 months. My work with cycles tells me that any seasonal cycle that tops out in 6 months or less has a 73% probability of moving below the previous seasonal cycle low. This same cycles work tells me that the average decline for all seasonal cycles topping in 6 months or less and that failed to move above their previous seasonal cycle high (in this case Point J) is 26.59%. In this case the decline that followed into the 4-year and seasonal cycle low, Point Q, was 45.22%. Dow theory does not tell us these things. Statistics such as these only come from cyclical quantifications.

Dow Theory

 Learn how to Trade Elliott Waves

Cycles work is nothing more than a means of trend quantification and it can be used to confirm and complement Dow Theory. I could go on and on with each of these points, but there is really no need as my point should be clear. Cycles are not a part of the Dow theory. Cycles simply offer us another way of looking at the same movement, but through different eyes. If we have a working knowledge of both disciplines, we can use them together to confirm each other. As in the example above, once the move failed in only 3 months, the cycles work was warning us based on the quantifications of previous cycles. At the same time the Dow theory was warning with its non-confirmation. A Dow theory "Sell Spot" then developed as the Industrials formed a "line" into early January 1907. The trigger to sell was then hit with the downside break of this "line." The cycles work confirmed the break and offered a price target, which in this case proved to be conservative. Then, with the violation of Point K, Dow theory confirmed the bear market. As you should be able to see in this simple example, both disciplines have their place and can be used as separate tools to confirm and complement each other.

As an example, it was cycle theory that allowed me in the summer of 2001 to forecast a decline below 7,400 in the DJIA in 2002. But, it was the Dow theory that first gave its warnings in September 1999. It was cycle theory that allowed me to forecast the bottom in gold in 2001. It was cycle theory that allowed me to call the 2002 bottom in the CRB. It was cycle theory that allowed me to call the dollar top in 2002 as well as the low in December 2004. It was cycle theory that warned me of the May 2006 high in gold. It is cycle theory that told me in late July that unleaded gasoline should begin moving lower and that in October it had made an intermediate-term low. It was cycle theory and my Cycle Turn Indicator that identified the September intermediate-term top in bonds as well as the intermediate-term low in October.

It is the Dow theory that provides the backdrop of the overall Big Picture. It is the Dow theory that provides the understanding of bull and bear market phasing and where we are in this Big Picture. It is the Dow theory that provides important non-confirmations at most major cyclical turn points. It is the Dow theory that provides us with the setups at "Buy and Sell Spots."

It is the use of the two theories that complement each other, which in turn aids in the overall market analysis. At present, both cycle theory and my work with the Dow theory are telling me we are entering a window of great market risk. I continue to hear many saying that the 4-year cycle low was made in June/July. I also continue to hear that the 4-year cycle is no longer even relevant. According to my cycle quantifications, this is incorrect and as I said before, the market has a surprise or two up its sleeve in regard to the phasing of the 4-year cycle. One such surprise is that this advance has served to make most people think that the 4-year cycle low has been made.

By Tim Wood
Cyclesman.com

Tim Wood specialises in Dow Theory and Cycles Analysis - If you are interested in a statistical and technical based source that also utilizes Dow theory and provides statistical probabilities as to what should occur, then Cycles News & Views may be for you. I also provide web-based updates giving short and intermediate-term turn points on the stock market, gold, bonds and the dollar, utilizing my Trend and Cycle turn Indictors. A subscription also includes short-term updates three nights a week. Please see www.cyclesman.com/testimonials.htm


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules