Reply #1: WrapUp by Tim W. Wood

[ozymandius]

THE DOW REPORT
Dow Theory and Cycles

Recently I have received e-mails asking about cycles and Dow theory. I have addressed this before, but it seems that it’s now time to look at this topic again. 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. Gold, the dollar, bonds or individual stock analysis is not a part of the Dow theory.

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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.

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It was the combination of both my trend or cycle quantifications and the Dow theory that I used to develop my 2006 forecast in which I stated in January we should first see the gain in 2006 and that the pain would follow in the last half of 2006. Also, In January I used statistical analysis to develop the projected market path for 2006. Thus far, that projection has been right on track with the market. It is cycle theory and my work with the Dow theory that is now telling me we are about to enter a window of great market risk. I hear many now saying that the 4-year cycle low was made in June/July, while others are expecting the low in October. According to my cycle/trend quantification, this is incorrect and as I see it, the market has a surprise or two up its sleeve in regard to the phasing of the 4-year cycle.

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