The Market Without a Return
by Tim W. Wood ; 07.15.2005
The Dow Jones Industrial Average is currently at the same level that it was in April 1999. This level is represented by the blue line on the chart below. Since April 1999 the market topped out with the bull market top in 2000. The top produced a Primary Dow theory sell signal that still remains valid today. Then, the market declined into the Phase I bear market low, which occurred in October 2002. From that low the rally separating Phase I from Phase II was born. This rally has brought the market back to the same levels of some 6 years ago. So, if one were invested in the DJIA from April 1999 to present, they would basically be at breakeven. See chart @ financialsense.com
Now, I want to look at the most recent 20 month period. This period is defined by the red boundary lines on the chart above. In 2004 the Industrials made three false breaks below this lower boundary line and one false break above it. In March of this year the Industrials also made a false break above the upper boundary line. In April of this year the averages produced a “Secondary” Dow theory sell signal which served to realign the Primary trend with the Secondary trend. Since that signal the market is up some 2%. Furthermore, during this 20 month period, which I believe is a distribution top, the market has made numerous shorter-term false breaks in both directions. This chopping process has served to frustrate both the bulls and the bears.
Anyone trying to invest on the long side would have had a very difficult time sitting through the declines that have continuously occurred during this 20-month period. Furthermore, being long in this environment would not have been advisable simply because of the risk due to the overriding bearish Dow theory implications. However, the short side has also been met with false breaks as well. Therefore, the market has presented an environment that has been virtually impossible for the position trader or the intermediate to long term investor to deal with. No one has been able to win on this time horizon. The market has and continues to wear down, frustrate and confuse both the bulls and the bears.
I continue to believe that the sideways action seen over the last 20 months is pretty much a direct result of two opposing forces. We have the natural forces of the market that are, no doubt, negative. For example, the Dow theory work continues to be negative as does the cycles work and a number of other long-term technical disciplines. But then we have the unnatural forces that are trying to hold things together. The net result has been a sideways market that continues to chop back and forth yielding no return.
Furthermore, the most recent rally has occurred on poor internals and this is simply not a healthy environment for the market. This advance should lead to another failure and disappointment for the bulls. Will the natural forces of the market overcome the unnatural forces of the market? Yes, all throughout history we know that the natural forces eventually overcome the unnatural. The question is, will this occur next week, next month or next year? Cycles News & Views offers technical information on these developments as they occur and now I can offer an alternative to this trendless market.
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