Our May 10, 2018 posting says all that we need to say. At the time, we said the following:
“A bear market would be indicated if the Industrials and Transports decline below their March and April [2018] lows, respectively.”
As of December 20, 2018, the Dow Jones Industrial Average and the Dow Jones Transportation Average have had the following price actions:
Not only has both indexes gone below their respective lows in March and April of 2018, they also established double tops, according to Charles H. Dow:
"Another method [for detecting manipulation] is what is called the theory of double tops. Records of trading show that in many cases when a stock reaches top it will have a moderate decline and then go back again to near the highest figures. If after such a move, the price again recedes, it is liable to decline some distance (Hamilton, William Peter. Stock Market Barometer. Harper and Brothers. 1922. page. 36)."
The general pattern that identifies a reversal of either direction in the market is shown below.
The figure 2b best demonstrates the double top that was experienced in the market in 2017/2018 as shown below. Point B in figure 2b is the equivalent of the March/April 2018 lows in the two indexes that we have tracked.
According to Dow, the short-term manipulation is the effort of large syndicates or operators to get the price back to the prior top which, if it fails to inspire general market excitement to higher highs then the relapse would cause the index “…to decline some distance.”
What is considered “some distance?” Based on the work of Dow, this is as follows:
“The market is always responsive to the great law of action and reaction. The longer the swing one way the longer it will be the other. One of the best general rules in speculation is the theory that reaction in an advance or a decline will be at least one-half of the primary movement [50% principle].
“The fact that the law is working through short ranges and long ones at the same time makes it impossible to tell with certainty what any particular swing may do; but for practical purposes, it is not infrequently wise to believe that when a stock has risen 10 points, and as a result of one or two short swings [double tops] does not go above the high point, but rather recedes from it, that it will gradually work off 4 or 5 points (Dow, Charles H. Wall Street Journal. October 19, 1900.).”
In another excerpt from Dow’s work, Dow says:
“It often happens that the secondary movement in a market amounts to 3/8 to ½ of the primary movement (Dow, Charles H. Wall Street Journal. January 22, 1901.).”
Effectively, an investor should expect a decline from –38% to –50% as a natural reaction from a double top. This means that the Dow Jones Industrial Average should decline to:
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19,015.21
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16,602.01
We’re waiting for the 19,015.21 target before we reassess the market conditions. In the meantime, we have taking the Bear Market Indication as a good time to clean house as shown in our latest transaction alert dated December 20, 2018.