Also looking at the $TRAN $UTIL and $INDU as they all made new all time highs (in $USD), the last time this happened was in 1998. So what happened to the DOW after it did that? Keep in mind that this voice update specifically talks about "the price" of the DOW and Transports (and in this case also the Utilities) that there is no such thing as "Subjective DOW Theory". The interpretation of DOW Theory is very straight forward. They confirm or they don’t. By making new all time highs it does confirm the bullish move until the day of the reversal. Versus chart patterns, Elliott wave and even some indicators and oscillators which are of the more "subjective" variety.........Review Update
Sunday March 4th 2007
Weekend Update - This has Happened Before - The DOW in 1998 comparison to the Dow in 2007
On this update I want to review and discuss what I highlighted and discussed 2 weekends ago regarding the froth I was seeing in the broader market indexes at that time. This past week, we witnessed a swift and sharp drop in the $INDU and $SPX. I was forecasting this market action two weeks ago. I want to call this past week's market action a tank back, because it sure wasn't a funback! I know that all the pundits and newsletter writers this weekend will each have a different point of view on this past week's market action. Instead of discussing what occurred this last week in the markets, I want to do something else. I want to review what I stated on the updates I issued out on February, 19th 2007, which were prior to the precipitous market drop in the DOW that occurred this past week Please view this update as a strong reemphasis/ review on what I already stated on those updates. Review Update
One of the updates that issued that weekend, was regarding the last time that the $INDU, the $TRANS, and the $UTIL all made new all time highs concurrently on the same day. If you recall, the last time that occurred was in 1998. That weekend, I also discussed what divergences I was seeing within the $INDU and the $SPX as seen from the vantage point of Pound Sterling. I then took you back to what happened in 1998, because this is the last time this occurred. I put up the chart from 1998.
WHAT IS DOW THEORY
Here is a snippet from the Update Titled 2/19/07 - Technical Analysis - $TRAN, $UTIL,$INDU,DOW as seen in Pound Sterling - Dow Theory" I have mentioned this significant fact in the trading room. Therefore, I want to bring it to your attention. Last week, the $INDU, $TRANS & $UTIL made all time highs concurrently on the same day! As far as Dow Theory is concerned, new highs in the $TRANS always confirm the highs in the $INDU. This is considered a bullish confirmation. Highs in one, cannot happen without highs occurring in the other. Otherwise it would be a false signal, one of non -confirmation. The transports confirm or they don't. It is Black or white. There is no subjectivity according to Dow Theory. All three indexes making new highs simultaneously on the same day is even more bullish according to Dow Theory. What happened the last time this occurred in 1998? After the 3 indexes made highs concurrently, the Dow dropped sharply, only to reverse and resume its bullish trend. The NASDAQ also went from 1300's in October all the way to 5000 in 2000. Lets look at the charts. (Scroll all the way down to look at the charts. the last chart.)"
Now let us look at the $INDU Chart from 1998 again. The daily chart illustrates clearly that the $INDU is in a Bearish rising wedge pattern. The $INDU started the year off well and placed a high in the first week of January at 8072.90. (January effect) The DOW then plunged a precipitous 681.30 points by January, 12th 1998 where it placed a low at 7391.60. This marks the short term low and the beginning of the uptrend line for the winter / spring rally of 1998. After the January low was placed at 7391.60, you can see where the retest of the lows occurred and where the exponential moving averages (EMA's) had a bullish triple EMA crossover. You can also see where the bullish Aroon cross occurred at the end of January '98. All the indicators and oscillators had 123 bullish trend reversal. This was followed by a 3 month rally where price traded bullishly above the 13 EMA until the 4th week of April. On the 4th week of April, the DOW placed a high at 9287.30. This was followed by another precipitous drop of 491.20 points to test the 50 EMA and place a low at 8796.10. This was followed by a swift but brief rally up to 9312.00 which was placed in the beginning of May '98 and which also marks the 5 month top. The DOW then stalled and traded laterally for the month of May until if finally dropped below the EMA's and broke the rising wedge uptrend line.
- Important Points about the 1998 Bearish Rising Wedge Pattern (Continuation Wedge (Bearish) Stock Chart Pattern )
- at that time the $INDU rose and rose ,1000's of points on bearish divergence
- Bearish divergence alone is not reason enough to sell because markets/equities can rise and rise on bearish divergence until they stop doing so
- The main point is this: it is important to be aware of when this bearish pattern and bearish divergence may occur prior to it happening in order to be prepared to take the appropriate course of action in advance. And also to know what to expect when it does happen
When you look at the chart, you can see that the $INDU began to top in April and formed the rising wedge pattern. The $INDU then broke down out of the rising wedge in June of '98 to place a low at 8524.60. The $INDU then promptly rallied 888.09 points up in order to back test the breakdown line of the bearish rising wedge. This backtest of the wedge, which always occurs, marked the Dow's yearly high at 9412.69 which was placed in July. The DOW then experience a precipitous drop of 2032.99 points! This drop lasted from mid July to the end of August where the DOW placed it's low at the 7379.70. Then in October '98 the DOW retested the August lows at 7467.49 and then promptly rallied back up to retest the '98 highs at the end of November where it place highs at 9380.20. The sharp drop that occurred during the summer months is a sign of classic bull market action. Bull markets try to leave as many people behind as possible, by shaking out the participants. The Dow's action in 1998 lead to one of the strongest bull markets in US history.
- The similarities between the 1998 $INDU chart and $INDU March 2007
- Precipitous Drop out of the Rising Wedge, with a drop of 800 to 1000 points, characteristic of Bull Markets
- Then resumed rally to place a new swing highs in the first part of July at 9412.60 this was also the backtest of the rising wedge
- Only after the back test of the wedge was placed and the year's highs were placed, did the bottom begin to fall out.
- The DOW had a precipitous drop of 2032.99 points in the summer of 1998
- After lows were placed the Dow. it swiftly went on the retest the 1998 highs at the end of November for the year end rally
- This marked the beginning of the strongest bull markets in US history 1998 - 2000.
- Market drops on a currency crisis in 1998 / somewhat similar to now 2007 - BOJ / China
- The Dow in 2007 is in the similar 1998 rising wedge pattern.
