Not only have prices moved below their August 2004 intermediate term lows, but this index has now erased all of its 2004 gains and is now down for the year. In spite of the efforts by the boys at the Federal Reserve this index is telling us that they are losing the battle to keep the consumer spending. Perhaps this is because of the enormous high level of debt that is being carried by the average person on the street today. Or, perhaps the higher commodity prices are also starting to take their toll on the consumer as well. Whatever the reason, this index is telling us that the consumer is beginning to tighten.

Here is an interesting correlation that I would like to share. Below is a chart of the DJIA and the Morgan Stanley Consumer Index. I have noticed a tendency for the Consumer Index to top out at major turn points ahead of the DJIA. This creates non-confirmations between these two indexes and the Consumer Index has then lead the way at these turn points. It's hard to see on this chart, but the Consumer Index moved above its February high in June. This June high was not confirmed by the DJIA. From this unconfirmed high the Consumer Index began to lead the way and is now beginning to pull the DJIA down. Hey, after all, if the consumer tightens up, the Industrials should follow.

Now I want to speculate just a bit by trying to look ahead at the next domino that may be about to fall. The consumer is beginning to pull back and as a result the Industrials are now beginning to feel the effect. The next domino that is likely to fall as a result of this trickle down effect will likely be the Transports. With the consumer consuming less the Industrials are beginning to produce less and with less production will likely soon come less shipping. So, unless the consumer can either find a way to take on more debt or to overcome the higher prices seen in commodities, or whatever his reason for tightening, the Transports might very well be the next domino. It will be very interesting to watch this relationship as it unfolds.

Now I want to show you a new development at Cycles News & Views and to do so I will continue with the Morgan Stanley Consumer Index. The chart below is a weekly chart of this index. The indicator in the top window of this chart is something that I have been working on for a while now. It is my Cycle Turn Indicator or CTI. This indicator is designed not to be your typical oversold and overbought oscillator, but rather a turn indicator. The level of this indicator is irrelevant. It is the turn that we are interested in and this indicator turned down at the September top and by doing so warned us that an intermediate term cycle top had occurred. Notice that this indicator is designed to turn at these intermediate term tops and bottoms and it does a great job.

The next indicator is the Trend Indicator. This is the green indicator plotted with the index. I call this indicator the Trend Indicator because it tends to turn at critical high and low points and thereby sets the longer trend for the market.

I use these two indicators in conjunction with each other. When the Trend Indicator is down and the CTI turns up we assume that the ensuing rally is a counter trend move. The most recent example of this can be seen during the August rally. Notice that the Trend Indicator remained down, but the CTI turned up. Until the Trend Indicator crossed over its moving average we considered the bounce a counter trend move which proved correct. So, once the CTI turned back down with the Trend Indicator, we knew to sell the rally.

Just the opposite is true when the Trend Indicator is moving up. For example, from March 2003 until March 2004 the Trend Indicator was moving up. So, when the CTI would turn down we considered the downward movement a counter trend move and once the CTI turned back up you could have been a buyer of this index. But, for now both remain in a downtrend. As long as the Trend Indicator remains negative any rallies in this index should prove to be a counter trend move.

These indictors can be used on different time scales. They can be used on the daily charts, weekly or even the monthly charts. I like to use the next larger scale to confirm or set the trend of the next lower degree. For example, I want to see the monthly ultimately turn in order to confirm the intermediate term weeklies.

Below is a monthly chart of the Morgan Stanley Consumer Index. Notice that both of these indictors have now turned down on a monthly basis. This is not a good sign folks. You have been warned, Again!

Not only can these indictors be used on multiple time scales, but they can also be used on any index and have proven to do an excellent job. Especially, on the intermediate term basis, which was the timeframe that I had in mind when I developed these tools. These indicators have evolved to become a regular part of the Cycle News & Views service in which I apply these indicators to the DJIA, NDX, SOX, Gold, Dollar, XAU, Bonds and others. Please visit www.cyclesman.com

16 October 2004