Mario Gabelli was pounding the table on Bloomberg this morning saying the bottom was in for stocks and everyone should be buyers, or they’ll be left at the station. Meanwhile Bloomberg was running a banner all day saying that, according to Dow Theory, the Transports have confirmed the lows in the Dow and we are headed lower. I think they are both wrong. I try to be a good student of Dow Theory, so I will give you my understanding of what happened yesterday. First I would like to start with the Transportation Index. Back in October 2007 the Dow topped and both indexes headed down making lows in November, and then again in January, and initiating a bear market signal. Once the January low was in, we began to see the divergence between the Dow and the Transports on numerous occasions and not just by a couple of points either. When the Transports made a new all-time high in early June, the Dow was more than 1,000 points below its respective all-time high. That is a big difference and I chalked it up to the then raging bull market in commodities. Since that new all-time high in the Transports, the Dow has made a series of lower lows, while the Transport gave up ground, grudgingly at best. This didn’t look right to me, especially when you consider that the Baltic Dry Index fell from over 11,000 to under 4,000 in less than four months. Then early last week I pointed out what I saw as the beginning signs of weakness in the Transports. That brings us to yesterday, when the Transportation Index took a big dive, moving it below not only the August lows but
the July lows as well (purple horizontal line). That’s a very good sign but it is not a confirmation of the lower low made by the Dow yesterday. In order for that to happen, we would need to see a close below the January closing low of 4,150 and that is still quite a ways away. Note also that back in January and February, the Transports completed a bullish reverse head-and-shoulders bottom, and yesterday’s intraday low bounced right off of the support from that neckline (diagonal red dashed line). As I see it, the Transports are now trending down and will eventually move below the January lows, but you need to see the movements for what they are.
When we stop and look at the Dow, we get a much clearer picture of a market trending down with four clearly defined lower highs and four lower lows (red arrows). As you can see below, we bounced off of the bottom band of the downward
sloping trend line yesterday, and that is normal. After yesterday’s steep drop, including a loss of more than 150 points after 4 pm, it does not surprise me to see a rally today. I told you in last night’s report to expect a run back up to the critical 10,725 area, or marginally above it, and that is exactly what has happened. No surprises here!
I would now like to make a few comments on gold. I told you two days ago that the bears would not let gold close out the month above 899.90 and that’s exactly what we
saw take place today. They hit December gold last night on the Globex, but it rallied back above 900.00 twice this morning, before it finally gave in to selling pressure. The dollar is rallying along with the Dow because of hopes a bailout will occur, and yet nothing could be worse for the dollar and better for gold. It looks like the December gold will close down 35.00 and somewhere around the 872.00 (with oil up close to 5.00!) and that an increase of almost 5% for the month and close to $130.00 off of the September low. Gold is one of the few investments you can make right now, and it is the best investment you can make right now.
In conclusion, we are going to see a lot of price manipulation in the coming weeks, especially as it becomes apparent to all that the government really has no solution. Then comes desperation, as they try to “regulate the markets in an effort to protect investors”. They will outlaw short selling and try to confiscate gold in an effort to stop what cannot be stopped. The problem is now out of control and spreading to Europe. Today Dexia Bank in Luxembourg, a good bank I might add, had to be taken over because they held American junk as reserves, and found out the hard way it was worth nothing. It is just one of many to follow in both the US, as well as the rest of the world.
ebo@dtanalysis.com
Dow Theory Analysis SAC
Sept. 30, 2008
Email this Article to a Friend 
Printer Friendly Version