RUSSELL LOVES CHARTS
A good chart is a thing of beauty. Ah charts, there's something about a point & figure chart that I find fascinating. P&F charts deal with only one thing -- price action. No time considerations, no volume, nothing but price. The theory is that price takes everything else into consideration -- time, volume, sentiment, short interest, you name it. A P&F chart is a picture of concentrated price action, and in concentration, you can often see things that are lost through time.
Let's take a look at the P&F chart below. This is a 50-point, three box reversal chart. Each box on this chart represents a Dow move of 50 points or more, and it takes a move of 150 Dow points (three boxes) or more for a reversal. Rallying action is shown by X's and declines are shown by 0's. The numbers in the boxes refer to months, but October is labeled A, November is labeled B and December is labeled D (because numbers 10, 11 and 12 don't fit into the boxes so letters are used for these three months).
In March (3) of 2005 at the 10,950 box a reversal occurred and here we see that a red declining trendline is drawn. All the action will now take place below the bearish trendline -- until the Dow rises above that trendline.
In April (4) a further bearish event occurs. A row of 0's breaks below a triple-bottom and in so doing it violates the rising blue trendline. All the action now takes place under the bearish red trendline and below the violated blue bullish trendline.
What we see now is a consolidation with an upside breakout in May (5). The row of X's rises to the 10,400 box, then reverses down to the 10,100 box. And most recently, we see a rally to the 10,250 box.
The question we now face is this -- will the Dow rise to the 10,450 box, in which case the Dow will have turned clearly bullish -- in that it will have risen above the last row of X's at 10,400, and it will also have broken out above the bearish red declining trendline. Or will the Dow decline to the 10,000 box, in which case it will have broken below a triple-bottom. In that case, the Dow will have turned clearly and ominously bearish.
So -- Dow 10,450 or Dow 10,000? The chart doesn't tell us which level will be hit first -- but it does tell us how important those two Dow levels are. Love those charts.
Below you see a chart of the yield on the bellwether 10 year T-note. The 10 year yield is an extremely important yield level; it's the one that sets the rate for mortgages. On the upside, the next important move would be 10-year rates rising to 4.70%. On the downside, the next important move would be 10 year rates declining to 3.9%. We await the verdict of the market.
However, I will say that the "look" on this chart is one of accumulation -- a base. If so, the next major move would be a rise to a breakout high to 5%. If that happens, the housing bubble would be in danger of bursting. So you can see that this is a crucially important chart.
The chart below of Goldman Sachs fascinates me. The reason is that Goldman is arguably the smartest and most successful outfit on Wall Street. But what's going on? The stock has clearly topped out and has now lost about 15 percent of its value since its April high. It's been said that Goldman is just one huge hedge fund. I dunno, but when the smartest outfit on Wall Street produces a chart like the one below, you have to wonder what's going on.
It looks to be as though the stock market got oversold. Monday we experienced a bounce with the Dow up over a 100 points. But volume dropped dramatically on the rally. As a matter of fact, in the 50 days since the March peak there were 36 days in which volume declined when the market rallied and volume expanded when the market declined. I take this as a sign that institutional money is slowly and methodically leaving this market. Institutional money isn't panicking, it isn't rushing for the exits -- it's just slowly and carefully unloading its stocks.
If I had to guess, I'd guess that the stock market is going to move sideways for a short while -- and then head south again.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsf
May 18, 2005
The inimitable and venerable Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.
Email this Article to a Friend 
Printer Friendly Version
