Wednesday, 8 August 2012

Words of wisdom from Richard Russell

Richard Russell's Dow Theory Letters are a must read for me, and his comments in last night's Remark resonated especially strongly. For those who don't know, Mr Russell began publishing Dow Theory Letters in 1958, and has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest market service continuously written by one person in the business.

Extracted from last night's Remark:

Question -- Russell, everybody has emotions. So where are your emotions regarding this market? From an emotional standpoint, be honest, are you really bullish or bearish?

Answer -- If the Averages confirm that this is truly a bear market, I'll have mixed emotions. On the one hand I will have been proven right on my bear market call, and that will be a boost to my ego. But I can't say that I'd be happy that we're in a primary bear market.

But if the Averages close above their May peaks, and all my charts point to a bull market, then I'll have been proven wrong on my bear market call, and that will be a bruise to my ego. Nevertheless, I'd much rather be living through a bull market than a bear market -- a bull market would be far better for me and my kids and for my business. So call it strange, but from an emotional standpoint, I'd prefer that I was wrong on my bear market call, and I'd prefer that we're in a re-confirmed bull market. 

Therefore, instead of confusing my subscribers with a lot of ego-boosting baloney, I'm just going to call this market the way I see it, being as honest and unemotional as I can possibly be. 

DAX's fractal nature suggests a likely turn lower from near current levels

Starting with the big picture, we see the decline from the 2007 peak was followed by a rally beginning in early 2009, which corrected almost 90% of the decline, before the market turned lower in 2011.

Zooming in to the 2011 decline and aftermath, we see that the rally from the September 2011 low corrected almost 90% of the decline from the April 2011 high, before the market turned lower in March of this year.

Zooming in again to the decline from this March and the subsequent rally, we see that the rally has reached similar proportions to the larger degree rallies shown in the preceding charts, before they turned lower.

Add the above charts to the megaphone pattern and proximity to trend line resistance that I illustrated last night, and you will understand why I am not bullish the DAX at current levels.

Gold hourly chart Head and Shoulders top completed

Maybe I am imagining things. Maybe it won't lead to anything. I've gotta call it as I see it. Quite likely this time frame is too short to be of interest to most, but from little things big things grow (sometimes). Adding confidence to the near term bearish view is the way the market is peeling away lower from a retest of the trend line drawn from the most recent significant lows.