dow in denial, page-2

re: dow in denial. what russell says G'Day mozz. Here's Russell's take from last night. It certainly puts things in perspective for me.

Following the March lows, the Averages started up once more. On May 2 the Transports closed above their January 6 high of 2421.71. The Dow did not confirm.

The question was -- would the Dow confirm by bettering it own November 23 high of 8931.68?

That question was resolved yesterday when the Dow shot up 116.03 points to close at 9038.98. True, it was a belated confirmation, coming a month after the Transportation break-out. But better late than never. So as of yesterday, both the Transports and the Dow had bettered their post-October highs.

This was a Dow Theory upside confirmation, and it was clearly a bullish development.

Yesterday was the eleventh consecutive day of rising breadth. The market has been severely overbought, and yesterday added to that burden. Also, there has been very heavy insider selling. On top of everything else, the Investor's Intelligence poll now shows bulls at 56.4% and bears down to 20.7%. This is a 35.7% spread between bulls and bears, an extreme and a valid reason for caution. The McClellan Oscillator has not undergone a real correction in the last few months. It should be overdue.

This is a bear market rally, and bear market rallies can be surprisingly powerful -- and they can be tricky. I've advised those of my subscribers who are willing to trade to take positions in Diamonds (a proxy for the Dow) and Spyders (a proxy for the S&P).

I've also advised keeping close stops under both of these, and to move up stops as the DIAs and SPYs advanced.

What we've been seeing is what we used to call a "breadth stampede," a surge in breadth with little in the way of correction in between. The breadth stampedes don't usually end after the first correction. Thus, if the market does back off in this area, I would expect, following any correction, that the market will try again on the upside.

Or let me put it this way -- when you see this kind of power in the advance-decline line, the market will not suddenly top out and collapse. Breadth stampedes just don't seem to end suddenly -- there's too much power behind these moves.

So is this a gathering mini-bull market in the style of 1967-68 or 1970-71? There's no way of telling, but it was on that possibility that I suggested in the May 22 site that traders take positions in the DIAs and SPYs

I wrote yesterday that this kind of bear market rally tends to continue until people are convinced that "a new bull market" is at hand. In bear markets, that's about the time when the upward correction dies out. Do I think the "new bull market" thesis has been accepted? No, not quite yet, at least in my judgment.

As I watch this market, I get the feeling that something weird is going on. The action just doesn't feel "right" or "normal" to me. And I think what it is -- is that the stock market and the bond market are both being driven, not by improving business, but by rising liquidity. A Fed-created tidal wave of liquidity is floating everything higher -- housing, stocks, bonds. It's a false rise, but it's happening, and in this business we don't deal with morality, we deal with reality.

The latest figures show that filings for state unemployment have jumped an "unexpected" 14,000 to a total of 442,000. So despite all the propaganda and baloney, it's clear that companies are continuing to lay off workers.

This brings up the question -- is the US economy really improving? And the next question -- is the rally in the stock market simply a corrective rally in a continuing bear market, a rally that has little or no predictive value as far as the economy is concerned?

Of course, there's no way at this time of knowing the answer to these questions. However, I want to suggest to subscribers that bear market rallies, even powerful ones, often offer little in the way of economic predictions.

I continue to believe that the dollar is the KEY to the future of the US. This morning the September Dollar Index was down I.10 points just off its lows. But on the chart (using a Japanese candle stick chart) we have an encompassing candle or a candle whose high and low encompass the previous six day's action. This is a bearish configuration, suggesting new lows in the Dollar Index.