About Dow Theory — First, we saw the recent April highs in the
Averages. Then we saw a plunge in both Averages to their May 7 lows –
Industrials to 10380.43, Transports to 4298.12, next a short rally. If
ahead, the two Averages turn down and violate their May 7 lows, that
would be the clincher. Such action would signal the certain resumption
of the primary bear market.

Just as for years I asked, cajoled, insisted, threatened, demanded,
that my subscribers buy gold, I am now insisting, demanding, begging
my subscribers to get OUT of stocks (including C and BYD, but not
including golds) and get into cash or gold (bullion if possible). If
the two Averages violate their May 7 lows, I see a major crash as the
outcome. Pul – leeze, get out of stocks now, and I don’t give a damn
whether you have paper losses or paper profits!
– Richard Russell, May 18, 2010

My goodness, I don’t think I’ve ever seen Richard Russell so emotionally charged and so adamantly negative. He wrote the above on May 18th. On May 20th the Dow and the Transports did in fact violate their May 7th lows. So I guess Russell, the venerable Dow Theorist, is officially bearish — really bearish. Scarily bearish.

I saw Russell’s quote at Business Insider. Apparently, Russell also wrote:

Do your friends a favor. Tell them to “batten down the hatches” because there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don’t need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country [my emphasis]. They’ll retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him.

Won’t recognize the country by the end of the year? That’s some pretty extreme stuff. But, after all, he is Richard Russell. He’s made some pretty amazing calls over the years, so he’s worth listening too.

Of course, Russell can’t see into the future any better than anybody else can. And he would be the first to admit that he could be dead wrong. So the real question is this: Are we seeing a bull market pullback in the stock market or is it a trend reversal? I’ll leave Dow Theory to Russell. He’s the master. I’ll just look at what the trend indicators are telling us.

The S&P is below its Ichimoku cloud. The shorter-term blue line is trading below the longer-term red line. The forward-looking cloud has turned pink. Ichimoku is clearly bearish.

The S&P is trading below both its intermediate-term 50-day moving average (blue line) and its longer-term 200-day moving average (red line). And the 50-day average is now pointing down. So that’s bearish. However, the 200-day average hasn’t turned down yet and the 50-day hasn’t crossed below the 200-day. That takes awhile. But, all in all, it’s mostly a bearish picture.

On the point and figure chart, the S&P had a double bottom breakdown on May 21st with a target of 940.

The lower edge of the envelope on the 10-month moving average (using a 1% variance) is 1083.73. The S&P closed on Friday at 1087.69. If it’s below the lower edge of the envelope at the end of the month, you may want to consider moving out of stocks for the first time since June of 2009. I’m talking about your long-term holdings like whatever stock market exposure you have in your 401(k)s and IRAs.

It may be a little early to say, but the weight of the evidence is leaning toward a trend change. So let’s look at how that possibility may affect the Grail strategies.

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