On July 18, 2007, Chris DeHaemer confirmed Dow theory as the DJIA crossed a new high of 14,000 in conjunction with the Transports’ move above 5,500. The theory held that if both indexes hit a significant new high (or low) or at the same time, you can positively declare the start of a bull (or bear) market.

The last time he confirmed the theory on October 20, 2006, he called for a new Dow high of 13,000 shortly thereafter. He got it, and moved to calling for a new Dow high of 16,000 over the next 12 months.

And we may very well see that... if housing, lending and credit deterioration conditions recover, and if the Dow can hold some level of support between 13,600 and 13,250 after plunging through major support of 13,800 this past week.

But, like I said… if.

Unfortunately, housing isn’t likely to show any signs of recovery until, best-case scenario, late 2008 to 2009, a theory we’ve held since early February 2007 in countless editorials found on TaipanFinancialNews.com. It’s also a theory newly held by Countrywide CEO Mozilo who doesn’t foresee a recovery until 2009, or a near-term end to the current correction period.

But even those recovery estimates also depend on further deterioration in housing, lending and credit. When an estimated $1.1 to $1.5 trillion of ARM mortgages face resets this year, costing the average homeowner an extra $200 to $250 a month on a $200,000 mortgage, for example, don’t be surprised to see many more delinquencies, foreclosure filings and heavier supply glut for homebuilders.

For housing, and the broader economy, the worst is far from over. I don’t care what Hank Paulson would have you believe.

Sure, eventually, we may see Chris DeHaemer’s call for Dow 16,000 come to fruition over the next 12 months, based on the Dow theory (highlighted in the Thursday Chart of the Day), but we won’t get there without bumps and bruises.

Ian