Dow Theory

[Birchtree]

Richard Russell is suggesting that, far from condirming that a bear market is in progress and presaging further market weakness, a close in the Transportation ZAverage below its January low (4398.97) might instead signal that the market's decline is about over. I would keep a close eye on the Utilities.

 

[Bullitt]

Richard Moroney from Dow Theory Forecasts posted a sample of his most recent newsletter, Dow Theory Forecasts, in Barron's this past weekend.

How Much Cash to Stash
Dow Theory Forecasts by Horizon Publishing
7412 Calumet Ave., Hammond, Ind. 46324

July 21: Our recommended cash position depends on the market's primary trend and the opportunities we see in individual stocks. While it has become difficult to argue that the market's trend is up, the values available in the market appear more attractive than they have been in years. Good values can become better values, and we would view a breakdown in the Dow Transports below the March low of 4,398.97 as a reason to raise our cash position. But for now, we still see reasons to keep our cash position at 15% to 20%.


The Transports have not confirmed the bearish trend. With a close in the Transports below 4,398.97, both the Dow Industrials and Dow Transports would be trading below prior significant lows -- and the validity of the April bull-market signal would be in question. Without new lows in the Transports, recent action represents divergence -- a reason for caution, but not a clear indication under the Dow Theory. [The Dow Transportation Average was recently at 4,916]....


High-quality growers are trading at attractive valuations. The average trailing price/earnings ratio of S&P 1500 stocks has dropped close to 18, a 13-year low. The average company's earnings growth has held up well, partly because of continuing strength in energy and technology...Going forward, the size of our cash position will hinge importantly on whether energy and tech can maintain their operating momentum -- and whether other sectors can deliver improved growth.

-- Richard Moroney​

http://online.barrons.com/article/market_watch.html

www.dowtheory.com

 

[Bullitt]

Quick little update on where we stand in Dow Theory Land....

On the DJIA we're watching the July lows of 10,962 and the Transports we're watching for a break of 4,653 which would signal a new bearish trend.

Richard Russell, another Dow Theorist, has this to say about the July lows.

All the above are in favor of the bear market designation. The action has not been typical bull market action. If we are in a bear market, then following the current rally, the market will turn down again to test, and probably violate, the July l4 lows (Dow 10962.44).

http://www.gold-eagle.com/gold_digest_08/russell081108.html

Like always I guess we'll have to wait and see!

 

[Bullitt]

Yesterday gave a Dow Theory non-confirmation sell signal. DJIA broke the prior lows, but the low wasn't confirmed by the transports. It will be interesting to see whether or not yesterday qualifies as an actual break of the lows after today registered such an enormous accumulation day. One would think it would, but stranger things have happened.

On a side note: This day, 9/16/08, may have possibly been the highest volume day ever on the NYSE.

 

[Bullitt]

Regardless of what the market did today, Dow Theory triggered a new bear market signal yesterday at the close. The Transports just couldn't carry the weight any longer. I'm sure the bears are saying, I told you so, but that's largely irrelevant when following a systematic trading system. Both the Transports and Industrials will need to make higher highs to get back to bullish mode. While it depends on who you follow for Dow Theory, the bear market signal usually means it's a good time to be building up cash by whatever means necessary.

This should be interesting, the last bear signal was triggered in 11/07, if I'm not mistaken, and the markets got hit pretty hard for months thereafter. Dow Theory did get anyone into the nice 10%+ rally we had from March to May after confirmation from both the Transports and Industrials.

 

[Birchtree]

With a close below 4398.97 in the Transports, both the Industrials and Transports would be trading below prior significant lows - and the validity of April's bull market signal would have to be questioned. We closed at 4503.89 with an intraday low of 4440.80 on the Transports. Richard Russell has stated previously, that far from confirming that a bear market is in progress and presaging further market weakness, a close in the Transportation Average below its January low might instead signal that the market decline is about over. So we are still on a secondary nonconfirmation of the decline. If the Industrials rebound to close above 13,058.20 and the Transports close above 5492.95, the bullish trend would be reconfirmed. How long will I have to be patient?

 

[Bullitt]

Jack Schannep is sticking to his buy signal from 10/7 which he admits in hindsight was a bit early. I don't understand his models or what correlation he has to the Dow Theory, but he masquerades as a Dow Theorist nonetheless.

See his latest prophecy at Marketwatch

From now on I believe we will want to be mostly in stocks for most of the time. A confirmed Bull market isn't that far away: plus 19% on the Dow would be at 9,730 and the S&P at 1,102 ... It looks like the month of October has once again been a "bear killer" for the seventh time out of the last 26 bear markets -- an extraordinary 27% of all bear markets have ended in just that one month.

Mr Schannep has challenged all other alleged Dow Theorists since 1998 to compete with his Dow Theory models. According to CXO Advisories, he's takes first place with a 64% accuracy.

You can see the history of his calls at www.thedowtheory.com.

It's interesting to note that all other Dow Theorists that I follow have either moved to recent sell signals or are still sitting on the Lilly Pad predicting more of the same.

 

[Bullitt]

The Transports did give a non confirmation in early Feb with the break of the November lows. The Industrials failed to confirm this downtrend, hence the term non-confirmation. Transports are showing a MACD divergence and may be gearing for a rally here.

Nearly every Dow Theorist seems to have a different criteria, but it appears that right now, if both the Transports and Industrials can break their early January highs, we can assume the market is in bullish territory. That would equate to around 9050-9100 in the Industrials and around 3700-3750 in the Transports.

A good indicator here is the Oil service stocks. Oil service stocks tend to lead the price of oil and the stocks have been making higher lows since December. Positive moves in Oil should eventually relate to positive moves in the Transports.

Dow Theory is a mechanical trading system that removes emotions. It's either bearish or bullish/buy or sell. For the record I would like to add that I'm currently as bullish as I was in early March 2008 in regards to the general market. A Dow theory buy is a bit of a ways off, but I see less risk on the long side than short side at this point. For those who read the daily charts and 5 minute tickers in search of the holy grail or are just looking to make that 1-2% on an in/out trade, I think it's time to take a step back and observe the forest, not the leaves. I truly believe that a run to 1050-1100 SPX could happen by springtime. It's not going to be a straight shot and I expect chartists to get hammered along the way with whipsaws just as any chartist has been hammered in the gold sector since the November lows.

Beware the PPT but more importantly, beware the Men in Black. I hear they've been active lately and I don't want to hear of anybody on this website getting abducted by them.

 

[Bullitt]

The break in the lows of the Dow came today. Richard Russell seems to think this is the end with a target of 6500.

This sell signal appears to be a better fade to me than a chance to sell, or sell short. Too many people watching those lows in the Dow, but hey, Dow Theory is a mechanical trading system and mechanical trading systems are there to take the emotion out of the game.

 

[Bullitt]

Dow Theory signals a new buy signal yesterday with it's confirmation surge after the break of the pivot line. For those who say, "It's manipulation, the market is rigged, the internals stink, the economy is terrible....", this is why there are things called systems. A chartist doesn't care what the economy is doing and neither should you.

 

[Intrepid_Timer]

Dow Theory signals a new buy signal yesterday with it's confirmation surge after the break of the pivot line. For those who say, "It's manipulation, the market is rigged, the internals stink, the economy is terrible....", this is why there are things called systems. A chartist doesn't care what the economy is doing and neither should you.

Hmmmm, all my indicators just gave me a "sell,sell,sell!!" signal today. At least for the next 3 days. Guess we'll see..........

 

[Guest2]

This is the problem. The left side of the brain says; "SELL" while the right
side says; "BUY". One person gets a "SELL SIGNAL" the other a "BUY".

 

[tsptalk]

Prior Dow Theory Signals:

Short 1/25/90
Long 6/4/90
Short 8/17/90
Long 1/18/91
Short 8/21/92
Long 2/3/93
Short 3/30/94
Long 2/13/95
Short 7/15/96
Long 11/11/96
Short 8/4/98
Long 1/6/99
Short 9/23/99
Long 6/6/03
Short 11/21/07
Long 7/23/09

Source: http://www.robertwcolby.com/dowtheory.html

 

[Bullitt]

Good link there showing the prior DT Signals.

As of today, we've got about 2,500 points until the next sell signal, so I don't see this changing any time soon.

 

[dpmp]

Good link there showing the prior DT Signals.

As of today, we've got about 2,500 points until the next sell signal, so I don't see this changing any time soon.

"Sell signal" as in a major pullback (or a crash)?

I am trying to figure out how to identify the timing/level of the Dow but have no clue. Could you elaborate? Thx

 

[Bullitt]

If we can assume that the averages discount everything, then Dow Theory is really only a way to confirm a trend in the markets. Currently the trend is up and making money on the upside is much easier than the downside. On uptrends, dips are considered buying opportunities. Spikes up in a downtrend are considered shorting opportunities. No great shakes, no secret formulas here.

The Transports give an idea of how much product is being delivered/consumed while the Industrials give an idea of production. Honestly, I have my doubts, but it does have a remarkable track record depending on how it is interpreted. For example, where does Tech figure in on the theory? Also, a basket of 30 stocks is pretty easy to manipulate in today's world, especially when more than a few are trading below $20 a share. Most every Dow Theorist also tends to have a different set of rules in determining whether the trend is up or down.

Dow theory does give minor signals periodically as it did in March 2008, and again a sell on October 2008, but the list of buys/sells that Tom posted on the 24th seems to capture the major trends. It's hard note to not take of the buy generated 6/6/2003 and the sell on 11/21/07. (If only I would have listened....) http://www.robertwcolby.com/dowtheory.html was a pretty good website and I would recommend reading it. I also attached an article from Arthur Hill.

 

[Birchtree]

Some really good information on Dow Theory. I'm waiting on the transports to flash 3717 and then I'm going to spend some hefty dollars. Long live the bull market.

 

[Bullitt]

Moroney doesn't believe that the Dow Theory issued a new buy signal. He's a stockpicker and rarely goes more than 30% cash. The most he's gone to cash was during the last major sell signal in which he was about 40% cash.

Will economically sensitive companies deliver the huge profit gains forecast for next year? Will P/E ratios return to levels above long-term norms? Though we're skeptical on both counts, we could be persuaded.

We'd like to see today's bullish consensus tested by meaningful corrections in the industrials and transports, followed by rebounds to new highs as investors discount an improving profit picture. In the meantime, we're holding about 30% of equity portfolios in a short-term bond fund and emphasizing modestly valued shares of reliable growers with the other 70%.

http://www.forbes.com/2009/08/28/wi...sonal-finance-investing-ideas-dow-theory.html

 

[Bullitt]

Yesterday the Industrials closed at a higher high, confirming the higher high also put in by the Transports. The volume of the break higher in the transports was the second highest since early June.

The uptrend remains intact with no signs of stopping according to Dow Theory.

 

[Bullitt]

Richard Russell is front running the Dow Theory system which is still no doubt in bull mode.

I'm removing the bull from the box. With the Industrials, Transports, Utilities and S&P all ‘rolling over,’ I'm thinking that the counter-trend rally from the March low is in the process of topping out. The Dow has declined six out of the last seven sessions; and, the MACD is on a well-defined sell-signal.

http://seekingalpha.com/article/165...ines-why-october-should-be-a-four-letter-word