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Missed it by That Much

Published on January 21, 2016 by in Dow Theory
160121DowTheory

During the day yesterday, the Dow Jones Industrial Average (DJIA) traded as low as 15,450. This was well below the last secondary low for DJIA at 15,666. Fortunately for the bulls, the market rebounded and closed a hundred points above the last secondary low. Remember, Dow Theory uses closing prices (not intra-day) so yesterday’s action didn’t break the long term bull trend. The bull market is still intact, but it’s on life support. The market is bouncing today so now we wait until the market turns down again… to see if 15,666 can hold again or is broken.

 
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Make or Break for the Long Term Trend

160116MarketRisk

I’m seeing several signs that we’re at an inflection point for the long term trend of the market (meaning years). It has been uptrending since 2009 and it looks like it’s make or break time for the bull. Here are some of the things I’m seeing that indicate the market must rally very soon or the long term trend will be down and a new bear market has begun. First is my market risk indicator, which is an intermediate term indicator, has just signaled. Take a look at the chart below and you’ll see that it signals at inflection points. It generally warns very near the low or just as the market is generating downside momentum. This indicator suggests that more excitement (either up or down) is close. Next we have Dow Theory. It is only a few percentage points away from signaling a long term bear market. This indicator marks very long term trends in the market. When both indexes break their secondary lows it tells us that the

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It’s Ugly Out There

160115MarketHealth

Wow. What a week. Like the market all of my core health indicators got hammered. They are now all deep in negative territory. I’ll let the chart speak for itself. One thing of note is that my market risk indicator is now signalling. This changes the volatility hedged portfolio to 50% long and 50% hedged with mid term volatility (an ETF/ETN like VXZ) or dynamic volatility (XVZ). For official tracking purposes I use XVZ, but the instrument is thinly traded so it introduces problems in actual portfolio management. First is that thin trading means it is difficult to fill large trades at a good “market” price. Second is that in a swiftly declining market the bid may as much as 20% below the market so you’ll have difficulty getting out of the position (or rebalancing) when pure panic has set in. As a result, I personally use mid term volatility like VXZ instead of dynamic volatility. But, since the back test has been done with XVZ I’ll continue to use

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Crunch Time for Dow Theory

Published on January 10, 2016 by in Dow Theory
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It’s crunch time for Dow Theory. We’re still in a long term bull market, but only about 4% away from a bear market signal. If the August closing low of 15666 on the Dow Jones Industrial Average (DJIA) is broken to the downside we’ll have a confirmed long term down trend underway. Currently, DJIA has retraced about 65% of the rally out of the August low. This is about as far as a “normal” secondary low carries. Any further lows in the market will increase the odds that 15666 will be broken. So what we really want to see (if you’re bullish long term) is a resumption of the long term up trend soon (and without much more price damage). So if Dow Theory signals a bear market what does that mean for portfolio management? For me, it means that I’ll be more willing wait for a 15% dip in the longs before rebalancing the longs and shorts. Conversely, I’ll be quicker to sell profit from the longs and firm

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Bull Markets Die Hard

Dow Theory non-confirmation

When a big decline occurs on a single day it’s a good time to step back and look at how much damage was done to the intermediate and long term time frames. Yesterday’s market action was pretty horrific for a single day. It was enough to cause all of my core indicator categories to go negative. As you know, I wait until Friday before making any portfolio allocation changes, but the damage done yesterday will be hard to overcome. That means it is likely that the intermediate term trend is down (or that we could see another month or so of decline). The long term trend, however, is still in question. Here are a few charts that show both good an bad signs for the longer term trend. First is a chart of the Dow Jones Industrial and Transportation averages (DJIA and DJTA). While the transports have clearly broken down and signaled a Dow Theory non-confirmation, the industrials are still well within the bounds of a “normal” consolidation of the

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Market Health Holds Steady

151204MarketHealth

Over the past week my core market health indicators held steady as the market whipped back and forth. The lack of movement in the indicators while the market was falling sharply on Wednesday and Thursday indicates internal strength. None of the core indicators moved enough to change any portfolio allocations. One thing of note this week is that the sharp dip didn’t cause any of my measures of risk to move much. Market participants aren’t reacting to downward price moves. One illustration of fear comes from price targets gleaned from the Twitter stream for the S&P 500 Index (SPX). On the chart below each red dot represents multiple market participants tweeting the same price level for SPX. Notice that the declines in early and late 2014 put enough fear in the market to result in a fair amount of lower price targets on dips for several months. Traders got skittish and tweeted their fears of how low the market might fall. The August / September correction didn’t result in the

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Industrials Create New Secondary Low

Published on September 16, 2015 by in Dow Theory
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Today the Dow Jones Industrial Average (DJIA) completed the work it needed to do for a new secondary low to be marked. It joins the transports (DJTA) which completed the low pattern yesterday. This is a significant event given the fact that it’s been almost three years since Dow Theory lows have been made. We now have a reference point that is only 6% to 9% below current levels (DJIA and DJTA respectively) that will signal a new bear market is upon us if they are broken. But, until the August lows are broken the long term trend is considered bullish. According to Dow Theory you should use the current dip to accumulate more stock. What!!? Yes, according to Dow Theory you should time your purchases with secondary lows…and that means buying this dip. The idea is that you’re buying a dip with a clear sell stop that is only 6% below DJIA. If you had followed this methodology from the last Dow Theory bull market signal in the summer

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Transports Create New Secondary Low

Published on September 15, 2015 by in Dow Theory
150915DowTheory

At the close today the Dow Jones Transportation Average (DJTA) finally made a new secondary low. The last secondary low for the transports was in June of 2012.The completion of the new low is a result of a decline that retraced about 40% of the rally from June 2012 to December 2014, that was subsequently followed by a three week rally that has retraced about 40% of the decline from the last secondary high made in late December. The Dow Jones Industrial Average (DJIA) needs to break above 16,655 (without falling below the August low) to make the August low a new secondary low. Another 50 points tomorrow would do it. If that low is made we’ll have much more clarity on the long term trend of the market…or if not clarity at least we’ll have a good road map to follow. After new secondary lows are created in both indexes all we have to do is watch to see if both averages make it to new highs or if

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Dow Theory Secondary Low Close

Published on August 23, 2015 by in Dow Theory
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Over the past few days I’ve started seeing articles that state Dow Theory has generated a sell signal. I believe those authors to be wrong. As I’ve mentioned in the past the most likely reason a Dow theorist makes mistakes is in identifying secondary highs and lows. If a practitioner misidentifies a secondary low during a rally low and price subsequently breaks below that low it generates a “Dow Theory Sell Signal” for them. During the past six years (current bull market by my count) I’ve seen at least five calls for the top from other technicians that have been wrong…due to misidentification of secondary lows. By my count the last secondary low for the Dow Jones Industrial Average (DJIA) was in November of 2012 (and hasn’t been broken yet…so the long term trend is still up). The rally out of that low was so powerful that it lacked dips that were large in price or long in duration. The current dip now meets both of those criteria which makes

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Likely Going Lower

150821spx

As a technical analyst I love it when independent chart patterns suggest the same resolution in the market. I’ve been highlighting two important chart patterns over the past month that will tell us if the market will eventually resolve in a rally or a decline. Yesterday both charts broke below their trigger lines suggesting a fairly large decline is ahead of us. The first chart is of the S&P 500 Index (SPX). It has been painting a tight line for most of the year. It finally fell below the bottom of the range. This break projects a minimum downside target of 1940 which would be about a 9% decline in total. I’m guessing that we’ll finally get the long awaited 10% projection. The second chart is of the Dow Jones Industrial Average (DJIA). It has been painting a rounded top pattern. Yesterday it broke below 17075. This break projects a minimum downside target of 15825 which would be a roughly 13.5% decline. From a Dow Theory perspective a decline to

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