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It’s All About the Range

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Another week gone and the market is still in a range. The S&P 500 index (SPX) has climbed back to the top of the range at 2120, while the Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJTA) are lagging a bit. As I mentioned last week the direction of the break in SPX, DJIA, and DJTA will point the direction of the next intermediate term trend. So we’re left waiting again this week for confirmation of the uptrend or a rejection at the current level which will result in more time waiting. On thing I’m watching on a longer term scale is the continued negative divergence from several indicators. Negative divergences aren’t good timing devices for the simple fact that they can last for month or years, but they do provide important information if price declines. The percent of stocks above their 200 day moving average has been diverging from price for over two years (although from abnormally high levels). This indicates that market participants are getting

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More Evidence of Accumulation vs Distribution

Dow Theory Line

Earlier in the month I highlighted some technical analysis indicators that showed a battle between accumulation and distribution. As of Friday we have more evidence of a battle between people accumulating stock and distributing it. This evidence comes from Dow Theory. Friday’s decline in the Dow Jones Industrial Average (DJIA) created a Dow Theory line. Both averages are now showing a pattern that indicates either accumulation or distribution is underway, but we’ll have to wait and see how these patterns resolve to know which will win. William Peter Hamilton stated: When a ‘line’ is in process it is the hardest thing in the world to tell either the nature of the selling or that of the buying. Both accumulation and distribution are at work, and no one can say which will ultimately exercise the greatest pressure. When the pattern is broken we’ll have an answer that will have a significant impact on the market. Hamilton said that the break of a line will indicate a change in general market direction

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Caution Sign From Dow Theory

Published on April 6, 2015 by in Dow Theory
Dow theory Line

At the end of February I noted that Dow Theory had created a non confirmation. In that post I mentioned that I wouldn’t care about it unless the transports (DJTA) fell below their January lows. On Thursday of last week the January lows were broken. This is our first caution sign from Dow Theory. What makes the warning more significant is that the transportation average has been trading in a tight range since the first of the year. This tight range is called a Dow Theory line. The break below the bottom of the range creates a warning, but a major tenet of Dow Theory states that both averages must move together. The industrial average (DJIA) still hasn’t created a low that is three weeks away from its early March high. In addition, it isn’t painting a line. When both averages paint a line then break out (either higher or lower) the event is considered significant in Dow Theory. Since that hasn’t happened it leaves us with a small warning

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The Long View

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As long time readers know, I usually focus on intermediate term indicators because our core portfolios attempt to catch intermediate term up trends (and avoid large draw downs). I don’t often focus on long term indicators so I thought it would be good to step back a bit and see what the very long term indicators are telling us. For the most part they are still showing healthy readings that indicate a long term bull market, but they’re starting to stall. Over the past month the monthly MACD for the S&P 500 Index (SPX) has be crossing back and forth between a bullish and bearish cross. Momentum for SPX is diverging from price as well. As you can see from the chart below, these two indicators have been losing strength for well over a year. For that reason, they aren’t very timely so instead of using them to indicate portfolio allocation changes I use them as warning to watch intermediate term indicators more closely. Looking at SPX on a weekly

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Dow Theory Non Confirmation

Published on February 23, 2015 by in Dow Theory
Dow Theory Non Confirmation

Last week the Dow Jones Industrial Average (DJIA) moved above its previous peak, however the Dow Jones Transportation Average (DJTA) remained below its own. This divergence between the two indexes has created a Dow Theory non confirmation…but it doesn’t matter…yet. A lot of Dow Theory proponents make a big deal out of non confirmations, but all non confirmations are not equal. The type that just happened where one average makes a new high and the other trails is what should happen. It would be extremely odd if both averages always moved above their previous peaks on the same day. When you see others suggesting that danger looms because the transports haven’t broken out yet don’t panic because this non confirmation gives us next to no useful information. A divergence that would make me sit up and notice would be if the transports started lower and broke below their January low. A condition where the industrials have made a new high and the transports are moving lower would be a warning

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Slower Downtrend

Published on February 3, 2015 by in Dow Theory
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One of the primary tenets of Dow Theory is that secondary movements tend to be more steep than the move they are retracing. For example, the Dow Jones Industrial Average (DJIA) made a secondary low point in June of 2012. The subsequent rally lasted four months. Then the next decline retraced 50% of the rally in only six weeks. This is typical behavior during long term bullish trends. What happened next isn’t typical. The market had a continuous rally lasting more than two years without a secondary reaction. This is because no price declines over that period retraced at least 33% of the move in a period lasting more than three weeks. We’ve now reached a point where both averages have declined for over a month. The fact that this decline has lasted over a month is but is only down roughly 5 to 6% shows a market that is changing character. Instead of quick declines and retracements (V bottoms) we’re now seeing some sideways to slowly down consolidation. If

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Dow Theory Best Indicator Since 2009

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Out of the lows in 2009 there has only been one of the indicators that I follow that hasn’t had whipsaws or bad signals somewhere along the way. That “indicator” is Dow Theory. It has continued to confirm  a long term bull market for the entire period from its bullish trend change in July 2009. This is due to time being an important factor in Dow Theory. The system outlined by Charles Dow and William Peter Hamilton waited for roughly three weeks of trend before declaring a secondary reaction point. The lack of secondary lows that subsequently failed has kept Dow Theory bullish. On the chart below I’ve annotated the secondary low and high points from the last several years. In addition there is a Dow Theory line during the first several months in 2012. We’re now approaching a month long decline in the Transportation average (DJTA). The industrial average (DJIA) will need to break below the December lows to pass the three week mark. At this point we’ll need

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Dow Theory Bullish Confirmation

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A few weeks ago I mentioned that Dow Theory was still confirming the long term bull market even though many others were calling a bearish long term trend change. On Friday, both the Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJTA) closed above their last secondary high points. This confirms again that we’re still in a long term bull market. Those that called for a sell signal made the most common mistake in interpreting Dow Theory. These technicians misidentified the last secondary low point as a result of not paying attention to the size of the price decline. Secondary reactions should retrace between 33% and 66% of the rally from the previous secondary low. As a result, the last secondary reaction was in 2012. This means that price will have to fall below those points (about 12542 for DJIA and 4847 for DJTA) without any rallies to change the trend from bullish to bearish. As I’ve mentioned before, that’s not a likely scenario. You can read this post

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Dow Theory Still Confirming Bullish Trend

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After seeing our core portfolios taking the most cautious stance they can last Friday I’m guessing you’re surprised that I’m writing a post telling you that according to Dow Theory the long term bullish trend is still intact. I’m also guessing that somewhere in the next few days you’ll read or hear people saying a Dow Theory sell signal has just been triggered. Those misinformed people will cite the fact that today both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) have closed below their previous lows. There are two problems with people calling a Dow Theory sell signal today. The first is that there is no such thing as a Dow Theory sell signal. The second problem (which is moot because the first problem negates it…but I’ll keep writing for those of you who still aren’t convinced) is that although both averages closed below their previous lows today, they didn’t close below their previous secondary low points. One of the major requirements for a

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Another Reconfirmation of the Bull by Dow Theory

Dow Theory Confirmation of Bullish Trend

Both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) closed above their last peaks today. This reconfirms the primary bull trend of the market according to Dow Theory.  Going forward traders who use Dow Theory will continue to buy dips. If you’ve read my posts on the subject you know that both averages going to new highs does not constitute a “buy signal”.  Instead, it is nothing more than renewed confirmation of the trend.  As a result, you shouldn’t take this as a signal to get fully invested right here.  In fact, you should have been building positions on the dips during this rally.   Robert Rhea in his book “The Dow Theory” actually warns that breakouts like those that occurred today can be a dangerous place to invest and “every trader should remember that from such new peaks or valleys secondary reactions can occur with amazing rapidity“.  Here’s a post with more information about new highs and how to trade with Dow Theory.  For an

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