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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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Dow Theory Reconfirms Uptrend

Dow Theory confirms an long term bull market

Over the weekend we mentioned that Dow Theory was showing a small non-confirmation of the current uptrend.  Today that condition was cleared as the Dow Jones Transportation Average (DJTA) joined the Dow Jones Industrial Average (DJIA) closing above the previous peak.  This reconfirms the primary bullish trend and suggests that the most likely long term direction is up.  Traders that utilize Dow Theory will continue to be buyers of dips…especially dips that create a secondary low point.

 
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New Highs

Buy signal from Twitter Sentiment for the S&P 500 Index (SPX)

Several major indexes made new closing highs this past week.  What more need be said about the resilience of this market. The S&P 500 Index (SPX), Russell 2000 (RUT), and the Dow Jones Industrial Average (DJIA) made new all time closing highs. Nasdaq and the Nasdaq 100 (NDX) made new 52 week highs. The only major index that didn’t participate is the Dow Jones Transportation Average (DJTA).  This technically makes a Dow Theory non-confirmation, but not all non-confirmations are created equal.  This non-confirmation comes after a small correction that did not create a secondary low point for the market.  In addition, DJTA is barely 2% away from reconfirming the primary trend (which is currently bullish).  We won’t become concerned about this non-confirmation unless we see several weeks of lagging performance from the transports or the levels mention in this post broken. The measures of breadth that we follow have all recovered and so have our investor contentment and market risk indicator.  The only sign of weakness comes from our market

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No Secondary Reaction Yet

Published on July 1, 2013 by in Dow Theory
Dow Theory Chart

We haven’t done an update on Dow Theory for a while. This is because the market has been moving almost straight up from the last secondary reaction and reconfirmation of the long term up trend (which occurred in mid January).  We thought that the recent consolidation might give us a secondary low point from which we could initiate new trades or use as a buying opportunity to add to our long term positions.  It didn’t happen.  If you take a look at our criteria for secondary reactions you’ll see that although many of them were met, a few critical items were not. Take a look at the chart below and you’ll see that the consolidation in the Dow Jones Industrial Average (DJIA) wasn’t deep enough to meet the “33% to 66%” draw down requirement.  One thing we like to see as well (but isn’t necessary by rule) is a secondary low point that is below the last minor low in the averages.  This would make a close roughly below 5900

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Dow Theory Buy Signals Do Not Exist

When the Dow Jones Industrial Average (DJIA) is making new highs and the Dow Jones Transportation Average (DJTA) follows to new highs as well you often seen news reports exclaiming a “Dow Theory Buy Signal”.  If you use those reports to make investment decisions you’re being misled by a writer who doesn’t understand Dow Theory.  There are no buy signals or sell signals in Dow Theory that indicate a specific date where you should go long or short.  Robert Rhea in his book “The Dow Theory” went so far as to warn about buying or selling just after a confirmation of a trend change due to the risk of an abrupt correction near those points. Whenever prices have pushed through into new low ground in bear markets or to new highs in bull markets, it is usually safe to assume the primary direction will be maintained for a considerable time; but every trader should remember that from such new peaks or valleys secondary reactions can occur with amazing rapidity. (emphasis

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Dow Theory Trends – Dow Theory Primer – Part 3

Published on February 5, 2013 by in Dow Theory
Identifying the Trend in Dow Theory

In part 1 of our Dow Theory primer we explained that Dow Theory is a study of stock market price and volume that attempts to identify the prevailing trend of the market and warn of possible changes in that trend.  In part 2 we explained how to identify Dow Theory movements. This post will focus on the trend  of the market and possible changes in the trend. In order to identify a long term trend, confirm a trend, or warn of a possible change in trend Dow Theory requires the use of closing prices for both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA).   Both averages must move together in the same direction to provide confirmation of a trend.  When the movement of the two averages conflict they warn of a possible change in trend. When the market is in a primary bullish trend both DJIA and DJTA move together to consistently make higher closing highs and higher closing lows.  Dow Theory calls the higher

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Dow Theory Movements – Dow Theory Primer – Part 2

Published on January 28, 2013 by in Dow Theory
Dow Theory Secondary Reactions

In part 1 of our Dow Theory primer we explained that Dow Theory is a study of stock market price and volume that attempts to identify the prevailing trend of the market and warn of possible changes in that trend. The theory uses the movement of price of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) with their associated volume to identify major trends.  This post will focus on the movements and how to identify them. Dow Theory Movements Dow Theory recognizes three movements in the price of DJIA and DJTA.  Those movements are:  1) Daily Fluctuations, 2) Secondary Reactions, and 3) Primary Trends. Daily Fluctuations are the smallest duration moves in price and are irrelevant unless combined with other elements of the theory such as secondary reactions or lines.  An investor looking at the day to day movement in price does not have enough information to determine the probable future direction of the market.  Daily fluctuations are easy to spot.  They are one day

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What is Dow Theory? – Dow Theory Primer – Part 1

Published on January 23, 2013 by in Dow Theory

I’ve seen a lot of blog posts about Dow Theory lately.  Unfortunately, many of them have had a lot of misinformation about what Dow Theory is and how it should be applied to the markets.  Like all types of technical analysis Dow Theory is simple in concept, but difficult in practice.  In an effort to help you understand the basics I’ll do some posts about Dow Theory over the next several days that explain it and the basic rules of how it works. Today we’ll start with an overview. What is Dow Theory? In the simplest terms, Dow Theory is a study of stock market price and volume that attempts to identify the prevailing trend of the market and warn of possible changes in that trend. William Peter Hamilton formalized the theory proposed by Charles H. Dow in a book titled “The Stock Market Barometer”. He considered the theory to be a general guide to the probable outcomes in the stock market based on the combined movements of the Dow

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Dow Theory Buy Signal a Whisper Away

Dow Theory Primary Trend Confirmed...almost. Buy Signal?

Over the past few days the Dow Jones Transportation Average (DJTA) cleared a long term divergence it had painted with the Dow Jones Industrial Average (DJIA) going back to July of 2011.  Clearing that level was one of the hurdles that Dow Theory needed to clear before creating what many call a “buy signal”.  In reality, there are no actual buy signals in Dow Theory, instead Dow Theory merely confirms a long term trend or warns of an possible change of trend.  It does so by following the price and volume action of DJIA and DJTA.  When both averages move and break above previous secondary highs together Dow Theory states that the market is in a primary uptrend.  During a primary uptrend traders should be buying dips and accumulating stocks. During the first part of 2012 the two averages painted what is call a Dow Theory Line where prices traded in a narrow range for several weeks.  The top of the lines for both DJIA and DJTA created secondary highs

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Dow Theory Update

Published on December 19, 2012 by in Dow Theory
Dow Theory Line, Secondary Low, Secondary High

Keep an eye on the Dow Jones Transportation index (DJTA) and the Dow Jones Industrial index (DJIA) over the next few weeks.  Both of them have now recovered to the top of the Dow Theory Line that they painted at the first of the year.  The decline below the line in mid May created a secondary low point (in early June).  This gives a line in the sand on the down side that both indexes must hold.  Any failure would create what many technicians call a Dow Theory Sell Signal, but in true Dow Theory it will merely represent confirmation that the primary trend has changed from bullish to bearish. With both indexes close to the top of the line we’re at a point that a small move higher will serve as confirmation that the trend is still up.  The transports need to clear 5370 on a closing basis, while the industrials need to close above 13610.  There is a very long term non confirmation between the industrials and the

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