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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

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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
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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

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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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Accumulation or Distribution

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As you know the core portfolios are almost fully hedged, but the volatility portfolio is 100% long. The reason for this is the core portfolios rely heavily on market internals to indicate everything is healthy under the surface. The volatility hedged portfolio relies on my market risk indicator that is much more sensitive to price. The core portfolios will often hedge during sideways markets because they see damage to market internals that result in chart patterns that can be either accumulation or distribution. My market risk indicator waits until it’s clear that distribution is underway. Currently the S&P 500 Index (SPX) is painting a pattern that can be either distribution or accumulation. We wont know which until the current range breaks. A break above 2140 on SPX would indicate accumulation has been under way and a strong rally should follow. A break below 2040 on SPX would indicate distribution has been occurring which should result in at least a 10% correction. The Dow Jones Transportation Average (DJTA) broke below a

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Dow Industrials Catching Down to Transports

Published on July 28, 2015 by in Dow Theory
Dow Theory Rounded Top

Yesterday the Dow Jones Industrial Average (DJIA) broke below its early July low. At the same time the Dow Jones Transportation Average (DJTA) held above its early July low. Since the top in the transports last December they have led the industrials lower. Yesterday broke that trend. It now appears that DJIA is catching down to DJTA. Another thing to watch with the industrials is that they’re starting to paint a rounded top with the downtrend from the last peak now two and a half months long. There hasn’t been a lot of price damage in DJIA, but the time damage is starting to be significant. The longer the market drips lower the more it drains confidence from bullish investors. Rounded tops are made by one set of market participants buying small dips while another set sells into the rallies over a long period of time. So DJIA has time damage with the formation of a rounded top, but price hasn’t broke yet. Keep a careful watch on DJIA if

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Market Changing Character

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Here are a couple of things that haven’t happened since late 2012. First is a downtrend in the Dow Jones Industrial Average (DJIA) that is more than a month long. Since the last secondary low for DJIA the down trends have lasted roughly a month. If DJIA closes at the current level today it will be in a down trend that is now six weeks old. The transports (DJTA) are now in a down trend that is six months long. One of the tenets of Dow Theory is that bull markets will have long up trends and short down trends. In context of the two and a half year rally out of the 2012 lows neither of these declines are significant, but they do point to a changing character in the market. As a reminder, Dow Theory is still in a long term bullish trend. The current declines haven’t changed that trend. I’ll keep you updated to any significant or interesting things that happen with Dow Theory. Another thing that

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Core Indicators Healthy But Risk Rising

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Over the past week the market has dipped a bit, but for the most part my core market health indicators have held steady. The one exception is my measures of risk. They have risen a bit and once again two of the four components of my market risk indicator are warning. The other two are a long way away so at the moment this appears to be just another short term dip in a long term uptrend. All of our portfolios are still 100% long. There’s been a lot of talk about the transports (DJTA) this week and the implications of their downtrend. If you look at the decline in a longer term context you can see that DJTA’s downtrend has only retraced about 20% of the rally out of its last secondary low. A “normal” decline in a bull market can decline more than 50% or even 67% of a move from a secondary low and still be healthy. With the industrials (DJIA) only a few percent away from

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