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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

150629DowTheory

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

150626MarketHealth

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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Waiting for a New Secondary Low

Published on June 1, 2015 by in Dow Theory
Dow theory secondary lows

Last week the Dow Jones Industrial Average (DJIA) made a new all time closing high, breaking above its recent range (Dow Theory line). At the same time the Dow Jones Transportation Average (DJTA) broke decisively below the bottom of its line. When this occurred it invalidated the line patterns in both indexes. Remember, a major tenet of Dow Theory states that both indexes must confirm a move to provide any useful information…so the fact that the indexes broke different directions invalidates the lines…period. So what do we do now? We go back to waiting for the current secondary low to be broken (which would signal a new bear trend) or the formation of new secondary lows. To break below the current secondary low (without creating a new secondary low) it will take a decline of over 30% in DJIA and 45% in DJTA. A highly unlikely scenario. So what we should be watching for is a new secondary low to be created. There are several criteria that should be met

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Why Dow Theory Still Works

Published on May 22, 2015 by in Dow Theory, Eating Cat
Dow Theory

There has been an increase in news stories about Dow Theory lately. Most of the discussion has been focused on the divergence between the transports (DJTA) and the industrials (DJIA). As you know I’ve added to the news flow by highlighting the break in opposite directions of Dow Theory lines by the averages. What almost everyone is talking about is the non-confirmation and its implication for the market. The opinions range from “the sky is falling” to “non-confirmations don’t mean anything” or even “Dow Theory is useless so this non-confirmation is nothing more than fodder for idiots”. I’ve been asked by one of the readers of Downside Hedge to share my thoughts on a recent blog post by a popular market commentator. His article was of the “useless fodder for idiots” variety. I’m happy to respond, but rather than call someone out I’ll focus on the general arguments I usually see against Dow Theory (which the “fodder for idiots” article touched on). The arguments against Dow Theory generally fall into

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Tale of Two Indexes

Dow Theory non confirmation

Over the past week the non-confirmation in Dow Theory between the industrials (DJIA) and the transports (DJTA) widened. Both indexes have been painting a line for over two months. Now both indexes have broken out of their lines. The problem is DJIA broke upward and DJTA broke down. This creates a non-confirmation that warns of a possible long term trend change in the near future (next several months…remember Dow Theory is about the very long term trend). Until this non-confirmation clears with the transports moving to new highs (and of course the industrials too) investors should be cautious about adding new long positions. On the other hand, if DJIA breaks the lower boundary of its range along with the transports then it will add a larger warning that the long term trend might be changing. Any low created after a break lower from the range in both indexes will create a new secondary low that will be the trigger point of a change from a bullish trend to a bearish

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Intermediate Term Indicator Strengthen

150501markethealth

Over the past week all of my core market health indicators have strengthened except for market risk. My measures of the economy strengthened enough to move slightly above zero. This means we’ll be adding exposure to the core portfolios. The new allocations will be as follows: Volatility Hedged portfolio: 100% long (since 10/24/14) Long / Cash portfolios: 100% long Long / Short portfolio: 100 long Here’s a chart with changes to the core portfolios over the past 18 months. Green is adding long exposure, yellow raising cash or adding hedges, red represents an aggressive hedge using an instrument that benefits from rising volatility. One thing of note is that my core indicators (which are intermediate term in nature) are currently at odds with some of the short term indicators I watch. For example, Trade Followers momentum from Twitter is currently issuing a consolidation warning. This indicates that even though we’re adding exposure the market may chop around or dip before it can move higher. Another thing of concern is that

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It’s All About the Range

150424spxSR

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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