For the last few months the major indexes have been diverging from each other. While the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) have traveled sideways in a range, the Nasdaq Composite and Russell 2000 Index (RUT) fell to their 200 day moving averages and bounced back to their 50 dma. As you must know by now this is a result of rotation out of the high fliers from 2013 into large cap and value stocks. The rotation caused damage in Nasdaq and RUT while at the same time kept SPX and DJIA in the range (DJIA made a marginal new high this week, but not a clean break of the range). With Nasdaq and RUT stuck in the middle of moving averages and SPX and DJIA stuck in a range it’s decision time. Over the next few weeks the market will most likely turn over and start a down trend or break higher out of the current range. I wish I could tell you which
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
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.
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
The stocks in the chart above have the highest total Twitter Intensity scores. Below are the Monthly scores.
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
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
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
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