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Watch the Dip

160408DowTheory

It’s been almost eleven months since the Dow Jones Industrial Average (DJIA) has made a new high. It’s been over fifteen months since the Dow Jones Transportation Average (DJTA) has made a new high. But, DJIA is only about 5% away from its highs. This makes it difficult for many people to determine if we’re in a bull or a bear market. According to Dow Theory, we’re in a bear, but getting close to levels that would turn the bear to a bull. When that occurs it’s time to watch the dip. All we have to do is watch to see if the downtrend resumes in force or if we get a small consolidation that rallies and breaks above the last secondary highs in DJIA and DJTA. A break higher will turn the bear to a bull. While we wait for a resolution, the core portfolios are moderately hedged or have a small exposure to the market. The volatility hedged portfolio, that is much more aggressive than the core portfolios,

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Identifying the Long Term Trend

160318spxPnF

As most of you know, I believe the market is currently in a long term down trend. However, I’m starting to see things that put the bear market in doubt… which should be a really good sign that we’re still in a down trend — because bear market rallies create enough doubt to suck people in. Back to the point, take a look at the chart below. It is a point and figure chart of the S&P 500 Index (SPX). This chart shows an intermediate or short term up trend within the confines of a longer term downtrend. But a closer look at the short scale indicates a long term sideways range. It will take a break of the range to add clarity to the pattern. A daily chart of SPX has a fairly clear downtrend channel. This indicates a new bear market is underway. We have to consider the current rally as a bear market rally until the upper bound of the trend channel is broken. If that channel

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Is the Bear Market Over?

160306MarketRisk

On Friday my market risk indicator cleared its warning. Does that mean the bear market is over? I doubt it. I’ll show you why in several charts below, but lets start with a longer view of market risk indicator warnings. Take a look at the chart below and you’ll see that the indicator is prone to whipsaws. As I’ve mentioned many times before, the indicator generally warns at inflection points — right before the market resumes its uptrend or accelerates to the downside. It also often clears just as the market is peaking. Especially, when the market is entering a more volatile phase like late 2007 thru early 2008, then again in the summer of 2011. I suspect that’s what we’re seeing now… but because I can’t see the future I set my bias aside and follow the signals. Who knows, this recent signal could be followed by a huge rally like the cleared warning in 2012. Long story even longer, the indicator has a lot of whipsaws, but the

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Dow Theory Bear Market

Dow Theory Bear Market

The Dow Jones Industrial Average (DJIA) closed at 15,660 today (six points below the last secondary low). DJIA is now confirming the long term down trend with the Dow Jones Transportation Average (DJTA). With both indexes below their previous secondary lows we’re officially in a Dow Theory bear market. The expectation is that both indexes will continue to make lower lows for the next one to three years. There will be strong rallies during the process, but when the primary trend is down, rallies generally fail. In order to change the primary trend back to bullish, DJIA will need to surpass about 17,920 with DJTA confirming the trend by surpassing about 8302. Those targets will stay in place until they are surpassed or new secondary highs are created. A new secondary high would require a rally that lasts more than three weeks and retraces 33% to 66% of the decline from the November highs for the indexes. Conclusion Dow Theory has signaled that we’re in a bear market. It’s time

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Missed it by That Much

Published on January 21, 2016 by in Dow Theory
160121DowTheory

During the day yesterday, the Dow Jones Industrial Average (DJIA) traded as low as 15,450. This was well below the last secondary low for DJIA at 15,666. Fortunately for the bulls, the market rebounded and closed a hundred points above the last secondary low. Remember, Dow Theory uses closing prices (not intra-day) so yesterday’s action didn’t break the long term bull trend. The bull market is still intact, but it’s on life support. The market is bouncing today so now we wait until the market turns down again… to see if 15,666 can hold again or is broken.

 
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Make or Break for the Long Term Trend

160116MarketRisk

I’m seeing several signs that we’re at an inflection point for the long term trend of the market (meaning years). It has been uptrending since 2009 and it looks like it’s make or break time for the bull. Here are some of the things I’m seeing that indicate the market must rally very soon or the long term trend will be down and a new bear market has begun. First is my market risk indicator, which is an intermediate term indicator, has just signaled. Take a look at the chart below and you’ll see that it signals at inflection points. It generally warns very near the low or just as the market is generating downside momentum. This indicator suggests that more excitement (either up or down) is close. Next we have Dow Theory. It is only a few percentage points away from signaling a long term bear market. This indicator marks very long term trends in the market. When both indexes break their secondary lows it tells us that the

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Crunch Time for Dow Theory

Published on January 10, 2016 by in Dow Theory
160110DowTheory

It’s crunch time for Dow Theory. We’re still in a long term bull market, but only about 4% away from a bear market signal. If the August closing low of 15666 on the Dow Jones Industrial Average (DJIA) is broken to the downside we’ll have a confirmed long term down trend underway. Currently, DJIA has retraced about 65% of the rally out of the August low. This is about as far as a “normal” secondary low carries. Any further lows in the market will increase the odds that 15666 will be broken. So what we really want to see (if you’re bullish long term) is a resumption of the long term up trend soon (and without much more price damage). So if Dow Theory signals a bear market what does that mean for portfolio management? For me, it means that I’ll be more willing wait for a 15% dip in the longs before rebalancing the longs and shorts. Conversely, I’ll be quicker to sell profit from the longs and firm

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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

151204MarketHealth

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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Core Indicators Turn Back Down

150918MarketHealth

Last week I mentioned that I thought the small triangle consolidation would be broken to the upside before the market ultimately turns lower. We’ve had the break higher and the turn lower so the market is now at a very critical junction. The action over the next few weeks will likely point not only the short and intermediate term direction, but determine the long term trend as well. It is critical that the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) hold the August lows or the long term trend will almost certainly be down. If on the other hand, the indexes can hold up the odds increase that the worst is behind us. My core market health indicators with the exception of risk all declined this week. This isn’t the type of action I like to see during a rally. It suggests that we’re seeing a dead cat bounce rather than a resumption of the uptrend. It appears that more time (and probably price weakness)

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