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Dow Theory Line Broken to Downside

Published on August 13, 2012 by in Dow Theory

One of the less frequent and lesser known patterns in Dow Theory is a “line”.  Robert Rhea defines a line as, “A price movement extending two to three weeks or longer, during which period the price variation of both averages move within a range of approximately five percent. “ He goes on to state that the narrow price movement indicates either accumulation or distribution.  When a line is broken to the upside the pattern is most likely accumulation.  When a line is broken to the down side the pattern indicates distribution. At the first of the year the Dow Jones Transports entered a 5% trading range that lasted over 4 months.  The Dow Jones Industrials traded in a narrow range for 3 months. On May 15th, 2012 the industrial average broke down from the line and was confirmed by the transport average on 5/17. William Peter Hamilton believed that the breaking of a line indicated a change in the general market direction.  This change in trend could be of either

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When Machines Take Control

Today it was reported that Knight Capital had a problem with their trading and market making algorithms which caused the NYSE to review the trades of 148 stocks earlier in the day.  Their review concluded that trades in six stocks would be canceled if they fell outside of a 30% band (either high or low from the day’s open).  Bottom line, a machine ran amok. Days like today make us feel glad we hedge.  Just as we did on May 6th, 2010…the flash crash. We didn’t see any problems in the market and in fact our hedging strategy was adding exposure.  We got 60% exposed (80% long and 20% short) on 4/5/2010.  It looked to us according to all our core indicators that this was a rally that might stick.  Then during the week of of April 26th 2010 our market risk indicator flashed.  It closed the week with a Market Risk Warning so on Monday the 3rd our portfolio was fully hedged.  The first few days of the week

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