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Dow Theory Update

The last joint closing high by both the Industrials and the Transports occurred on April 29, 2011. The Transports moved to a new slightly higher high on May 10, 2011 and then again on July 7, 2011. This has in turn created a non-confirmation between the averages. I have had numerous questions asking if this non-confirmation is an indication that the advance out of the 2009 low has run its course. The short-term answer is, no. I know, based on my trend quantification work, that non-confirmations can occur at not only major tops, but also in association with intermediate-term tops and even shorter-term corrections as the market continues moving in the general direction of the primary trend. So, to automatically assume that a non-confirmation alone is an indication of a major trend change is indeed a premature assumption without the aid of other factors.

Another mistake in regard to Dow theory that I'm seeing is the importance of the June low. It seems most everyone is now assuming that the June lows marked the most recent secondary low points in accordance with Dow theory. Again, based on my trend quantification work, I cannot confirm the June low as having marked a bona fide secondary low point.

Dow Industrials and Transports 2006-2011

So, here's the mistake that I see a lot of people potentially about to make. They are looking at the averages and because there is a non-confirmation in place they are automatically assuming that it is signaling a major turn. Now, lets suppose that the market were to drift lower as the so-called debt ceiling crisis is worked through and in doing so let's assume that the June lows were to be violated. Based on what I'm hearing from the questions I'm receiving, most anyone who knows the words "Dow theory" would be convinced that any such move would be a "Dow theory sell signal." But, what if they were wrong? What if the non-confirmation is associated with a correction rather than a major turn? What if the June low was not the last secondary low point? Rather, what if this is a setup, much like that of last July, when everyone and their dog proclaimed a Dow theory sell signal? Last July, because of my trend quantification work, I was able to tell my subscribers, in print, that it was not a "Dow theory sell signal" but rather an intermediate-term low, which lead to the rally into the recent May high.

My point here is that just because we have a non-confirmation in place and even if the averages were to move below their June lows, I wouldn't be so quick to follow conventional wisdom when it comes to Dow theory as such a move does not automatically mean that a bona fide Dow theory trend change will have occurred. I have learned that no single method, be it Dow theory or any other method can be relied on solely and that other methods can actually be used to compliment each other and in turn can give you an edge when properly understood and used. It is for this reason that I combine my work with Dow theory, trend quantification, cycles, etc. Based on my work with these different methods I know that the advance out of the 2009 low should ultimately prove to be the rally separating Phase I from Phase II of a longer-term secular bear market. I continue to believe that we are operating in a period much like the 1966 to 1974 bear market. I continue to believe that the rally out of the 2009 low is synonymous with the advance out of the 1966 low into the 1968 top. But, until the proper setup appears and the DNA Markers that have been seen at all other major tops since 1896 are in place, it is premature to say that this rally has run its course just because of a non-confirmation and the rest of the world concludes that a "Dow theory sell signal" has been triggered. The details of these DNA Markers are covered in the monthly research letters at Cycles News & Views. I have included a chart of the 1966 to 1974 bear market below. Once the proper setup is in place, the current expectation is that the 2009 low, which is synonymous with the 1966 low, will be violated. Until such time, the bear market rally will live on and the bear will use every trick in the book to confuse as many people as possible.

Dow Industrials and Transports 1962-1974


I have begun doing free market commentary that is available at www.cyclesman.net The specifics on Dow theory, my statistics, model expectations, and timing are available through a subscription to Cycles News & Views and the short-term updates. I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified the common traits associated with all major market tops. Thus, I know with a high degree of probability what this bear market rally top will look like and how to identify it. These details are covered in the monthly research letters as it unfolds. I also provide important turn point analysis using the unique Cycle Turn Indicator on the stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.


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