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Dow Theory Buy?

As a result of the Industrial's move above their 2007 high last week, there has been a lot of talk about that advance triggering a so-called Dow theory "buy signal." First let me say that according to the original writings of Charles H. Dow, William Peter Hamilton and Robert Rhea, there is no such thing as a "buy" or "sell signal" in accordance with orthodox Dow theory. Rather, our Dow theory founding fathers would anticipate trend changes, near anticipated market tops and bottoms, based on market behavior. It was actually these areas of anticipated trend change that they referred to as "buy and sell spots." They would then take their positions accordingly and would then use the joint price movement of the averages above or below previous secondary high or low points to either confirm or negate their suspicions of the trend change. It was then these joint movements of the averages above and below secondary high and low points that served to confirm a bullish or bearish "primary trend change" in accordance with orthodox Dow theory. Some how, today, people erroneously perceive the movement of the averages above and below previous secondary high and low points as "buy and sell signals," when in fact, there is no such thing in accordance with orthodox Dow theory. Furthermore, the perception of what constitutes a secondary high or low point is almost always wrong. While, the concept of Dow theory is quite simple, it is because so few have actually read the original writings of our Dow theory founding fathers that 99% of all Dow theory articles are erroneous.

With this said, let's back up to August 2011, at which time a bearish primary trend change occurred. However, I reported at that time that this trend change was occurring in conjunction with a move into the secondary low point, which occurred in October 2011 and that based on my statistical work the Industrials were in fact expected to move above the May 2011 high once the secondary low point was established. This anticipated move above the May 2011 high occurred in early 2012 by the Industrials. As the October 2011 low was being made, I wrote numerous articles explaining that this expectation was based on the fact that none of the DNA Markers seen at previous major tops had been seen and that as a result not all Dow theory bearish trend changes were created equally. It was because the Transports were unable to also close above a previous secondary high point, as the Industrials did in February 2012, that a bullish primary trend change did not occur in 2012 and that the bearish trend change from August 2011 remained intact. This is noted by the green and blue lines on the chart below. It was also the inability of the Transports to confirm the Industrials with a move above their previous secondary high point that caused the non-confirmation during 2012. Then, on January 18, 2013, when both averages closed above their previous secondary high point, as is noted in blue on the chart below, a bullish primary trend change was triggered. A bullish primary trend change did NOT require the move last week above a 5 year old high. That would be a complete misapplication of orthodox Dow theory. This was covered for my subscribers in detail in my short-term updates in January and in my February research letter. The current Dow theory chart can be found below.


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Now, for those that doubt this let me say that I have read and studied the original writings by Charles H. Dow, William Peter Hamilton, Robert Rhea and E. George Schaefer. Specifically, in one of Robert Rhea's original writings, he goes through every crook and turn of every primary bull and bear market from 1896 to 1932 and there is not one single incident in which he required both averages to move to new all time highs or new all time lows. In these writings and in the earlier writings by William Peter Hamilton and Charles Dow it was merely a joint close above or below a previous secondary high or low points that was considered in order to establish a bullish or bearish primary trend change.

Robert Rhea wrote:

"It is not necessary for the Rails and the Industrials to confirm each other in extent of movement, nor is it required that they confirm in duration; nonetheless, while we may disregard the extent of a rally (or decline), and while we may ignore, to a degree, the time required for a movement, it is necessary for these formations to confirm each other, both in direction and in the penetration of the preceding critical high or low points, before the movements can be taken as having any authority of forecast."

I assure you, when Rhea speaks of the preceding critical high or low point he is referring to the previous secondary high or low point. The previous all time high on the Industrials that was made in October 2007 has been of no consequence to orthodox Dow theory for years. A high or low point from over 5 years ago is just not relevant. If it were, then many of the previous primary bull markets that our Dow theory founding fathers called would not have been possible. For example, per Robert Rhea's newsletters, which I have, he called the bullish primary trend change on May 27, 1933 when both averages closed above their previous secondary highs points that had occurred in September 1932. Yet, following the 1932 low, it was not until 1964 that both averages moved to new highs. Pretty obvious that he was looking at previous secondary high and low points. Also, following the October 1974 bear market bottom, it was not until 1982 that both averages moved to new all time highs. Yet, Richard Russell issued a special report on December 20, 1974 saying that there was better than a 50/50 chance that the bear market ended at the October 3rd and 4th lows. On January 27, 1975 both averages closed above their previous secondary high points. In Mr. Russell's February 5, 1975 letter he wrote: "On January 27,1975, the D-J Industrials and the Transports Average closed above their preceding peaks of 674.75 and 156.61. On the methods put forth by Charles H. Dow at the turn of the century, the joint penetration by the two averages confirm what we have already suspected. We have been in a primary bull market since October 3, 1974." Obviously Mr. Russell did not wait until a previous all time high was bettered to make the call of the bullish trend change.

Likewise, William Peter Hamilton made his "A Turn in the Tide" call on October 26, 1929 in which he called the bull market top. He obviously did not wait for all time lows to be seen before making the call. If that were a requirement of Dow theory, he could have never made the call. Rather, it was the violation of the previous secondary low points on October 25th that prompted his call.

Based on the writings of our Dow theory founding fathers, there is no doubt that it is only the price movement above and below previous secondary high and low points that count. So no, it is clear to me that Dow theory did not require both averages to move to all time new highs before a valid bullish primary trend change occurred. This bullish trend change actually occurred on January 18, 2013 and the alleged 5-year old non-confirmation has now proven meaningless. This bullish trend change will now remain intact until a joint close below previous secondary low points is seen.

Now, with this all said, please do not misunderstand my position on the market or my overall point, which I am about to make. I am by no means trying to say that we have begun a new long-term secular bull market. Not At All. I continue to believe that the advance out of the 2009 low is a cyclical advance within a much longer-term secular bear market. I have said this ever since the 2009 low was made and the advance began. My position has NOT changed.

I want to point out that the 1966 to 1968 rally separating Phase I from Phase II of the 1966 to 1974 secular bear market was also accompanied by such bullish primary trend changes, as is noted by the blue circle on the chart of that period below. This was also the case with the 1970 to 1973 rally separating Phase II from Phase III of that secular bear market, which again is noted by the blue circle. The key then was understanding the longer-term Dow theory phasing and values. The same is also true here as well and it is for these same reasons that I continue to believe that the rally out of the 2009 low is synonymous with the 1966 to 1968 rally separating Phase I from Phase II of a much longer-term secular bear market. I also want to point out that each of the obvious bullish primary trend changes in 1968 and 1972 occurred near the top of the rallies separating each of the phases and that each of these tops occurred in conjunction with ALL of our DNA Markers. I also want to point out that the advance into early 1973 carried the Industrials to a new all time high just before the collapse into the 1974 secular bear market began. While this is a larger version of that period and there are currently some technical differences, based on the overall technical landscape, I believe that we are seeing something similar in association with the current bullish primary trend change. The key is the formation of the DNA Markers that I have found have occurred at every major top since 1896. Yes, this includes the 1968 and 1973 tops as well. As I have said ever since the rally out of the 2009 low began, while I believe this to be a bear market rally, it will nonetheless remain intact until these Markers are seen. In the meantime, according to orthodox Dow theory, this bullish primary trend change will remain intact until it is authoritatively reversed by a joint close below the previous secondary low points. At present, those low points occurred at the November lows. The closing numbers are 12,542.38 on the Industrials and 4,891.27 on the Transports. These numbers will change once the next secondary low points are established.


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Now, I want to make it perfectly clear that cycles have absolutely positively nothing to do with Dow theory as these are two separate disciplines. However, the cycles work gives us an edge with our Dow theory work because it allows us to quantify trends and to develop statical expectations that Dow theory alone does not offer. Also, I know from my study of the Industrials, going back to 1896, that secondary high and low points, as defined by our Dow theory founding fathers themselves, are one in the same as intermediate-term cycle highs and lows. Knowing this, the cyclical based statistics allows us to anticipate secondary high and low points. More importantly, the statistical based cycles work also allows us to quantify common denominators that tend to occur at highs and lows. It is these common denominators that I refer to as DNA Markers.

Again, as I have said ever since the rally out of the 2009 low began, the rally out of that low appears to be occurring within the context of a longer-term secular bear market, just as was seen into the 1968 and 1973 highs. As was the case with the 1968 and 1973 high, and every other major top since 1896, once the DNA Markers setup, this rally will be capped and the secular bear market will resume. In the meantime, this rally continues to convince the masses that all is well and in the process a much much larger trap is being set. Based on my statistical research I warned of the extended 4-year cycle advance into the 2007 top. I explained all throughout 2004, 2005, 2006 and into mid-2007 that because we had not seen the DNA Markers, the cycle was extended, that the longer it extended the worse the decline that followed would be and that once the setup was in place, the decline into the over inflated 4-year cycle low would unwind. The markers did in fact appear and the unwinding that followed resulted in the worst financial disaster since the great depression. Seems that people have forgotten about that. All the while, the same thing is occurring once again. This is an overinflated cyclical advance and the appearance of these DNA Markers will again mark the top. Once in place, there will be another unwinding that few can currently fathom. Just as it was difficult to see what was setting up to follow the move into the 2007 top, I also understand that it is difficult to see what is occurring now. But, if you would like detailed information on the DNA Markers, their development and the statistical based expectations, they are available in my research letters and updates at Cycles News & Views. Just as I warned into the extended advance into the 2007 top, I am again warning and the DNA Markers are key. Hope you are listening.

 


I have free audio market commentary that is available at www.cyclesman.net so please begin joining me there. The March issue of Cycles News & Views is now out and in it I give detailed analysis of the current situation from a cyclical and a Dow theory perspective as well as a look at the currently applicable statistics and the DNA Markers. A subscription includes access to the monthly issues of Cycles News & Views, which included Dow theory, a very detailed statistical based analysis covering not only the stock market, but the dollar, bonds, gold, silver, oil and gasoline along with short-term updates 3 times a week.

 

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