Dow Theory

The great Dow Theorist Richard Russell (www.dowtheoryletters.com) has indicated that based on today's market action we are now (again) in a bull market. This is after Mr. Russell had taken away his bullish stance from August 14, 2009 to August 24, 2009. While I respect Mr. Russell's over 50 year contribution to Dow Theory, the longest recorded history of Dow Theory from a single person, I have to disagree with the notion that we can say with confidence that the bullish indication needed to be taken out on the 14th and that we've achieved a confirmation of the trend today.

Regarding the matter of August 13th and 14th, on August 13th the Industrials and Transports both hit a new high (on a closing basis) from the March 9th low. On August 14th both indices fell in unison, achieving a temporary low on August 17th. However, what makes for a reversal of a bullish pattern according to Dow Theory is that both indices take out the point at which both indices initiated the bullish move to begin with. This means that both indexes would have had to fall below their respective July 23rd breakout levels. For the Industrials this would be the 8799.25 and for the Transports this would be 3404.11. The decline from the August 13th high never took out the levels that initiated the bull market indication.

It should be noted that on July 22nd, Richard Russell had a bear market indication at the end of the trading day. On July 23rd, Mr. Russell had a bull market indication prominently displayed at the end of the trading day. As I've said in the past, most if not all, Dow Theorist should come to the same conclusion at the same time. This is widely represented by searching "Dow Theory " and "July 23, 2009."

As I said in my July 24th Dow Theory commentary, what remains unresolved according to Dow Theory is the fact that the Dow Jones Transportation Average has not gone above the previous high of 3774.12 while the Industrials keep racking up new, albeit tepid on a percent basis, daily highs. What we have currently is what is known as a classic Dow Theory non-confirmation. This non-confirmation is resolved by the Transports exceeding 3774.12 along with the Industrials making a new high (above each previous high point since March 9th) or both indexes going below the breakout level that initiated the bull market.

I am hopeful that Mr. Russell will either correct me on my interpretation (giving me the chance to learn something new from the best) or that he revises his indication to reflect that the market is bullish with a pending non-confirmation that needs to be resolved. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

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