Category Archives: Dow Theory Bull Market indication

Dow Theory: October 4, 2019

In the chart below, we see two different stocks showing strongly bullish reversal patterns in the period from July 2017 to October 2019.

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The line in red saw a bottom in September  2018 while the line in blue saw a bottom in July 2019.  Adding strength to the direction of these two stocks is the persistent inability of the stocks to decline below the yellow support lines. Especially encouraging is the blue line having the ability to bounce in September 2019 and move sharply higher since that time.

Except, the chart above isn’t a couple of stocks and the yellow lines aren’t bullish trends.  Instead, the red line is the Dow Jones Transportation Average and the blue line is the Dow Jones Industrial Average.  The chart is the inverse of the actual pattern and shows what the two indexes have done in the last couple of years.

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If a stock market analyst is in agreement that the charts at the beginning of this post is showing a bullish reversal pattern then the same analyst should view the actual charts of the same two indexes as exhibiting bearish reversal patterns from the prior trend.

The bear market continues until the dashed red and blue lines are exceeded to the upside.  How do we know we are in a bear market?  The inability of the two market indexes to exceed the prior peaks is one indication.  The other indication is best stated by Charles H. Dow regarding the formation of a line:

Such a narrow fluctuation, to the experienced student of the averages, may be as significant as a sharp movement in either direction. (Rhea, Robert. The Dow Theory. Barron’s. 1932. page 82.).”

At present, a market that meanders sideways or down must earn the patient investor income. For now, there is some time (approximately 3-4 months; if successful) that will have to pass before the upside targets are defied.

Our Call on the 7-Year Recovery

On August 21, 2009, we said the following:

“Based on the combination of the Dow Theory confirmation of July 23, 2009 and the IPI turning up from the June low, I will have to guess that the National Bureau of Economic Research (NBER) is going to proclaim June 2009 as the official end to the recession. The end to this recession will be lackluster and questioned from all corners.

“Additionally, the stock market will only follow the pattern of a cyclical bull market (bear market rally) within a secular (long term) bear market. I doubt that the general public will agree that the recession is over since jobs will not be as plentiful as the past.”

Below is the September 20, 2010 announcement from the National Bureau of Economic Research that the recession had officially ended in June 2009:

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In addition, the jobs data has been lackluster as is par for the course but was anticipated in our August 2009 review.

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Many claim that the employment data is rigged to reflect favorably for whichever politician that is in power at the time, so we have included the U-6 TOTAL unemployment data to verify if the economic environment really did turn around at or near the same period in time.

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From all appearances, the turn in the economy did arrive at the time that we thought that it should.  There are critics who say that the U-6 TOTAL unemployment data isn’t as low as it was at the 2007 period and therefore we aren’t in a recovery.  However, to achieve a low in the U-6 TOTAL unemployment you would need the clearly obvious bubble economy that we experienced at the peak of 2007.  Anyone who wants the same U-6 TOTAL unemployment as the 2007 period also wants the subsequent bust that is required of such a period.

We haven’t had as much luck calling a top in the economy as we had in calling the bottom.  On two occasions we had Dow Theory bear market indications which turned out to be false and in one instance, we’ve had the Industrial Production Index in decline.  However, we haven’t had both occur at the same time allowing us to make the call that the economy was entering a recession.

What are the odds that such a coincidence (saying that the recession was over a year before the NBER, that no one would believe it, that unemployment would be lackluster and that a bull market was in effect) could occur?  Got lucky is all we can say.

Dow Theory, This Is Not

Dow Theory is only a theory.  Therefore, it is necessary to take all indications with a tremendous grain of salt.  However, it has been our endeavor to determine the qualitative nature of the work as presented by anyone who writes on the topic.  One individual that we’ve found of interest is Manuel Blay on SeekingAlpha.com.  Mr. Blay provides commentary on elements of Dow Theory and in this piece we’d like to examine the performance of the market calls associated with the concept of Dow Theory.

How do we arrive at performance data?  We take the date that a primary trend bull/bear market is indicated and looked for the date for when the indicated stock, ETF or index next received a change to the primary trend bear/bull market indication.  This seems the best way to gauge the concept of performance even though we understand that there are nuances to actual start and end dates.  The very end of this article has the internet links and dates associated with the collection of performance data.

Anyone interested in Dow Theory should make it their goal to identify, whenever possible, what the primary trend of the stock market is based on the movements of the Dow Jones Industrial Average and Dow Jones Transportation Average.  The goal of identifying the primary trend is to maximize profits while avoiding as much loss as possible.  In the case of Mr. Blay, he has applied Dow Theory to ETFs and individual stocks as well as the usual stock market indexes.

For each bullet point below, we only took the date of the call for a “primary bear market” or “primary bull market” and measured the respective stock, ETF, or index for percentage change.  If it was a bear market and the percentage change was negative from the primary bear market signal to the subsequent primary bull market signal then, on the whole, we’d consider that Dow Theory met expectations as a tool for profitable investing (green font).

Alternatively, if it was a bear market and the percentage change was positive from the primary bear market signal to the subsequent primary bull market signal then, on the whole, we’d consider that Dow Theory did not meet expectations (red font).

There may be errors in our ability to identify any subsequent bull or bear market article, however, below is our best effort to identify any change to the primary trend based on the work of Manuel Blay (We’d give a margin of error +/-1% to any estimate.):

  1. Bear Market: –31.54% for GDX
  2. Bear Market: –26.08% for SIL
  3. Bull Market: –24.91% for GDX
  4. Bull Market: –26.95% for SIL
  5. Bull Market: –5.24% for HAO
  6. Bear Market: +7.46% for DJT
  7. Bear Market : +6.21% for DIA
  8. Bear Market: +7.00 for SPY
  9. Bull Market:  -9% for GDX
  10. Bull Market: –23% for SIL
  11. Bull Market: –11.30% for GLD
  12. Bull Market: –16.01% for SLV
  13. Bear Market: +8% for DIA
  14. Bear Market: +7% for SPY
  15. Bear Market: +8% for DJT
  16. Bear Market: +4% for  HAO
  17. Bull Market: +2% for  DIA
  18. Bull Market: –9% for GLD
  19. Bull Market: –11% for SLV
  20. Bear Market: +17% for GLD
  21. Bear Market:+10% for SLV
  22. Bear Market: +2.60% for DIA
  23. Bear Market: +52% for GDX
  24. Bear Market: +58% for SIL
  25. Bull Market: –4.39% for DIA

It could be argued that the date that the primary trend changed was not the same as the publish date of the article.  However, as a person interested in Dow Theory, you probably could only act on what is published and not the literal date that the market made a presumed bull or bear market primary trend change.

Among all 25 instances of a bull or bear market primary trend indication, only three (#1, #2 and #17) had performance that was expected of Dow Theory.  All of which leads to the obvious question, why would Dow Theory provide such disastrous results when the whole point of Dow Theory is to take advantage of primary trends in the stock market?

Primary Trend Bull Markets

Our view on the lack of performance at the conclusion of a primary trend bull market is best stated by Charles H. Dow himself when he said:

"We have frequently demonstrated that the stock market, while full of short fluctuations [also known as secondary reactions], has a continuing main movement, which often runs in one direction for three or four years at a time. (source: Dow, Charles H. Review and Outlook. Wall Street Journal. September 13, 1900)."

We believe that the primary trend indications provided by Mr. Blay are not long enough to be meaningful and advantageous.  The lone exception, in terms of time, HAO from September 13, 2013 to August 21, 2015, still garnered a performance that was counter to the goal of Dow Theory (primary trend bull market but lost –5.24%).

When a signal is given in a period that is less than a year for a primary trend bull market, we would reassess the current and previous interpretation to determine where we went wrong, because clearly, calling a full cycle of a (bull-bear-bull) primary trend WITH negative returns does not augur well for Dow Theory analysis.  If the (primary trend bull market) is less than a year then something is wrong.

Primary Trend Bear Markets

Alternatively, it is known that primary trend bear market last ⅓ to ½ as long as the preceding bull market.  Therefore, we cannot hold primary trend bear market signals to the same time criteria as primary trend bull markets.  A collapse in the market (a la 1987) resulted in a bear market to bull market signal in less than 5 months.

Do you short bear market for additional gains?  If the performance data for Mr. Blay is any indication, we wouldn’t recommend short selling primary trend bear markets.  Only in the very first case (#1) were we able to see a bear market with declines by the end of the bear market period.

Dow Theory in Three Steps

What does a Dow Theory primary trend bull or bear market look like, in theory?

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Again, this is a theoretical look at the way primary trends should transpire.  Anyone who plays the “Dow Theory” game will need to accept some missed opportunities like the very top and very bottom of a market move.  Notice that  each primary trend indication occurs after a peak or trough.  This is the point at which a low or peak has been reached, is then retested but not violated, then continues in opposition to the previous primary trend.

What does the above primary trend chart mean?  It means that as an investor who attempts to apply Dow Theory, you should see some investment gain no matter which market you’re in.  While the amount of the gains will vary, the net result should be positive percentage change in a primary trend bull market and negative percentage change (for short sellers) in a primary trend bear market.

Mr. Blay’s performance of 12% correlation with the primary trend suggests that either Dow Theory doesn’t work, that the analysis was incorrect or that Dow Theory AND the analysis don’t work.  We’d argue in defense of Dow Theory being reasonably accurate and the interpretation being incorrect in this instance.  An investor cannot be faced with 88% of calls not correlating with the primary trend.

A Line or Trading Range

Missing from the above chart is the period of time that the market wallows in a trading range. The concept of trading range or “line” does get addressed by Charles Dow and is best described by William Peter Hamilton, fourth editor of the Wall Street Journal, as indicated in the following commentary:

Such a narrow fluctuation, to the experienced student of the averages, may be as significant as a sharp movement in either direction.” Rhea, Robert. The Dow Theory. Barron’s (1932). page 82.

Hamilton suggests that a trading range is equal to or greater than a parabolic move up or market crash.  The current market environment has provided us with what we believe is a trading range which began in February 2014.

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With a range of 6.70% between the middle of the line and the top/bottom, any breakout above or below the range should result in exceptional change in the index.  However, these processes are a function of market sentiment which generally plays out over time.  A line can last for quite some time and Dow Theory has been clear in saying that the previous trend is still in effect until the line is broken.  (the Dow Jones Industrial Average isn’t the only element necessary to achieve a Dow Theory primary trend change.)

Conclusion

It is very clear that Mr. Blay is dedicated to the work he does in Dow Theory.  He writes on the topic almost every other day.  However, Dow Theory moves at a glacial pace and requires stepping away from the topic.  None of the great Dow Theorists (Russell, Schaefer, Omerod, Fritz, Shumate, Rhea, Hamilton, Nelson, and Charles H. Dow) carried an account of market action with primary trend changes with the frequency that has been displayed by Mr. Blay.

There is no way that a person could be applying Dow Theory and come away with, at least on paper, results that are the exact opposite of each call in the change of the primary trend.  As shown in the cycle chart above, there is a theoretical sweet spot where a gain will be made if you go long in a primary trend bull market and go short in a primary trend bear market.  Yet, in neither case, except in the three out of 25 instances cited above, was it possible to demonstrate gains.

For anyone interested in Dow Theory, when you see primary trend changes at such a high frequency you have to be very critical of the work.  When you see the above performance that is attributed to Dow Theory analysis, then you should know that you’re not witness to Dow Theory at all.

References:

Dow Theory: August 14, 2014

In our last Dow Theory posting on May 18, 2014, we revealed an issue with Dow Theory that had gone unaddressed since S.A. Nelson’s book The ABC of Stock Speculation coined the term “Dow’s Theory.” We believe the acknowledgment of this issue adds clarity to the writings of Charles H. Dow and may produce new insights that have not previously been explored.

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Dow Theory and the Gold Stock Indicator

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Dow Theory

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Dow Theory: Downside Targets

It has been almost two months since our last Dow Theory posting.  This is as it should be, since Dow Theory does not require a daily accounting of changes to the market.   As indicated in Robert Rhea’s The Dow Theory:

“There are three movements of the averages, all of which may be in progress at one and the same time.  The first, and most important, is the primary trend: the broad upward or downward movements known as bull or bear markets, which may be of several years’ duration.  The second, and most deceptive movement, is the secondary reaction: an important decline in a primary bull market or rally in a primary bear market.  These reactions usually last from three weeks to as many months.  The third, and usually unimportant, movement is the daily fluctuation.” (source: Rhea, Robert. The Dow Theory. Barron’s, New York. 1932. Page 32.)

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Dow Theory

On March 5, 2013, we got a declarative indication from Dow Theory suggesting that we are now in a new primary bull market that has cyclical and secular implications.  As seen in the chart below, both the Dow Jones Industrial Average and Dow Jones Transportation Average have reached new all-time highs, designated by going above the respective dashed lines.

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Dow Theory: Waiting for Confirmation

Today the Dow Jones Transportation Averaged (DJT) closed at a new all-time high.

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Dow Theory: Downside Prospects

We have indicated in our August 2, 2011 posting (found here) the fact that we are now in a bear market.  According to Dow Theory, the primary trend remains in place until the opposite indication has been signaled.  This is best described by Richard Russell in the following remark:

…the Dow Theorist has learned that the last trend should be considered to remain in effect until the contrary has been proved”[1].

We believe that there has not been a reversal of this bear market indication as outlined in our August 7, 2012 Dow Theory analysis (found here).

Despite getting a bear market signal only days earlier, on August 9, 2011 we indicated that a bear market rally (found here) was likely to take place.  Our work on the topic of Dow Theory at that time indicated that there was upside potential to go as far as the prior highs (12,807.51).  From the August 9th low, the Dow Industrials rose as high as 13,338.70, or +23.38%.

From our experience on the topic, bear markets usually connote declines of -30% or more.  However, the bear market that we’ve experienced so far can be characterized from a slight dip to a nice market run to the upside.  While the Dow Jones Industrial Average and the Dow Jones Transportation Average have diverged overall, there has been nothing that we’ve seen since August 2, 2011 to make a person feel like any confidence in the indication.  After all, it has been over a year since the signal and no real fireworks.  Was it really worth reducing market exposure for a non-event?

Since this bull market move began on March 9, 2009, there have been sizable declines of -14% or more in 2010 and 2011 before the stock market continued higher.  The best we can do at this point is assume that 2012 is due for a correction in line with the two previous years and see what the downside prospects might be.

period of decline Dow Industrials % change
April 26, 2010-July 2, 2010 -14.60%
May 2, 2011-October 3, 2011 -19.19%
May 1, 2012-???? -2.09%
   
   
period of decline Dow Transports % change
May 3, 2010-July 6, 2010 -18.72%
July 7, 2011-October 3, 2011 -28.11%
March 15, 2012-???? -6.39%

Because a bear market decline of -30% or more has not taken place, the best we can do is assume that a similar decline to 2010 and 2011 is the most likely outcome…for now.  The previous declines, within the context of a bull market, have averaged –16.90% for the Dow Industrials and –23.42% for the Dow Transports. 

If the Industrials were to decline from the current level by –16.90% it would fall to 11,035.12.  If the Transports were to decline from the current level by –23.42% it would fall to 4,096.84.

As described in our Dow Theory analysis from August 7, 2012 (found here), there are two overhanging non-confirmations of a bull market.  This means that the overall trend of the Industrials and Transports should eventually be down.  In our negative bias against an new bull market, particular emphasis is weighted against the Transportation Index which has been falling while the Industrial Index has been rising.

However, the last week of August has provide the Dow Industrial Average with what we consider a double-top.  Although not the most classic double top, it is still a double top. 

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Double tops and double bottoms were indicated to be very important formations according to Charles H. Dow.  Alternatively, William Peter Hamilton and Robert Rhea arrived at the conclusion that such formations bear little importance when considering the price movement of the indexes.

From our own work on the topic of double tops and double bottoms, we have found that Dow was right about the importance of such a price characteristics and have been able to prove, with significant evidence throughout the history of the Dow indexes, that double tops and double bottoms are critical indicators for determining market direction when applying Dow Theory. 

In this case, a double tops mean that the direction for the stock market is down.  Since the bear market signal, based on Dow Theory, hasn’t resulted in a decline of over -30% for either the Transports or Industrials, were proposing that at the very minimum a decline of 13%–15% should be expected.

[1] Russell, Richard. Richard Russell’s Dow Theory Letters. Issue 166. December 27, 1961. page 1.

Dow Theory: Continuation of Bull Market Confirmed

In our last discussion of Dow Theory on September 8, 2010, we indicated that the Dow Industrials and Dow Transports had formed a line. The line that we discussed in the September 8th article was broken through on the upside in the month of October. According to William Peter Hamilton, a line in the market could be considered as important as a market crash. We decided against a reaction on the line being broken to the upside out of concern for jumping the gun. To be conservative on the topic of Dow Theory, we opted for the sure fire signal of a continuation of the bull market trend with the markets making new highs above the April/May points.
On November 3, 2010, the Dow Industrials confirmed the Dow Transports breach of the their respective highs since the 2009 bottom. The new high came on the news that the Federal Reserve is going to fully implement quantitative easing (QE2) to further boost the economy. In addition, the new high arrived as the results of the November 2nd election were finally in. We are not surprised of the coincidence of QE2 being introduced immediately after the election results. Our last article on the topic Dow Theory on September 8, 2010 closed with the following commentary:
Politicians vying for re-election will fight tooth-and-nail against outcomes that don’t ‘appear’ positive. With this in mind, it is possible that the only option is to the upside.”
With this confirmation, we can only guess as to where the next stop for the markets might be. However, in our February 12, 2009 article, we discussed the idea that when the stock market falls 40% or more there is the tendency to retrace 50%-100% of the prior decline. So far the Dow Industrials have retracted 61% of the previous decline from 14,164.53. With the introduction of QE2 at this point in the game, we’re likely to achieve 100% retracement of the market from the October 2007 top.
With a goal of self-preservation in mind, we have the tendency to believe that the market is always going to fall rather than head higher. This time is no different. However, the Dow Theory signal is telling us that as long as we don’t get a sudden reversal of the trend we’ve got at least another 3 to 9 months of an upward bias in the stock market and the economy. Our September 8th article said:
the length of time that has been spent in such a range seems to indicate that we’re due for a breakdown or an explosion if the markets cross below or above the range.
As a result of breaking above the line and the previous high, we may experience the oddity of a full-fledged financial stock panic to the upside regardless of whether it is warranted or not. Basically, this could be the final blow-off before attaining the cyclical bull market top.
Downside targets for the Dow Jones Industrial Average are:
  • 10,000
  • 9,500
  • 8,000
Because we have a natural bias against the upside prospects, we caution all investors to pay close attention to the downside targets. All new investments should be with the acceptance that the Dow Industrials could fall to the 8,000 level without warning. However, facts being what they are, Dow Theory seems to be pointing the way for the economy and the stock market.

Please revisit New Low Observer for edits and revisions to this post. Email us.

Dow Theory

On Friday April 9, 2010, the Dow Jones Industrials and the Dow Jones Transportation Averages both moved to new highs at the same time. According to Dow Theory, this confirmation by both averages would indicate that the market has more room to go on the upside before a change of direction is to take place.
The path to this bull market confirmation (within a secular bear market) has been a battle with many casualties. The last week had many examples to demonstrate this point. On April 5th, the Industrials broke to a new closing high however the Transports did not confirm. On April 6th, the Transports broke to a new high but the Industrials did not confirm. On April 8th, the Transports broke above the high that was established on April 6th however the Industrials could not exceed the previous high of 10,973.55 set on April 5th.  April 9th finally cleared the air on the much needed confirmation of the market's trend.
The factors that are in favor of the continuation of the bull market are that the Industrials and Transports are 50% above their respective 2007 to 2009 declines. Additionally, prior declines within secular bear markets like 1906 to 1924 or 1966 to 1982 have had many retrenchments of 80% to 100% before falling back to the old lows. So far, the Industrials have recouped 58.42% of the previous decline. If the Industrials were to retrace a classic Dow Theory 2/3 of the previous decline, the index could go to 11,574.59 with no problem.
However, the tepid nature of the gains that led to the new highs along with the lackluster volume that has accompanied the move up from the March 9, 2009 low doesn’t seem to encourage confidence in the direction. More alarming is the fact that we are not near historical levels of under-valuation in the market in general. The Dow Industrials currently has a dividend yield of 2.48% when the long-term average high yield is around 6%. Also of concern is that the Dow Fair Value is at 6.92 times the dividend yield. This is contrasted with the 1.52x that is normally associated with great buying opportunities.
The former editor of the Wall Street Journal and Dow Theorist William Peter Hamilton once said, “the wish must never be allowed to father the thought.” For this reason, we will take a wait and see approach to the market going forward.  However, until proven otherwise, we are on a march back to Dow 14,164.53, which was set on October 9, 2007. In anticipation of the rise to the old market high, we have illustrated, in the chart below, three upside scenarios for the Dow Industrials.
The first projection (green line) assumes that the Industrials will continue the torrid pace set from March 9, 2009 to January 19, 2010. The likelihood of the index continuing at such a pace is not expected. However, in the book Charles H. Dow: Economist by George W. Bishop, Jr., it is noted that, according to Charles Dow, there are two stages to a bull market in stocks and that the second stage is more bullish than the first stage. This contrasts sharply with Robert Rhea and William Peter Hamilton’s assertion that there are three stages to every bull and bear market. If we are in the transition to the “second and final” stage of this bull run then it is possible for the market to continue on, and possibly exceed, the first trajectory that was previously set. The projected date that the Dow would reach 14,164.53 is November 19, 2010.
The second projection (blue line) is based on the March 9, 2009 to April 9, 2010 action on the Dow Jones Industrials. This pace seems more realistic than the first projection since it assumes a less dramatic increase in the index. To think that the market could continue moving higher as it had in the past would be quite unrealistic. Based on the current trajectory the Dow would reach the old high by January 31, 2011.
Finally, the third projection (black line) is based on the current trend being the mean and the first projection being the high end of the range. The third projection is a mirror of the first. The third trajectory would reach the old high by June 18, 2011.
Although we have a clear bull market confirmation (within the context of a secular bear market) it is necessary to determine where the downside targets should be. According to Dow’s Theory the following are the targets for a subsequent decline:
  • 9513.92
  • 8030.49

In addition to the normal downside targets, there is the prospect that if the Dow falls below the imaginary third projection level (black line), then all bets are off.  From the current Dow Theory confirmation, if the index cannot retains the level of 10,997.53 beyond July 15, 2010, then the market should have a major correction shortly thereafter.
Reaching the old high is all within the context of a normal secular bear market. The tendency is for the market to get to the old high and then quickly wipe out the notion that a new secular bull market is about to begin. This is the nature of a secular bear market.
Useful References: 

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Dow Theory

There are three areas that I would like to cover regarding Dow Theory. First I’d like to discuss the Dow Theory confirmation of the trend. Next, I want to cover the concept of a “line” and it’s potential impact on the Dow Industrials. Finally, I’d like to discuss the Dow theory 50% rule. Additionally, I want to describe what I believe are the future projections for the market going forward.

On January 8, 2010, the Dow Industrials and the Dow Transports confirmed the Dow theory cyclical bull market trend of the stock market. The significance of this is that we can expect the Dow Industrials to head much higher in spite of the threat of future economic uncertainties. Below are the recent charts for the Dow Transports and the Dow Industrials.

Since November 9, 2009, the Dow Industrials have traded in a tight range of less than 3%. According to Dow theory, the market trading in a range of about 5% is considered to be a “line.” A line is a key indication of accumulation or distribution of stocks. It is not known whether or not accumulation or distribution has taken place until the market either breaks above the high range or below the low range of the line.

According to Dow Theory, the formation of a line can act as the equivalent of a market decline or secondary reaction in a bull market if it lasts for over eight weeks. In this instance, the line lasted exactly 8 weeks. I’m hesitant to accept that the “rule” of 8 weeks can be trusted altogether. However, the upward bias of the market has indicated that the most recent breakout will be followed until proven otherwise. It is important to note that secondary reactions act as a release valve from built-up pressure in the market. The fact that the market has responded by breaking above the line that had been drawn indicates that the market has successfully absorbed the large amount of shares that have been distributed by corporations as well as the negative economic news since the March 2009 low.

Because the Dow Industrials and the Dow Transports have both broken to brand new highs at the same time, along with the fact that the Dow Industrials have broken above the line that has been drawn since November 9, 2009, we can safely guess that the market has little desire to go lower and that the bull market is still in place.

Below are the charts of the Dow Industrials and Dow Transports retracements from their respective peaks in 2007. The Dow Industrials have retraced more than 50% of the prior peak while the Transports have retraced more than 60% of the prior peak. This suggests a possible move to retest the high of 14,000 and 5,400. According to Charles Dow, if the market can retrace more than half of the prior move, it (the market) will likely go to the old level that was previously established. One way this was demonstrated was during the decline from October 2007 to March 2009. The decline that took place accelerated significantly once the Dow Industrials exceeded 50% of the rise from September 2002 to October 2007. Likewise, we should be on the lookout for a similar accelerated rise in the market on the way to 14,000.

In an October 15, 2009 article, I charted what I believe to be two scenarios where the market would go. In the first scenario, I suggested that the Dow Industrials would continue on an upward trajectory. Basically, I connected the March 9, 2009 low with the low of July 2009 into the future. In the other scenario, I suggested that the Dow would be able to decline back to the July 2009 low and still be considered a bull market. Additionally, using cycle analysis, I suggested that the market would reach its respective lows between the period of December 2009 and late February 2010.

Since writing the article on October 15, 2009, the Dow Industrials have remained above the upward (red) trendline (see chart below.) I continue to believe that the strongest resistance for the market will be when the Dow Industrials get to 10,700. At this juncture, the Dow Industrials will either break out to the upside in dramatic fashion or retrace back to 9,500. However, given the strong indications from the Dow Industrials and Dow Transports on Friday, I suspect that we can reach 12,000 not long after the month of February 2010.

Considering that this is a cyclical bull market, within the context of a secular bear market, I understand that a reaction of 100% (going back to 14,164 on the Dow Industrials) is not unusual. Additionally, valuations of the market are not at historical lows. Investors should seek out quality companies that are at or near a new low that seem to have viable business models. My preference tends to favor Dividend Achievers or companies that have increased their dividend at least 10 years in a row. -Touc

Dow Theory

The market continues to move higher. We got a cyclical bull market confirmation within the context of a secular bear market at the close. The Industrials closed at 10,501.05, above the previous high of 10,471.58. The Transports also closed higher at 4,165.11. Art.

End of September Market Commentary

Today's action was a close one for the market. The Transport index, at one point, broke below the previous high from late August. The Industrial Index is still well above the previous high so nothing to worry about there. If the Transports were to closed below the previous high, we would have the first part of the non-confirmation move under the Dow Theory.
Note: If you are not familiar with the Dow Theory, please read a free description from Dow Theory Letter or StockCharts, but I recommend reading Richard Russell's Letter.
Coppock Curve
At the end of September, the Coppock Curve or Index remained bullish. People who understand the Coppock Curve may wonder why I still keep track of the curve since the buy signal was given to us in May. My answer is that I don't want to this to be a false buying signal such as the one in 2001. The curve rose by 53.8 points, the highest since the buy signal was triggered.


Summary
We are cautiously bullish on the market. We are looking to purchase Northwest Natural Gas (NWN) and Cardinal Health (CAH). This will depend on what the overall market does when we start October.
Art