Category Archives: Dow Theory

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

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.

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.