Some Thoughts On The Dow Theory
One of the best market-timing tools ever devised is the reknowned Dow Theory. It was formulated by the late Charles Dow, first publisher of The Wall Street Journal.
In brief, the Dow Theory looks at just two factors: the Dow Jones Industrial Average and the Dow Jones Transportation Average. And from the movement of these two Indexes, the Dow Theory determines whether the market's primary trend - the trend that lasts at least 18 months - is bullish or bearish.
The Dow Theory works using the concept of confirmation. Thus, for the market and the economy to be in sync, both the Dow Industrials and the Dow Transports should be moving in the same direction, thereby confirming one another. On the other hand, when both the Dow Industrials and the Dow Transports are moving in sync on the downside, making a series of new lows, that is generally bearish for stocks.
For the past several months, the last major signal under the Dow Theory had been bullish. In fact, as recently as March of this year, both the Dow Industrials and the Dow Transports closed above their previous important highs, thus confirming the bullish primary trend.
More recently, however, the market's performance has been less than stellar. Fueled by rising oil prices, both the Dow Industrials and Dow Transports have sold off sharply in recent trading.
Despite these pullbacks, the damage has not been severe enough to trigger a Dow Theory bear-market signal. However, both averages have fallen closer to key points on the downside.
In the simplest terms, market closing prices (not just intraday moves) below 10,012.36 on the Dow Industrials and 3382.89 on the Dow Transports would be bearish for stocks.
It's important to bear in mind that in order for the Dow Theory to move to the bearish camp, you would need both indexes to close below those important points. Any move by one average that is not confirmed by the other would not signal a bear market.
So to recap, market closes below 10,012.36 on the Dow Industrials and 3382.89 on the Dow Transportation Averages would be bearish for stocks and would likely trigger heightened selling in the market.
Conversely, should either or both of the Dow Averages hold their important lows, such resiliency likely would be a catalyst for a nice rally, perhaps to 11,000 in the Dow.
Note: Bob Brinker is very optimistic about the prospects for the second half of 2005!
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In brief, the Dow Theory looks at just two factors: the Dow Jones Industrial Average and the Dow Jones Transportation Average. And from the movement of these two Indexes, the Dow Theory determines whether the market's primary trend - the trend that lasts at least 18 months - is bullish or bearish.
The Dow Theory works using the concept of confirmation. Thus, for the market and the economy to be in sync, both the Dow Industrials and the Dow Transports should be moving in the same direction, thereby confirming one another. On the other hand, when both the Dow Industrials and the Dow Transports are moving in sync on the downside, making a series of new lows, that is generally bearish for stocks.
For the past several months, the last major signal under the Dow Theory had been bullish. In fact, as recently as March of this year, both the Dow Industrials and the Dow Transports closed above their previous important highs, thus confirming the bullish primary trend.
More recently, however, the market's performance has been less than stellar. Fueled by rising oil prices, both the Dow Industrials and Dow Transports have sold off sharply in recent trading.
Despite these pullbacks, the damage has not been severe enough to trigger a Dow Theory bear-market signal. However, both averages have fallen closer to key points on the downside.
In the simplest terms, market closing prices (not just intraday moves) below 10,012.36 on the Dow Industrials and 3382.89 on the Dow Transports would be bearish for stocks.
It's important to bear in mind that in order for the Dow Theory to move to the bearish camp, you would need both indexes to close below those important points. Any move by one average that is not confirmed by the other would not signal a bear market.
So to recap, market closes below 10,012.36 on the Dow Industrials and 3382.89 on the Dow Transportation Averages would be bearish for stocks and would likely trigger heightened selling in the market.
Conversely, should either or both of the Dow Averages hold their important lows, such resiliency likely would be a catalyst for a nice rally, perhaps to 11,000 in the Dow.
Note: Bob Brinker is very optimistic about the prospects for the second half of 2005!
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posted by Bob Moser at
4:00 PM
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