How Many Dow Theorists Does it Take to Move a Market?

• Posted by Greg Harmon
• on January 13th, 2012

Dow Theorists look at the interaction between the Dow Jones Industrial Average, $DJIA, and the Dow Jones Transportation Average, $DJT. Both of these averages have been around forever. And both, in terms of the narrowness of the underlying components, have become much less significant. There are only 30 stocks in the $DJIA and 20 in the $DJT. These were very important to the economy when the Indexes were created. But now with the S&P 500 and Russell 2000 developed to take advantage of the ability to diversify out risk, do they still have meaning? We may find out very shortly.

Dow Jones Industrial Average, $DJIA

One of the key premises of Dow Theory is waiting for the lagging Index to confirm a new higher high or lower low before declaring a new trend and deploying capital. The monthly chart of the $DJIA above is now only a little over 3% from making a new higher high over 12876. A Dow Theorist would look at this and determine that it a new trend higher is occurring when the $DJT makes a new high as well, over 5267.85 as shown in the chart above. If and when that happens we will

Dow Jones Transportation Average, $DJT

see just how many Dow Theorists are in the market today. But I will predict that if the $DJIA makes a new high there will be a lot of chatter from the television pundits about a $DJT confirmation requirement before getting too excited. Remember where you read it first. This crew may be late to the party though. A modern interpretation of Dow Theory uses the S&P 500, $SPX, and the Nasdaq 100, $NDX the same way. With the $NDX within 2.4% of a new high and the $SPX less that 6% away from then being able to confirm it, this pair may start the party early. Markets taking off higher without a $DJIA/$DJT confirmation may be scary for some but will certainly answer the question as to which pair carries the most weight in the current market.

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