107 Points From Greatness?

• Posted by Greg Harmon
• on January 16th, 2014

As we walk into Thursday morning that is what a good many people will be focusing on. The Dow Jones Industrial Average ($INDU, $DIA) closed Wednesday just 107 points away from making a new all time high, and in the process re-confirming the uptrend for the markets from a Dow Theory perspective. The first part of the the Theory fell into place last Friday when the Dow Transports Average ($DJT, $IYT) made a new all time high. If the Industrials confirm then we can go about buying stocks willy-nilly as the uptrend is confirmed. This works great in theory and many will actually follow it in practice but it has not always been a long lived short term buy signal recently. Often it has signaled a short term top.

Since the November 2012 low there have been 7 such signals from the Transports and the Industrials as you can see in the chart above. The first three, in February, March and May 2013 did lead to runs higher in both Indexes. But the next two signaled a topping in the short term. The fifth instance resulted in the Transports continuing higher but the Industrials only slightly. And the last time the confirmation signaled a top in the Industrials and shortly later the Transports topped.

So what are we to make of this? Will a confirmation from the Industrials mean another short term top? This chart shows why the market was so difficult for many in 2013. Without a very wide stop or a very fast trigger you were subject to a market that undulated. The Dow Theory signals worked, but if you read them this way you likely lost a ton of money. Dow Theory is one tool to use in Technical Analysis, and as you can see, it is most useful in long trending markets.

But this not exactly correct. These confirmations, outside of the first one in red, are just reconfirming that the trend remains higher. The uptrend signal that was created in February of 2013 was never negated but a down trend signal. It had a chance in October when the Industrials made a lower low, but the Transports did not confirm it. They did not make a lower low. Uptrend in tact. So a new re-confirmation signal, on a move higher in the Industrials by 107 points will be nice. But if it does not happen it does not negate the uptrend. It will confirm some weakness. But it takes two new lower lows to confirm a downtrend. Dow Theory has had this right all along.

Don’t forget to download A Longer Perspective, my take on 12 broad markets for 2014 and beyond, for the price of a latte.
____________________________________________________________________________________________________

Want to learn more about Dragonfly Capital Views?

Dragonfly Capital Views Performance Through December 2013 Expiry and sign up here for the free 7 day trial before you pay.

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus