A Brief Update on Dow Theory and the Current Non-Confirmation
On August 2, 2011 the primary trend, in accordance to classical Dow theory, was confirmed as bearish. That bearish primary trend change led to the decline into the October 2011 low and from there the market began to rally. However, beginning in February, the Transports began to lag and in doing so an upside non-confirmation was born. Then, in May both the Industrials and the Transports again closed below their previous secondary low points. In doing so, another bearish primary trend change occurred, which served to reconfirm the bearish primary trend change from August 2011. Since then, the Industrials have moved to post-October 2011 highs while the non-confirmation with the Transports has continued to grow.
According to orthodox Dow theory, a joint close by both the Transports and the Industrials, is required either above or below a previous secondary high or low point in order to trigger a primary trend change. Since the bearish primary trend change in August 2011, when both averages closed below their previous secondary low points, we have not seen a joint close by the averages above a previous secondary high point. It is for this reason that the previously established primary bearish trend change continues to remain intact. While the non-confirmation by the Transports has received some attention, virtually no one understands that we have been operating within an orthodox bearish primary trend change for over a year.
Now, this may prompt the question in some people's mind to question the value of Dow theory. But, that too, is a misunderstanding. Our Dow theory founding fathers never used these methods as a specific market timing tool. Rather, they explained that it was a tool to tell us the economic environment in which we operate. William Peter Hamilton described the Dow theory as a barometer, which can be used to tell you if conditions are becoming stormy or if the storm is passing. Anyone who tries to use the Dow theory as a specific timing tool is likely to find that it is not meant to be used in that manner because not all Dow theory trend changes are created equal. An example of this was with the August 2011 bearish trend change. When this occurred, I remember everyone turning bearish, because that trend change got a lot of attention. Yet, I came out publicly and said that because of my market statistics and missing DNA markers the market should move higher and specifically that the May 2011 high should be bettered. This call was well documented as I made it public on a number of websites. My point here is not the call I made over a year ago. Rather, my point is that there are other factors that must be considered and incorporated besides just Dow theory and that was one such example. That said, should one conclude that because of the advance seen since the bearish primary trend change in August 2011 that the Dow theory is flawed, is an error. Once again, research shows that not all Dow theory trend changes are created equal and there are other factors that must be considered. Again, the Dow theory was intended not as a market timing tool, but rather as a barometer to gauge business and economic conditions. I have learned that if we use the Dow theory with this in mind and then incorporate my trend quantification statistics and historical DNA markers, that it becomes a very powerful tool.
As an example, in September 1999 a Dow theory bearish primary trend change occurred. Those that tried to use the Dow theory as a timing tool were disappointed as the market moved higher in association with a non-confirmation that formed in conjunction with the 2000 top. So, the fact that the market moved higher did not mean that the Dow theory wasn't valid. Rather, it told us that the economic conditions had become stormy. Then, when I incorporated the cyclical setup, which told me the market should move below its 1998 4-year cycle low, and the structural DNA Marker fell into place, it was then checkmate for the market. The same was also true at the 2007 top as well. In that case, the Industrials peaked in October in conjunction with a non-confirmation by the Transports. The market then continued lower into early 2008. From that point, the Transports moved to a new recovery high while the Industrials lagged, which created a Dow theory non-confirmation. But, by knowing and understanding the statistical data and the structural DNA Marker to look for, we were better able to make sense of the overall setup and know what was happening, before it occurred.
The same is true with the current situation. Again, while I hear some talk of the lagging Transports, virtually no one understands that we are still operating within a Dow theory bearish primary trend change. Then when you explain this, the natural response is to question the validity of Dow theory. However, Dow theory is doing exactly what it was intended to do. It is confirming that business and economic conditions are not good. All the manipulative efforts by the powers-that-be have not changed this fact. Just as was the case at the 2000 and the 2007 top, the key now is the statistical and structural DNA Markers. Once they are in place, the die will be cast and all the kings horse, all the kings men nor the Fed will be able to put this Humpty Dumpty back together again. It will then be at that time that the unraveling will begin. Details of these structural DNA Markers and the statistics are covered, as they develop and evolve, in my research letters and short-term updates. For now, the storm clouds, in accordance with Dow theory, continue to form.
I want to share a few quotes with you from our Dow theory founding fathers on the subject of non-confirmation.
William Peter Hamilton - "The movement of both the railroad and industrial stock averages should always be considered together. The movement of one price average must be confirmed by the other before reliable inferences may be drawn. Conclusions based upon the movement of one average, unconfirmed by the other, are almost certain to prove misleading."
William Peter Hamilton - "Dow's theory stipulates for a confirmation of one average by the other. This constantly occurs at the inception of a primary movement, but is anything but consistently present when the market turns for a secondary swing."
William Peter Hamilton - "When one breaks through an old low level without the other, or when one establishes a new high for the short swing, unsupported, the inference is almost invariably deceptive."
William Peter Hamilton - "Indeed it may be said that a new high or a new low by one of the averages unconfirmed by the other has been invariably deceptive. New high or low points for both have preceded every major movement since the averages were established."
William Peter Hamilton - "The two averages may vary in strength, but they will not vary materially in direction especially in a major movement. Throughout all the years in which both averages have been kept, this rule has proved entirely dependable. It is not only true in the major swings of the market, but it is approximately true of the secondary actions and rallies. It would not be true of the daily fluctuations, and it might be utterly misleading so far as individual stocks are concerned."
Robert Rhea - "The most useful part of the Dow theory, and the part that must never be forgotten for even a day, is the fact that no price movement is worthy of consideration unless the movement is confirmed by both averages."
Robert Rhea - "The Dow theory deals exclusively with the movement of the railroad
and industrial stock averages, and any other method would not be
Dow's theory as expounded by Hamilton." Robert Rhea - "A wise man lets the market alone when the averages disagree."
Robert Rhea - "When the averages disagree they are shouting 'be careful.'"
I guess my overall point here is that this upside non-confirmation and bearish primary trend change has gone on so long that many have begun to discount it. But, fact is, the Dow theory is working beautifully in that it has been giving those that understand and respect it a warning since August 2011. It told us that the rally out of the October 2011 low was suspect and since February the warnings have intensified. If you think about it, what other method has been so generously warning of the economic condition and what is to come? Have you heard the fine folks on CNBS warning you? Have the politicians warned you about the economic environment? Well, the Dow theory has and I urge you not to discount it. Now, I'm telling you, once the statistical data and structural DNA Markers that have been seen at every major top since 1896 are in place, the die will be cast and the fallout from the Dow theory warnings will become reality.
I have begun doing free audio market commentary that is available at www.cyclesman.net so please begin joining me there. The October issue of Cycles News & Views has been released and in it I give detailed analysis of the current situation from a cyclical and a Dow theory perspective as well as a look at the currently applicable statistics and the DNA Markers. A subscription includes access to the monthly issues of Cycles News & Views, which included Dow theory, a very detailed statistical based analysis covering not only the stock market, but the dollar, bonds, gold, silver, oil and gasoline along with short-term updates 3 times a week.