From my seat and in light of the price action this past week, I truly find
the lack of understanding surrounding Dow Theory amusing. I also find the content
from most any article on this subject to be inaccurate and/or typically misleading.
Such erroneous articles result from the misunderstandings and/or the lack of
quality study of Dow Theory, which in turn makes such articles dangerous to
those who read them, as well as being a discredit to Dow Theory. In my experience,
virtually 99.9% of all articles written on the subject of Dow Theory are wrong.
I think this is because of the scarcity of the original writings by our Dow
Theory Founding Fathers and again, the lack of quality research. More often
than not, someone will make an erroneous Dow Theory call, then blame Dow Theory
for being wrong or no longer applicable when it doesn't work out. In reality,
it always turns out to be the misapplication of Dow Theory. Dow Theory was
just as applicable at the 2000 and the 2007 tops as it was at the 1966 bull
market top or at the 1929 top when William Peter Hamilton wrote his article, A
Turn in the Tide, in which he called the top. Also, the Dow Theory Primary
Bullish Trend Change following the 2002 low and the 2009 low proved just as
applicable as the one following the 1932 and the 1974 lows. To think that Dow
Theory is somehow no longer relevant simply has no merit. Rather, what happens
is we see erroneous applications of Dow Theory, which are then blamed on the
theory rather than the error of the practitioner.
Fact is, according to orthodox Dow Theory, there is no such thing as a "buy" or "sell" signal.
That's right! So if you see this in an article, that is clue number one. Rather,
there are Bullish and Bearish Primary Trend Changes. A Bullish Primary Trend
Change requires a close by both the Industrials and the Transports above their
previous Secondary High Points. Conversely, a Bearish Primary Trend Change
requires a close by both the Industrials and the Transports below their previous
Secondary Low Points. Furthermore, once a Primary Trend Change occurs, that
Bullish or Bearish Primary trend is assumed to be "in force" until it is "authoritatively
reversed" by an opposing trend change. The tricky aspect of Dow Theory, which
most people get wrong, is the identification of Secondary High and Low Points.
I get that, because identifying these points is subjective. However, while
cycles have absolutely nothing to do with Dow Theory, I have found that intermediate-term
cycle highs and lows are one and the same as Secondary High and Low Points,
in accordance with Dow Theory. And, since the cycles are quantifiable and Dow
Theory is not, this in turn allows me to quantify the Secondary High and Low
Points, which in turn removes the subjectivity.
This all said, on Friday, October 10, 2014, the Transports closed below their
August 7th Secondary Low Point. On Monday, October 13, 2014, the Industrials
followed with a close below their August 7th Secondary Low Point. In the wake
of this development, I have sat quietly to see what, if anything, would be
written on this development. The current Dow Theory chart can be found below.
As a result of this joint close below the previous secondary low points, an
orthodox Dow Theory Primary Bearish Trend change has been triggered. Yet, I
have not seen a single article on this development. Not one. In fact, I have
only seen one Dow Theory article period and guess what? It proclaims that because
of the strength seen by the Transports later this past week, this is a signal
that the correction in the broader markets may be over. Cyclically, yes, a
short-term low was seen and further strength may well follow. But, the Dow
Theory Founding Fathers made it perfectly clear that, "Both Averages Must Confirm." In
but one quote, Robert Rhea wrote, "students of Dow's Theory must not ever forget
that an indication of one average, unconfirmed by the other, should never be
considered as having any valid forecasting significance."
So, here is the reality and the irony. The very week an orthodox Dow Theory
Primary Bearish Trend Change occurred, I only see one article in which Dow
Theory is so completely misapplied that it is basically the polar opposite
of the truth. Therefore, once again and true to form, because of the universal
misunderstanding of Dow Theory, the misapplication of Dow Theory lives on.
Regardless of what anyone else says, we now have a bonafide Primary Bearish
Trend Change in place and it will remain in force until it is authoritatively
reversed. From a cyclical perspective, I told my subscribers that in spite
of Monday's developments, we were looking for a low this past week. What happens
in the wake of this cyclical low has nothing to do with the fact that the Transports
closed up last week, with Dow Theory or with the Bearish Primary Trend Change.
All Dow Theory Primary Trend Changes are not always created equally. It is
the weight of the overall evidence and the totality of the DNA Markers, the
cyclical setup and the associated statistics, all of which I am currently monitoring
at Cycles News & Views. If you would like to know more about the current
expectations in the wake of this Dow Theory Bearish Primary Trend Change, that
research is being covered at https://cyclesman.com as
it unfolds.
