Of late, I have been seeing another round of articles circulating the internet
claiming that Dow theory is no longer valid. These articles all generally theorize
the same common theme in that they claim the Dow theory is an antiquated relic
of the past and that for this reason it does not apply in today's new high
tech age.
Another commonality with these articles is that it is clear to me that the
writers of such articles do not understand Dow theory. Reason being, they have
never studied the original writings by Charles H. Dow, William Peter Hamilton
or the detailed studies by Robert Rhea. As a result, 99% of the articles on
Dow theory are incorrect in that they are full of erroneous statements, misapplications
and false conclusions.
As an example, Dow theory worked beautifully at the 2000 top. In fact, a bearish
primary trend change was triggered in September 1999. From there, the Industrials
moved to a higher high in January 2000, which created a Dow theory non-confirmation
in addition to the bearish primary trend change. But, as a result of the higher
move by the Industrials, people did not seem to understand the non-confirmation
and the warning that orthodox Dow theory was clearly sending. I remember the
criticisms of Dow theory and the claims that it was wrong. This non-confirmation
and the original bearish primary trend change was followed in March 2000 by
another bearish primary trend change. Surely we can all remember the roughly
40% decline that followed. Obviously, Dow theory was not too antiquated at
the 2000 top, after all.
Then there was the 2007 top. The fact is, the averages made joint highs in
July 2007. That high was then followed by a breakdown of the Transports while
the Industrials moved above their previous secondary high point into the October
2007 high. This in turn created a Dow theory non-confirmation that was soon
followed by a bearish primary trend change in November 2007. In June 2008 the
Transports actually moved to another all time high. As a result, we again heard
stories of why Dow theory was wrong. Truth was, this additional advance again
created a non-confirmation following the bearish primary trend change. According
to orthodox Dow theory, a trend change is considered to be in force until it
is authoritatively reversed and that requires a joint close above or below
the previous secondary high or low point, whichever the case may be. Given
that the averages were not into gear to the upside following the November bearish
primary trend change, that bearish primary trend change was never reversed
and the advance by one average unconfirmed by the other has no forecasting
authority according to Dow theory. Surely, we can all remember the roughly
50% decline into the 2009 low and the worst financial crisis since the 1930's.
Again, Dow theory worked just fine. It was the misunderstanding and bad calls
by those that did not know how to properly read Dow theory that was wrong.
Then, there was the so-called "Dow theory sell signal" in July 2010. Oh yeah.
I remember it well. Everyone that had ever heard of Dow theory came out with
this one. However, I explained that this was merely a decline into a secondary
low point. The same thing happened again in August 2011. Again, everyone and
their dog was proclaiming a "Dow theory sell signal." Yet, once again, they
were wrong. Big time wrong, but then again, they blamed Dow theory. I came
out with articles publicly stating that there was no such thing as a "Dow theory
buy or sell signal." I further explained that while we had seen a bearish primary
trend change, "not all Dow theory bearish trend changes were created equally" and
that the market was expected to move higher in spite of the August 2011 bearish
primary trend change. My reasons for this at the time was simply because of
my missing DNA Markers and my quantitative approach to Dow theory. I actually
received e-mails telling me that I was "stupid." Regardless, the fact is, at
the depths of the October 2011 lows I specifically called for a move above
the May 2011 high, which did occur in early 2012 and the so-called "Dow theory
sell signal" was in fact proven wrong.
Now, that said, the Dow theory bearish trend change that occurred in August
2011 remained in force all throughout the remainder of 2011 and 2012. All the
while, as the market moved higher and eventually bettered the May 2011 high
in early 2012, we once again saw the articles proclaiming Dow theory to be
wrong. As is always the case, it was the application/interpretation of Dow
theory that was wrong, not Dow theory. Now with the Transports having moved
to all time highs and Industrials moving above their 2012 highs, we are again
hearing the controversy about Dow theory. Some are again claiming that the
Dow theory is irrelevant and antiquated for the same various reasons that we
always hear. Others are saying that because the Industrials have not also moved
to all time new highs we still have a Dow theory non-confirmation in place.
I assure you the Dow theory is every bit as relevant as it was in 2000 or
2007 or 1929 for that matter. Fact is, there have been other bullish primary
trend changes within other longer-term secular bear markets. This is not the
first nor is it uncommon. As an example, bullish trend changes were seen during
the counter-trend bear market rallies, during both 1967 and into 1968, in association
with the rally separating Phase I from Phase II of the longer-term secular
bear market. The same thing also occurred during the 1971 to early 1973 rally
in association with the rally separating Phase II from Phase III. It was the
understanding of the Dow theory phasing that was key. This was also seen in
reverse during the great secular bull market of the 1950s and 60s in which
traditional Dow theory bearish primary trend changes occurred. But, during
that time E George Schaefer, who was the leading Dow theorist of that day,
understood that these bearish primary trend changes were occurring within a
longer-term secular bull market period and he was able to do so based on Dow
theory Phasing. I believe that we are seeing something similar to the 1967
to 68 and the 1971 to 73 rallies and here too, the phasing is key. Once a Dow
theory non-confirmation is seen, a bearish primary trend change is again triggered
AND the DNA Markers that I have found, which have occurred at every major top
since 1896, are seen, we will again see just how valid the Dow theory really
is. Until such time, just as I've maintained ever since the 2009 low, higher
prices will remain possible.
Now, as for the fact that the Industrials have not bettered their all time
high along with the Transports is of no consequence in accordance with orthodox
Dow theory. According to the original writings by our Dow theory founding fathers,
it is the joint close above and below previous secondary high and low points
that count. All time high or lows are not a requirement of Dow theory.
In closing, my long-term view on the market remains the same. It is a house
of cards. An out right disaster waiting to happen and it will happen. The rally
out of the 2009 low is a rally within the context of a much longer-term secular
bear market. The underling issues with the market have not changed nor have
they gone away. Again, I have identified a very specific set of common denominators,
which I refer to as DNA Markers, that have been seen at every major top since
1896. By understanding Dow theory and the identification of these DNA Markers
we will know when the tide turns. Once these pieces fall into place, the die
will be cast. Until then, just as I have said all along, higher prices will
remain possible. In fact, I wrote in my December research letter to my subscribers:
"Based on the weight of the overall data, we simply cannot rule out
the possibility of the advance out of the November intermediate-term cycle
low carrying price above the October high. In fact, I'll even go so far
to say that the balance of the evidence at this time is actually more suggestive
that it will than that it won't. But, even if this proves to be the case,
the overall weight of the evidence also suggests ......."
If you want to know more on the developments and details surrounding
Dow theory, my quantitative methods and the DNA Markers, that research is available
in the monthly research letters and short-term updates at Cycles
News & Views.
