Dow Theory

[winston]

what's Dow's theory anyways?

Dow Theory on stock price movements is a form of technical analysis that includes some aspects of sector rotation.

The theory was derived from 255 Wall Street Journal editorials written by Charles H. Dow (1851–1902), journalist, founder and first editor of the Wall Street Journal and co-founder of Dow Jones and Company.

Following Dow's death, William Peter Hamilton, Robert Rhea and E. George Schaefer organized and collectively represented "Dow Theory," based on Dow's editorials. Dow himself never used the term "Dow Theory," nor presented it as a trading system.

The six basic tenets of Dow Theory as summarized by Hamilton, Rhea, and Schaefer are described below.

1) The market has three movements
2) Market trends have three phases
3) The stock market discounts all news
4) Stock market averages must confirm each other
5) Trends are confirmed by volume
6) Trends exist until definitive signals prove that they have ended

http://en.wikipedia.org/wiki/Dow_Theory

[kennynah]

thanks w....

[winston]

A DOW THEORY SELL SIGNAL by Cullen Roche

I don’t generally subscribe to Dow Theory, but having been a long-time reader of Jeff Saut, I do recall the Dow Theory sell signal he often discussed in 2007 and 2008 that preceded the 2008 equity collapse.

According to Mr. Saut, a sell signal was just recently triggered although he’s keeping an eye on the indicator for confirmation:

Well, while I didn’t believe it was going to happen, the D-J Industrial Average (DJIA/11444.61) confirmed the D-J Transportation Average (TRAN/4693.59) last week when both of those indices broke below their respective March 16, 2011 closing reaction “lows,” thus rendering a Dow Theory “sell signal.” It was the first such “sell signal” since November 21, 2007.

Unlike the November 2007 “sell signal,” this one came at much lower valuation levels and following a nearly 11% decline since the selling stampede began on July 8, 2011.

While my hunch is last week’s Dow Theory “sell signal” will prove false, like the one that occurred during May 6, 2010’s “Flash Crash,” I would still tread carefully “living forwards.”

Source: Raymond James


http://pragcap.com/a-dow-theory-sell-signal

[winston]

What is the Dow Theory?

I was alerted to the fact that November 3 will be the Charles Dow’s 160th birthday.


Dow Theory can be summarized in the following six tenets:

1.The First Tenet is that markets move in one of 3 trends:

a. Up Trends are defined as when successive rallies close at levels higher than those of previous rallies and lows occur at higher levels than previous lows.

b. Down Trends are when the market makes successive lower lows and lower highs.

c. Corrections are defined as a move where the market recedes in a direction opposite of a move sharply in one direction before it continues in that original direction.


2. The Second Tenet is that trends have 3 phases (a precursor of the theories of market life cycle and psychology described above):

a. The Accumulation phase which is when “expert” traders actively take positions actually opposite the majority of people in the market.

Price does not change much during this phase as the “experts” are in the minority and so are not significant enough to move the market.

b. The Public Participation Phase which is when the public at large catches on to what the “experts” know and begins to trade in the same direction.

Rapid price change can occur during this phase as everyone piles onto one side of a trade.

c. The Excess Phase is when rampant speculation occurs and the “smart money” starts to exit their positions.


3.The Third Tenet is that the markets discount all news so that once a piece of news is released it is quickly reflected in prices.

On this point Dow Theory is in line with the efficient market hypothesis.


4. The Fourth Tenet is that the Industrials and Rails Averages must confirm each other; a sign that the market is going to change direction comes when two averages move in opposite directions.


5. The Fifth Tenet is that trends are also confirmed by volume. There are many reasons why price may move on low volume, but when prices move on high volume there is a greater chance that the move is representative of the overall market’s view.


6. The Sixth Tenet is that trends exist until definitive signals prove that they have ended.

What Dow was saying here is that there will be market moves which are against the primary trend but this does not mean that the trend is over and the market will normally resume its prior trend

http://www.yolohub.com/trading/what-is-the-dow-theory

[winston]

CHART OF THE WEEK: THE TRANSPORTS BREAK OUT

Our chart of the week brings a bit of good "price news" for those bullish on America. It shows the transports are getting stronger…

While most folks just pay attention to conventional stock averages like the Dow Industrials, market traditionalists (like us) also pay attention to transportation stocks, like those contained in the Dow Jones Transportation Index.

This index tracks the share price performance of railroad, airline, trucking, and freight companies. Major transporters like FedEx, Union Pacific, UPS, and Norfolk Southern are components of the average.

The idea here is that if the shippers of goods are enjoying robust profits and share prices, the economy can't be doing that badly.

After trending higher for much of 2011, the transports sold off with the rest of the market during the summer crash. This index fell from 5,400 to 4,200 (a 22% drop).

It then spent several months drifting sideways. But as you can see from this week's chart, the Transportation Index has climbed out of the basement… and just this week, "broke out" to its highest level in five months.

Good news on the American economy is tough to come by these days. But one can look at this positive price action in the transports and say, "The shippers of America are still moving freight… their share prices are perking up… so things can't be all bad."

Source: Daily Wealth

[iam802]

On the Daily Chart, $TRAN (Dow Jones Transport) seems to have break above the resistance level. However, the break is not convincing and this is reflected in the last 3-4 candles.



On the Ichimoku Weekly Chart, the resistance level ahead is clearer.

Currently, we can see that the price level is hitting against a resistance level from the Chikou Span.

More importantly, we can also see that the kumo resistance is ahead at around 5250. The leading kumo has not twist and confirmation of bullish outlook is not confirmed.

Will we see $TRAN head higher in the weeks ahead? Yes, there is a chance. Option expiration is less than 2 weeks ahead. However, at this moment, there is chance that $TRAN may turn when it hit Feb.

[winston]

A BIG BREAKOUT FOR A CRUCIAL MARKET SECTOR

We're seeing upside breakouts all over the place. That's the biggest thing to take away from the week's trading action…

Regular DailyWealth readers are familiar with the concept of a "breakout." It's simply a price at which an asset "breaks" into fresh price territory.

A breakout can come on the downside or the upside. But whatever the direction, no trend can start without one. They act as a sort of "starter's pistol" for rallies and declines.

This week, we've seen a handful of important upside breakouts. The broad S&P 500 index, for example, just staged an upside breakout to hit its highest level in five months.

Regional bank stocks are staging upside breakouts. So are defense stocks and homebuilder stocks. But you'll see one of the most important "breakouts" in the chart below…

Around Christmas, we noted how the positive price action in transportation stocks – railroads, truckers, airlines, and shippers – was a good sign for those "bullish on America."

The idea is that if the shippers of goods are enjoying robust profits and share prices, the economy can't be doing that badly.

This week brought more good "price news" for the transports. The big transport fund just broke out to its highest high since August. For now, the trend is UP… trade accordingly!

www.dailywealth.com

[winston]

What Are the Industrials and Transports Suggesting? By Barry Ritholtz

Dow Theory — a study of the relationship between the Industrials and the Transports — are suggesting a potential inflection point is nearing.

A move above 12,900 in the Dow Industrials would surpass the April 2011 highs, and the bulls would like to see that confirmed by the Trannies getting over 5630.

As we see from the indices via The Chart Store below, both the Industrials & Trannies are on the verge of that breakout. Just note that Classic Technical analysis requires you wait for the breakout/breakdown confirmation, rather than anticipate it.

Caveat: I am not a Dow Theorist, and this is a grossly oversimplified explanation.

For more details, Wikipedia has an excellent primer on the major tenets of Dow Theory.

Or check out Richard Russell’s The History of the Dow Theory.

http://www.ritholtz.com/blog/2012/02/wh ... uggesting/

[winston]

This Sector Will Lead the Stock Market Lower By Jeff Clark
Thursday, February 16, 2012

Transportation stocks are in trouble.

The Dow Jones Transportation Average has been moving steadily higher over the past few months. But in the process, its chart has morphed into a bearish rising-wedge pattern.

The Transportation Average quietly broke down from the pattern last week… But given the resiliency of the overall stock market, it managed to hold up fairly well. Until yesterday, that is…

Yesterday, the Transportation Average fell more than 2% – suffering more than twice the damage of the S&P 500 or the Dow Jones Industrial Average. And by the look of the chart below, there's more suffering to come…

The pattern projects a move down to 4,800 or so. That's a loss of roughly 8% from yesterday's closing price.

We also have this overbought condition on the transportation sector bullish percent index (BPTRAN)…

A bullish percent index measures overbought and oversold conditions for a sector. A sector is typically overbought when the bullish percent index rallies above 70… and it's oversold when the chart drops below 30.

"Sell" signals occur when the chart runs into overbought territory and then turns lower. As you can see, the Transportation Average is on the cusp of a sell signal right now.

The BPTRAN flashed a sell signal right about the same time last year as well. That signal led to a swift 6% drop in the Transportation Average in just two weeks.

It looks like we're set up for the same action this year.

Yesterday's selloff may have been the start of the short-term correction I've been predicting. If that's the case, the transportation sector is poised to lead the market lower. Aggressive traders can look to short names in the sector with a plan to take profits as the Dow Jones Transportation Average approaches 4,800.


www.growthstockwire.com

[iam802]

Take note of Dow Jones Transport.

Since Feb, it has been going lower.

Screen Shot 2012-02-17 at 4.18.53 AM.png