Dow Theory

Dow Theory is similar to waves on the beach.  As high tide comes in it is hardly perceptible with each wave whether the level is rising or not.  However, as time passes there is an incremental move to higher levels.  Likewise, with Dow Theory, successive moves over time readjust the market levels higher.  This is the case with our last estimate of Dow Theory downside targets on May 1, 2013 (found here).

As the Dow Jones Industrial Average and Dow Jones Transportation Average exceeded their respective peaks at the time, new thresholds for downside targets were established.  On June 5, 2013, the Industrials and Transports established lows at the 14,960.59 and 6,138.36 levels, respectively.  After achieving these lows, the indexes started to move higher in an attempt to exceed the previous highs set on May 28th for the Industrials at 15,409.39 and May 17th for the Transports at 6,549.16.

The failure of each index to exceed the May highs was the first non-confirmation of a continuation of a bull market.  Non-confirmations can persist for a long time with either index going to new highs while the other declines.  Ultimately, this type of non-confirmation is resolved with either the index that went to new highs collapsing or the index that declined going to new highs.

In this case, the fact that both the Industrials and Transports have fallen below the June 5, 2013 lows means that, according to Dow Theory, we are now in a bear market.  Violation of the June 5th lows occurred on June 20, 2013 for the Industrials and June 21, 2013 for the Transports.

The following are the indicated technical downside targets:

What would it take to reverse the current indication from a bear market to a bull market?  In this case, it would require that both indexes jointly exceed the prior highs set in the month of May.  It is not inconceivable that this could occur.  However, we’ll make that judgment when the time comes.   For now, a bear market has been indicated and we’ll see how far this market could go on the downside.