Category Archives: Dow Theory Non confirmation

Dow Theory

The great Dow Theorist Richard Russell (www.dowtheoryletters.com) has indicated that based on today's market action we are now (again) in a bull market. This is after Mr. Russell had taken away his bullish stance from August 14, 2009 to August 24, 2009. While I respect Mr. Russell's over 50 year contribution to Dow Theory, the longest recorded history of Dow Theory from a single person, I have to disagree with the notion that we can say with confidence that the bullish indication needed to be taken out on the 14th and that we've achieved a confirmation of the trend today.

Regarding the matter of August 13th and 14th, on August 13th the Industrials and Transports both hit a new high (on a closing basis) from the March 9th low. On August 14th both indices fell in unison, achieving a temporary low on August 17th. However, what makes for a reversal of a bullish pattern according to Dow Theory is that both indices take out the point at which both indices initiated the bullish move to begin with. This means that both indexes would have had to fall below their respective July 23rd breakout levels. For the Industrials this would be the 8799.25 and for the Transports this would be 3404.11. The decline from the August 13th high never took out the levels that initiated the bull market indication.

It should be noted that on July 22nd, Richard Russell had a bear market indication at the end of the trading day. On July 23rd, Mr. Russell had a bull market indication prominently displayed at the end of the trading day. As I've said in the past, most if not all, Dow Theorist should come to the same conclusion at the same time. This is widely represented by searching "Dow Theory " and "July 23, 2009."

As I said in my July 24th Dow Theory commentary, what remains unresolved according to Dow Theory is the fact that the Dow Jones Transportation Average has not gone above the previous high of 3774.12 while the Industrials keep racking up new, albeit tepid on a percent basis, daily highs. What we have currently is what is known as a classic Dow Theory non-confirmation. This non-confirmation is resolved by the Transports exceeding 3774.12 along with the Industrials making a new high (above each previous high point since March 9th) or both indexes going below the breakout level that initiated the bull market.

I am hopeful that Mr. Russell will either correct me on my interpretation (giving me the chance to learn something new from the best) or that he revises his indication to reflect that the market is bullish with a pending non-confirmation that needs to be resolved. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

Dow Theory

When it comes to Dow Theory, we have to carefully monitor the market to see if we get a clear sign of a non-confirmation of the trend. A non-confirmation of the trend can take place in many ways and is most prominent when one index goes up while the other goes down. Anyone interested in Dow Theory must be vigilant for signals that might indicate that a reversal of the primary or secondary trend is in the offing.

On Friday August 21, 2009, the Dow Jones Industrial Average (^DJI) exceeded the prior high of 9398.19 set on Wednesday August 12th. Unfortunately, the Dow Jones Transportation Index (^DJT) are lagging in the ability to exceed the high of 3774.12 set on Thursday August 13th. The only thing that favors the Transports in this instance is the fact that on a percentage basis the Transports rose 2.58% versus the Industrials 1.67% increase. This indicates that there is relatively strong interest in the Transports. Hopefully this enthusiasm will spill over into today's trading.

If the Transports do not break above the August 13th high then we might be on track for a non-confirmation. A non-confirmation means that the recent upward trend in the market will be coming to an end soon. Conversely, if the Transports break the indicated high while the Industrials move moderately higher then we could be in good shape for the short term.

Dow Theory Q & A

Q.When looking at a chart with weekly Dow prices, how is the weekly price calculated? Is it the Friday close or is it an average of the whole weeks close?

A. In all my readings of Dow Theory, I cannot remember anyone suggesting the use of weekly data for analysis. This doesn't mean that weekly data isn't useful, you might see a consistent pattern that I would otherwise overlook. Dow Theory is supposed to be calculated by using the closing price for both indices on a daily basis. I have bastardized Dow Theory by taking the high and low price of a given period as a way to get a sense of herd mentality or market psychology. This is in contrast to taking only the closing price.

Depending on the source, weekly data is calculated using the opening price from the open on Monday, the high and low price is from whichever days in the week that had either number and the closing price from the Friday close. An average of the week isn't how the weekly closing price is calculated. Touc.


Please revisit Dividend Inc. for editing and revisions to this post.