Category Archives: Dow Theory

Dow Theory: 1910-1913

Posted on July 29, 2012 by | Leave a comment

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Bull market indication (A): According to the Edwards and Magee book Technical Analysis of Stock Trends, the Dow Theory bull market began on October 10, 1910 when the Dow Industrials and Transports exceeded the August 17, 1910 resistance levels of 81.41 and 115.47, respectively.  The NLO team believes that the bull market began at point (C) when the Dow Jones Industrial Average and Transportation Average exceeded the July 22, 1910 resistance levels of 77.78 and 110.51, respectively.  From the point (C) of the bull signal to the respective market tops, the DJI gained +10.61% and the DJT gained +11.98%.

We also believe that after a bear market signal was issued at point (D) on August 2, 1911, a new bull market indication was issued at point (E), on November 6, 1911, when the Dow Jones Industrial Average closed at 79, above the previous resistance level of 78.34 established on October 16,1911.  The Transportation Index had already gone above the previous resistance level of 114.13 set on October 20, 1911 by closing at 114.46 on October 31, 1911. From the point (E) of the bull signal to the respective market tops, the DJI gained +19.13% and the DJT gained +6.01%.

Bear market indication (B): According to Edwards and Magee, the bear market began on January 14, 1913.  At the time, the Dow Jones Industrial Average was at 84.96 while the Transportation Average was at 115.01. Edwards and McGee never indicated that in between October 10, 1910 and January 14, 1913 there are any other bull and bear signals according to Dow Theory.

However, in our view, as we mentioned above, we believe that a bear market indication was given on August 2, 1911 point (D) when the DJI and DJT were at 84.80 and 120.71, respectively.   The Industrials and Transports fell -13.98% and -9.03% from the August 2, 1911 levels.

After getting a second bull market indication at point (E), a second bear market indication was triggered on November 4, 1912 point (F) when the Dow Jones Industrial Average declined below 90.38 on September 11, 1912.  The Transportation Average had already given the bearish indication on October 25, 1912 by falling below 120.44.  From point (F) to the June 11, 1913 low, the Dow Jones Industrial Average declined –20.21% while the Dow Jones Transportation Average declined –16.55%.

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Market Outlook: Mixed Signals

Posted on June 6, 2012 by | Leave a comment

On February 7, 2012, we wrote an article on the topic of gold titled “Gold Stock Indicator Points Down” (found here).  In that article, the very last sentence said the following:

“based on the current trajectory, we have May/June 2012 as our tentative reversal period.”

Well, the month of May has passed and we’ve seen an amazing plunge in gold stocks since the posting of our February 7th article, as reflected in the chart below:

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Since February 7, 2012, the XAU gold stock index declined -28.95% to the May 15th low.  As we had anticipated, the “May/June” bottom was reached, for now. Ordinarily, this would be the time to buy gold stocks, especially those that pay a dividend.  However, in our May 27th transaction review of NUGT (found here), we said that, based on our Gold Stock Indicator, there would be a second opportunity to buy gold stocks at a considerable value.

The recovery in the XAU index has been even more spectacular than the plunge.  Historically, such rapid increases in a stock or index would require a decline of at least -50% of the most recent rise, even if the trend is still higher.  Therefore, based on the most recent price of 168.71 in the XAU index, there should be a decline to the 154.56 level or half of whichever the most recent peak might be.  We’d consider buying dividend paying gold stocks at half of the highest point achieved or lower.  (Please, if you have any questions about this paragraph we’d be more than glad to explain further if we were not clear in any way.)

For now, the direction for gold stocks is up based on our Gold Stock Indicator, until proven otherwise.  However, at the same time the Gold Stock Indicator is pointing up, we have a Dow Theory bear market indication as outlined in our May 19th article (found here) suggesting that stocks in general are supposed to decline.  Our vast amount of research on the topic suggests that if the general stock market were to have a decline of 10%-15% or more, then gold stocks would decline by a greater percentage.  As an example, in 2008, when the general stock market declined –37% as reflected in the S&P 500 (full year decline), the XAU gold stock index declined -66% within the period from March 2008 to October 2008.

We don’t know which indication will take precedence.  Therefore, we are opting for the most conservative stance possible.  We’re waiting for the stock market to confirm the Dow Theory bear market indication or quickly come up with a bull market indication.  We’re holding out for the possibility that gold stocks will provide the second opportunity to buy as has been indicated in our May 27th transaction review.

Questions or thoughts?  Let us know, we’ll do our best to provided a thoughtful response.

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Posted in Dow Theory, Gold Stock Indicator, XAU

Dow Jones Industrial Average: Where To Now?

Posted on June 2, 2012 by | Leave a comment

Dow Theory Review

  • On August 2, 2011 (article here), we said that a new bear market had begun.
  • On August 9, 2011 (article here), we announced that, based on the closing price of August 8, 2011, a bear market rally would ensue (stock prices would rise.)  That call was 2 months ahead of the ultimate market bottom set in October 2011 and off the actual low by 1.43%.
  • On March 16, 2012 (article here), we warned about the lack of participation of most stocks in the rise of the stock market from the 2009 low.  Additionally, we cited the divergence between the Dow Jones Industrial Average and Dow Jones Transportation Average as confirmation that we were still in a bear market.  This was less than 1% from the actual top in the market.
  • On May 19, 2012 (article here), we pronounced that the bear market rally had ended.  This call came 7.41% below the actual peak in the market on May 1, 2012.

Charting a Path for the Dow

Now comes the challenge of determining the downside targets for the Dow Jones Industrial Average.  To accomplish this task, we’ve gone back to the secular bear markets of 1906-1924 and 1966-1982 for some insight as to what might occur going forward.  It is important to understand that the signature of a secular bear market is that it will not increase very much above the initial peak and declines significantly below the initial peak multiple times.

In the chart below, we have the price action of the Dow Jones Industrial Average from 1906 to 1924.

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In the chart below, we have the price action of the Dow Jones Industrial Average from 1966 to 1982.

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There is considerable debate about where the peak of the current secular bear market began.  Although we believe that the secular trend began at the 2007 peak,  we’re being conservative by considering that the most recent secular bear market began at the 2000 peak, as represented in the chart below.

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Beneath each trough is the number corresponding to the major declines within the secular bear market. In each chart there are at least three major market declines while the peaks remain in close proximity to the original market peak.

It is our view that the first decline of the Dow Jones Industrial Average in the secular bear market trend later becomes a minimum downside target.  In the current market, we believe that the Dow Jones Industrial Average will revisit the 8,200 level.  If the Industrials were to revisit the 8,200 level, the total decline would be approximately -32% from the closing price of June 1, 2012.

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NetApp: Dow Theory Gets It Right

Posted on May 24, 2012 by | Leave a comment

On May 24, 2012, NetApp (NTAP) was hammered down –12.29% after it was announced that the company forecasted lower earnings.  The decline of NetApp comes as no surprise to us as we ran our analysis of the company in our January 20, 2012 Nasdaq 100 Watch List (found here).  In our Dow Theory analysis of NTAP, we said the following:

“According to Dow Theory, the current downside targets are $28.02, $22.52 and $17.02. Based on the current price of $36.85, NTAP could fall by 53% in the worst case scenario. According to Dow Theory, NTAP has upside targets of $44.52, $50.02 and $55.52.

The Punchline: After a 39% decline in price, NetApp (NTAP) is a prime candidate for a two transaction purchase. The first purchase should take place starting at $30. The second purchase should take place around $23.47. Based on the market capitalization, NTAP may actually be a buyout candidate.”

Dow Theory set accurate parameters for the upside and downside targets.  After our January 20, 2012 posting, NTAP rose as high as $46.45 and has retrenched as low as the current closing price of $28.82.  Although we said that NTAP is a buy at prices below $30, as indicated above, our macro view on the markets are negative at the present time as found in our May 19, 2012 (found here) Dow Theory analysis.

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It appears that NTAP will easily achieve the Dow Theory downside target of $22.52 and may achieve a rebound at the $20 level.  However, because Dow Theory suggests that the overall market will decline further, we believe that the first purchase of NTAP could reasonably take place at $22.52 or below, instead of $30 or below.

We will reassess NTAP in terms of the general market when, and if, the price declines to the $22.52 price.

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Dow Theory

Posted on May 19, 2012 by | Leave a comment

Our posting from May 12, 2012 should have said it all, we said the following:

“We believe that the break below 12,715 on the Industrials and 5,047 on the Transports would lead to a more bearish move for the market, at least for the intermediate term.”

On May 14, 2012, the Dow Jones Industrial Index fell to the closing low of 12,695.35. This was below the 12,715 level that we believed was a critical support level for the Industrial Index.

On May 17, 2012, the Dow Jones Transportation Index fell to the closing low of 4,938.18.  On May 18, 2012, the Transports fell to the closing low of 4,873.76.  This was significant in that it was below both the 5,047 level and below the 200-day moving average.

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As of Friday May 18, 2012, the bear market rally, which began on August 9, 2011 (found here), is over. Now it is a simple matter of how much of a decline that we have in store.  The following are the downside targets for the Dow Jones Industrial Average (% decline based on 5/18/2012 close):

  • 11,728.46 at –5.18%
  • 11,192.80 at –9.51%
  • 10,362.26 at –16.23%

We will reassess the downside moves when and if the above targets are met.

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Dow Theory Update

Posted on May 12, 2012 by | Leave a comment

The S&P 500 fell -1% for the week on fears of another European zone collapse. Topping it off, JP Morgan (JPM) announced a $2 billion trading loss for the quarter which took the markets by surprise. One may wonder where the market will head in the coming weeks. Going back to our post on March 15 on Dow Theory, we suggested caution should be the operative word. Since then, the S&P500 had declined -3%.

When the Dow Jones Industrial Average broke above the 13,000 level in March, the Dow Jones Transportation Average failed to exceed its February high of 5,368. Divergence between the Industrials and Tranports is continued cause for concern. The transports appear to be trading in a line formation. Similarly, the Industrials have traded in a narrow range between 13,300 and 12,700.

We believe that the break below 12,715 on the Industrials and 5,047 on the Transports (red lines in the chart below) would lead to a more bearish move for the market, at least for the intermediate term.  All of this is within the context of the bear market rally as indicated in our August 9, 2011 article (found here).

INDU

TRAN

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Is a Recession Coming?

Posted on April 20, 2012 by | Leave a comment

Review

On August 23, 2009, using Dow Theory and the Industrial Production Index [IPI], we predicted that the National Bureau of Economic Research (NBER) was going to say that the recession ended in June 2009 (article here).  We specifically said the following:

“Implicit in my discussion of the IPI [Industrial Production Index] is that we are at a turning point for the economy. Based on the combination of the Dow Theory confirmation of July 23, 2009 and the IPI turning up from the June low, I will have to guess that the National Bureau of Economic Research (NBER) is going to proclaim June 2009 as the official end to the recession. The end to this recession will be lackluster and questioned from all corners.”

As has been the case historically, the announcement that the recession had ended came 1-year and 3 months after the fact (NBER announcement found here.)  Additionally, few have been satisfied with the definition of a recovery especially if it means that job growth and income increases have not been exceptional.

Now we are faced with what we believe could be the defining moment for a sustained stock market and economic decline worthy of being deemed (by NBER) a recession.  The factors that go into this assessment are based on our interpretation of Dow Theory and the vacillations of the Industrial Production Index.

Dow Theory

Starting with Dow Theory, we have the following established indications:

  • On August 2, 2011, Dow Theory indicated that we were in the initial stages of a cyclical bear market (article here).  At the time, the Dow Jones Industrial Average (DIA) and the Dow Jones Transportation Average (IYT) fell below their respective June and March 2011 lows.
  • On August 9, 2011, we indicated that a bottom had been reached and that a bear market rally to prior highs was due, within the context of a cyclical bear market (article here).
  • On March 16, 2012, we demonstrated that the divergence between the Dow Jones Industrial Average and the Dow Jones Transportation Average was confirmation that we’re in a Dow Theory bear market rather than a renewed bull market (article here).

Generally speaking, Dow Theory acts as a leading indicator of the direction of the overall economy, with the Industrial Production Index following behind as confirmation.  In this case, this is the first month that the Industrial Production Index (IPI) has declined after the Dow Theory bear market indication of August 2, 2011.

Industrial Production Index

Historically, the Industrial Production Index has “averaged” a decline of 1.44 consecutive months in periods of an economic growth period.  This suggests that if the Industrial Production Index declines for two full months in a row, it would be enough to give us the all clear as to whether we can consider the economy as having reverted back into a recession after the rise from the June 2009 bottom.  This interpretation relies on Dow Theory also having a bear market indication.  In order for this to be the case, The Dow Industrials and Dow Transports would need to remain below their respective 2012/2011 peaks.

Month IPI data
August 2011 94.1845
September 2011 94.3800
October 2011 94.9389
November 2011 95.0939
December 2011 95.9095
January 2012 96.5705
February 2012 96.5731
March 2012 96.5685
Source: St. Louis Fed

What would the Market Impact Be?

So far, we expect that the recessionary period would have at least four consecutive months of declines in the Industrial Production Index (IPI) and a total of at least  7 non-consecutive months of declines within the period considered a recession.  This would be on par with the recession from July 1990 to March 1991.  At the time of the 1990 to 1991 recession, the S&P 500 (SPY) declined -19.61% and the Nasdaq Composite Index declined –29.90%.

However, The stock market typically leads the call of a recession by topping out first.  this suggests that potentially, the April 2, 2012 high for the Dow Industrials was the top and we're now in a declining trend at least until August/September 2012 to 10,611.59.

Again, our preliminary prediction is that if we see a second month of declines in the Industrial Production Index while the Dow Theory bear market indication is in place, we’ll have what will be considered a recession by the NBER which would be announced from 9 months to a year after the fact.

As a sidebar to the discussion of the possibility of a recession, the long-term gold stock positions that we've recently recommended which includes Agnico-Eagle (AEM),  Gold Fields Ltd. (GFI) and Newmont Mining (NEM) will require reduced exposure or sold off since gold and silver stocks tend to perform worse than the general stock market during a recession.

Note: Industrial Production Index data is subject to constant revisions by the Federal Reserve Bank.  We hope to reassess the Industrial Production Index based on the most updated information that is provided by the Federal Reserve.

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Posted in bear market, bear market rally targets, Dow Theory, economic forecasting, Industrial Production Index, NBER

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Nasdaq 100 Watch List: March 16, 2012

Posted on March 18, 2012 by | Leave a comment

Below are the Nasdaq 100 companies that are within 20% of their respective 52-week lows. This Nasdaq 100 Watch List is strictly for the purpose of researching whether or not the companies have viable business models or are about to go out of business. These companies are deemed highly speculative unless otherwise noted.

Symbol Name Price P/E EPS Yield Price/Book payout % from Low
CHRW C.H. Robinson Worldwide 65.67 25.06 2.62 2.00 8.55 50.38% 5.41%
VOD Vodafone Group Plc 26.41 12.28 2.15 3.60 1.02 44.19% 8.64%
EA Electronic Arts Inc. 17.46 0 -0.52 0.00 2.45 0.00% 8.79%
CTRP Ctrip.com Int'l 24.68 22.09 1.12 0.00 3.03 0.00% 12.08%
APOL Apollo Group 42.59 12.08 3.53 0.00 4.07 0.00% 14.86%
FSLR First Solar 29.08 0 -0.46 0.00 0.66 0.00% 14.99%
AMZN Amazon.com 185.05 135.07 1.37 0.00 10.82 0.00% 15.07%
RIMM Research In Motion 14.38 3.39 4.25 0.00 0.68 0.00% 15.50%
VMED Virgin Media Inc. 24.18 65.18 0.37 0.70 7 43.24% 17.84%
SRCL Stericycle, Inc. 86.88 32.3 2.69 0.00 6.11 0.00% 18.93%
DTV DIRECTV 47.47 13.68 3.47 0.00 -10.53 0.00% 19.21%
EXPD Expeditors Int'l of Wash 45.81 25.59 1.79 1.10 4.71 27.93% 19.76%

Watch List Summary

A company that we’re considering buying is C.H. Robinson Worldwide (CHRW), the first company on our list.  The primary consideration that we have is always the downside risk.  We almost ignore the upside targets and projections in order to come up with an idea on the best ways to avoid loss.

The following are two perspectives on the way to view the potential downside risk of buying CHRW. First, according to Dow Theory, CHRW has three significant downside targets that should be considered carefully. The three downside targets are as follows:

  • $60.34 (fair value)
  • $52.91
  • $38.06

The way we approach the Dow Theory downside targets is to buy CHRW if it falls to $60.34 (fair value according to Dow Theory). However, we prepare ourselves for the worst case scenario by expecting that CHRW will decline to the $38.06 level, the low for 2009. With this assumption, we ensure that our initial purchase does not include 100% of what we'd normally invest. Instead, we only invest 30%, 50% or 65% of the amount that we'd ordinarily invest. The remainder of funds is set aside for the possibility that the stock declines. Naturally the greater the amount invested initially, the greater the loss or gain if the stock declines or rises.

The second way to view CHRW's downside risk is strictly from the "technical" patterns based on a chart from the last 5 years.

3-16-2012

From a "technical" standpoint, there are significant support levels at $63.50, $55 and $38. These technical levels are not very different from Dow Theory even though the technical levels based on the chart above are strictly based on the visual cues. We specifically chose the last 5 years because Charles H. Dow has said that best way to gauge a company's future prospects is usually through careful consideration of the period when earnings, book value, price and other fundamental attributes are at their worst. For us, the inclusion of 2007 to 2009 is the best reflection of the worst that has been experienced recently.  With either approach to reviewing the downside risk of a stock, the purpose is ensure that you do not get caught off guard at the prospect of a major price decline.

Watch List Performance Review

In our ongoing review of the Nasdaq 100 Watch List, we have taken the topic 5 stocks from our March 6, 2011 Nasdaq 100 Watch List.   The top 5 companies from the watch list are provided below with the closing price from March 7, 2011 to March 6, 2012.

Symbol Company 2011 2012 % Change
CSCO Cisco Systems, Inc. $18.40 $20.03 8.86%
CEPH Cephalon, Inc. $56.17 $81.49 45.08%
AMGN Amgen Inc. $52.32 $67.38 28.78%
TEVA Teva Pharmaceutical Industries  $50.32 $43.08 -14.39%
ATVI Activision Blizzard, Inc $11.27 $12.65 12.24%
Average 16.12%
NDX Nasdaq 100 $2,328.07 $2,712.78 16.52%

3-6-2011 Top 5

Our primary goal at the New Low Observer is to achieve 10% gains within the span of a year inside of our tax deferred accounts.  In the case of AMGN, CEPH and ATVI our goal of 10% within a year was accomplished within the first four months.  CSCO was the last 10% gain that arrived at the end of the 1-year period.  Teva Pharmaceutical (TEVA) severely underperformed for the remainder of the 1-year period.  CEPH did not last very long since it was acquired by none other than Teva Pharmaceutical.  Cephalon was acquired by TEVA within two months of being on our watch list.

Our specific recommendation of Cephalon at $58.99 on February 15, 2011 and the subsequent acquisition explains why we’re drawn to companies at a new low.

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Posted in CEPH, Cephalon Inc., Charles H. Dow, Dow Theory, Nasdaq 100 Watch List, TEVA, Teva Pharmaceutical, Uncategorized

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Broader Market and Dow Theory Suggest Proceeding with Caution

Posted on March 15, 2012 by | Leave a comment

As the Dow Jones Industrial Average and S&P 500 exceed the highs set in 2011, there is an alarming coincidence with 1972, just before the Dow Industrial’s -44% decline, that we’d like to bring to your attention.  To set the stage, we must first point out an important factor about the Dow Industrials and S&P 500 that contributes to their ability to reach new highs.

First, the Dow Jones Industrial Average is what is considered to be a price-weighted index.  According to Investopdia.com, a price weighted-index is:

“A stock index in which each stock influences the index in proportion to its price per share. The value of the index is generated by adding the prices of each of the stocks in the index and dividing them by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index.” (read more here)

Next is the S&P 500.  The S&P 500 is a capitalization-weighted index.  Again, referring back to Investopedia.com, a market-cap weighted index is:

“A type of market index whose individual components are weighted according to their market capitalization, so that larger components carry a larger percentage weighting. The value of a capitalization-weighted index can be computed by adding up the collective market capitalizations of its members and dividing it by the number of securities in the index.” (read more here)

Each of these indexes are biased in the way they reflect the overall market movement.  In the case of the Dow Jones Industrial Average, it is biased towards the highest priced members while the S&P 500 is tilted to the stocks that are similarly expensive, on a market-cap basis.  In order to get a true sense of how all of the stocks are faring, rather than a select few that have been favored by investors, it is best to track a broadly based “equal-weighted” stock index.  According to Investopedia.com, an equal-weighted stock index  is:

“A type of weighting that gives the same weight, or importance, to each stock in a portfolio or index fund. The smallest companies are given equal weight to the largest companies in an equal-weight index fund or portfolio. This allows all of the companies to be considered on an even playing field.” (read more here)

For the most part, an equal-weighted index reflects how all stocks have fared in a bull or bear market.  This is important because it allows for greater insight into where we are and potentially where we might be going.  One equal weighted index of over 1,700 companies that has been around since 1962 is the Value Line Geometric Index (found here).  In the chart below, we have compared the market action of the Value Line Geometric Index over a ten year period from 1962-1972 and 2002-2012.

Value Line Geometric

What should stand out the most between both charts is the fact that, according to the Value Line Geometric Index, while the general indexes like the S&P 500 and Dow Jones Industrial Average are making new highs, the majority of stocks have not participated in the rise.  In addition to not exceeding the peaks of 1968-1969 and 2007, the inability to exceed the 2011 highs is an indication of significant resistance as was experienced in 1971 and 1972 peaks.

Adding to our concern about the lack of participation by the broader stock market is the divergence between the Dow Jones Transportation Average and the Dow Jones Industrial Average since February 2012 (found here).  This divergence can also be found in the chart below in the period from April 6, 1972 to January 5, 1973 between the Transports and Industrials.  The declines that followed the divergence and peak of ‘72-‘73 were -59% and –44% for the Transports and Industrials, respectively.

DT '72

Until the Dow Theory divergence is resolved and the Value Line Geometric Index make new highs above the 2011 and 2007 peaks, we’re concerned that the stock market is skating on thin ice.

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Dow Theory Update

Posted on March 6, 2012 by | Leave a comment

It appears that Dow Theory is not understood, by even the best in the industry.  In an article titled “The Meaning of the Transports’ Weakness,” Mark Hulbert surveyed some of the industry’s best Dow Theorists for a clue as to what the market was expected to do next. What stands out in this article is the following remark:

“Frustratingly, not all Dow Theorists agree on an answer. In fact, two of the three monitored by the Hulbert Financial Digest — Jack Schannep of TheDowtheory.com and Richard Moroney of Dow Theory Forecasts — think the appropriate point of comparison is not last summer but late October. And because, near the end of December, the Dow averages rose above their late-October highs, both Schannep and Moroney believe that the Dow Theory is solidly in the bullish camp — notwithstanding where the Dow transports might be relative to their July high.”

Within this commentary is a revealing explanation as to the reason why we believe that Schannep and Moroney got it wrong, thereby issuing a bear market indication in August 2011 and a bull market indication in late December 2011.  In order to understand this, we must first point out a diagram of how Dow Theory reversals typically occur.

Plotting of Primary Reversal

Courtesy of Richard Russell’s Dow Theory Letters (www.dowtheoryletters.com), Figure 1a and Figure 1b show how the Industrials and Transports need to retest prior lows established at point A.  This retesting of the prior low would come after a medium-term rise at point B.  Once the market rests the prior low, the market would then need to exceed the medium-term high of point B.

With the diagram above, we can now see how Schannep and Moroney could have considered that a new bull market was in the making.  Once the market exceeded what they believed to be the POINT B in figure 1a and 1b, it then appeared to be a new bull market.  Unfortunately, while the Dow Industrials appeared to follow the script in Figure 1a, the Transports were far behind in providing a similar pattern of retesting the previous low.  This error led to an incorrect assessment of a new bull market.

Interestingly, Schannep and Moroney were inaccurate even in their call of a “bull market” using Dow Theory.  Based on the diagrams of figure 1, a new bull market should have been indicated in early October instead of late December.  In the chart below, it should be noted that the false bull market indication in October had much more to gain than the late December indication.  Worse still, only a month later, in February 2012, the Dow Transportation Average starts to diverge from the path of the Dow Jones Industrial Average.

2012 03 06 Dow Theory

The current divergence between the Industrials and Transports is a confirmation of the bear market trend.  Additionally, we expected that the Industrials and Transports are going to re-test the lows of 2011.  However, our suspicion is that both the Transports and Industrials will sink below the 2011 lows and possibly go strait to the 9,700 level on the Industrials.  The prospect remains that the bear market could potentially end if the Transports retest the lows of 2011 without falling significantly below.

As early as October 15, 2011 (article here), we indicated that the “…coming market volatility will provide great opportunities for traders and allow investors a chance to cash out of otherwise undesirable positions and take profits. Our expectation is that the Dow will go to the July 2011 highs before struggling at the May 2011 highs. Again, we’re still in a cyclical bear market until the Transports and Industrials exceed their respective 2011 highs.”

We hope that our readers have benefitted from our advice to unload undesirable positions.

Best regards.

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Posted in Dow Theory, Dow Theory Confirmation, Dow Transports, Richard Russell, Uncategorized

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Correction of Errors on iShares Silver Trust (SLV) Interpretation

Posted on February 11, 2012 by | 1 comment
In our previous reviews of the iShares Silver Trust (SLV) (found here), we attempted to apply Dow Theory to the price movement of SLV. However, we have made an error in our analysis that has resulted in arriving at the wrong conclusion of the price potentially declining to the previous low that was established at the beginning of the bull market run on November 21, 2008 at $9.02.

 

Instead, we are revising our analysis to reflect that the price of silver may decline as low as $21.02 if it were to replicate the rise and decline from October 2001 to November 2008.This revision should provide a more qualitative view on the future prospects for both SLV and the price of silver.


As background to the error that was made, we first must explain that the iShares Silver Trust (SLV) is supposed to track the price of silver. However, SLV has only been in existence since April 2006.Our Dow Theory analysis of SLV was incorrect because we didn’t have an appropriate starting point, the previous low, to arrive at a correct downside target. The previous low occurred in 2001 which was long before SLV began trading.


This resulted in the mistaken belief that SLV should be expected to go back to the low of 2008 at $9.02. To remedy our error, we have obtained the price of silver from the last major low in the price, and re-ran our Dow Theory analysis. The chart below provides the three downside targets from the March 17, 2008 high of $20.99.


The downside targets from the peak were as follows:
In the final outcome, the price of silver fell below the third downside target of $9.68, ultimately resting at the $9.02 level before making the ascent to the recent high of $48.35.This sets the stage for our analysis of the current price action.
Our current Dow Theory analysis involves the period from the November 21, 2008 low at $9.02 to the peak of April 28, 2011 at the $48.38 level. The downside targets are as follows:
It should be noticed in the chart below that as time passes, the support levels increase which exerts greater pressure on the price to either rise substantially or breakdown.

 

Despite the revision to our numbers, our previous analysis about the expected outcome has remained accurate.Our May 5, 2011 article was on target with the claim that SLV would trade in a range before falling much further. SLV traded in a range until mid-July and ultimately fell as low as $26.16, a drop of -30.87% since that article was written.
The current indications suggest that SLV will fall as the $22.14 support level. Because silver easily fell to the third support level in the period from 2001 to 2008 (within the context of a precious metal bull market), we expect that the $21.02 is a realistic worst case scenario to watch for. We will consider buying silver and related derivatives at $22.25 and below.
We view the most recent rise from the December 2011 low as running out of steam.Therefore, the rising resistance level established at $28.70 appears to be firmly in place…for now.

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Posted in Dow Theory, Error, gold, iShares Silver Trust, SLV

Dow Theory: Non-Confirmation

Posted on February 4, 2012 by | Leave a comment
On February 3, 2012, the Dow Industrial Average made a new all time high since the low of March 2009.  All that is needed in order to achieve a confirmation of the upward trend is for the Dow Jones Transportation Average to exceed the July 7, 2011 high of 5,618.25.
There is a marginal difference of 4.64% between the Dow Transports high and the current level.  We're anxiously waiting to see if this gap can be closed with conviction in a relatively short period of time.  So far, every day that the Dow Industrials makes a new high with the Dow Transports below the previous high is considered a Dow Theory non-confirmation which reinforces the bear market thesis.

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Dow Theory Applied to Silver?

Posted on December 20, 2011 by | Comments Off on Dow Theory Applied to Silver?

A reader asks:

“How do you relate Dow Theory to the Silver market?”

Our response:

Charles H. Dow was first an economist, then a commodities expert and finally a stock market analyst. Before Charles H. Dow co-founded the Wall Street Journal, he was better known for writing the “Leadville Letters” for the Providence Journal. The “Leadville Letters” reported on Colorado’s silver mining boom in 1879. After co-founding the Wall Street Journal, the lessons learned in the silver mines ofColorado were found to have application on Wall Street.

Charles Dow was keenly aware of the importance and correlation between commodity prices and stock prices. Many of Dow’s articles in the Wall Street Journal were focused on the movement of commodity prices and all costs of production that went into commodity prices from shipping to the finished product.

As an example, Dow made the following observation:

“For the past 25 years the commodity market and the stock market have moved almost exactly together. The index number representing many commodities rose from 88 in 1878 to 120 in 1881. It dropped back to 90 in 1885, rose to 95 in 1891, dropped back to 73 in 1896, and recovered to 90 in 1900. Furthermore, index numbers kept in Europe and applied to quite different commodities had almost exactly the same movement in the same time. It is not necessary to say to anyone familiar with the course of the stock market that this has been exactly the course of stocks in the same period.”

Much of Dow Theory is based on Dow’s observation of the price action of commodities and then later applied to stock prices. The application of Dow Theory to the price of silver, gold or almost any other commodity is bringing Dow’s work back to its roots. In fact, Dow’s observations in commodities and then later applied to stocks is the basis for much of the modern fundamental and technical analysis that is done today, which includes the quest to determine the “value” of a company and the uses of Fibonacci numbers.

Dow Theory is applicable to all prices that are subject to the whims of market forces. Dow Theory also accounts for manipulation and hoarding. Dow Theory attempts to account for what can reasonably be expected of price action in the not too distant future.

Sources:

  • Dow, Charles. Review and Outlook. Wall Street Journal.February 21, 1901.
  • Bishop, George W. Jr. Who Was the First American Financial Analyst? Financial Analysts Journal, Vol. 20, No. 2 (Mar.-Apr., 1964), p.26-28.
  • Bishop, George W. Jr. New England Journalist: Highlights in the Newspaper Career of Charles H. Dow. The Business History Review.Vol. 34, No. 1 (Spring, 1960) p. 77-93.
  • More on Dow Theory from NLO

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Posted in commodities, Dow Theory, gold, Silver

Dow Theory: 1907-1910

Posted on December 19, 2011 by | Leave a comment
Bull market indication (A): According to Edwards and Magee, the bull market began on April 24, 1908. The New Low Observer believes that on January 9, 1908 (C), the DJI & DJT confirmed that we're in a bull market by going above the December 6, 1907 intermediate peaks. From the point (C) of the bull signal to the respective market tops, the DJI gained 55% and DJT gained 44%.
Bear market indication (B): Edwards and Magee indicated that on May 3, 1910, the bear market signal was initiated.  However, we believe that on January 12, 1910 (D) the DJI confirmed the  DJT bearish move of falling below the September 9, 1909 low. From the point of the bear signal (D) to the respective market bottoms, the DJI lost -23% and the DJT lost -16%.

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iShares Silver Trust (SLV) Update

Posted on December 17, 2011 by | 1 comment

The iShares Silver Trust (SLV) ETF has fallen in line with our assessment from May 5, 2011.  However, it is times like these that we get nervous about our ability to believe that the price action of SLV will continue on a forecast that was presented over six months ago.  Back in May, we said the following:

“…we should see SLV tread water for a brief period of time before falling back to the prior low which began with the current run back in November 2008.   Dow Theory suggests that a reasonable buying opportunity would exist at [or] below line B (blue line B).”
Currently, the “blue line B” is around $24.31 and rising as time passes.  In our May Dow Theory interpretation of SLV, the price fell right through line B in 2008 without any hesitation.  We’re not so certain that such action will occur this time around.  As long as SLV can hold above the Dow Theory fair value of $28.15, there is a good chance silver will be able to rebound in a meaningful fashion.  However, closing below $28.15 (again) could be a confirmation of the downtrend.    
Many precious metal enthusiasts are arguing that what happened in 2008 was an outlier event for silver and therefore is unlikely to happen this time around.  It is hard to argue against such a view. However, it is difficult to get the period from 1974 to 1976 out our mind (visual here) when gold fell 50% and gold stocks fell 66% in the middle a gold bull market.  
Below is our updated chart of SLV reflecting the most recent price action:
The Punchline: If you like the idea of investing in silver, then a buying opportunity should be at/or below the blue line B ($24.31).  However, don’t go all in, just in case the dashed blue line does materialize at $17.

 

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