Monday, September 3, 2012

Where is the stock market now as per Dow Theory? Bull or bear?

While Dow Theory is not an exact science, I can confidently say that my interpretation of Dow Theory shows that we are within a primary bull market movement.

The bull market signal was given on June 29, 2012 when both the Industrials and the S&P bettered their previous correction highs. Since then the bullish signal has not been reversed.

Since 8/17/2012 both the DJIA and DJT are experiencing a pause in the bullish thrust. However, as per strict Dow Theory we are not yet experiencing a secondary correction.

There are three requirements that always must be met in order to qualify a movement contrary to the prevailing primary trend as a secondary correction:

1)     Firstly, it must last at least 10 trading days. This requirement has been met by the three indices I monitor (DJI, DJT and SPY). Since, 8/17/2012 the markets stopped going up.

2)     Secondly, it must at least be 3% movement. As per Dow Theory a rally or a decline to be meaningful must result in a net reversal of direction exceeding 3%.

3)     Two indices must confirm. The movement of one index unconfirmed by the other leads to deceptive conclusions.

There is a fourth requirement that comes in handy when appraising secondary reactions. A secondary reaction tends to retrace 1/3 to 2/3 of the previous primary up movement. However, this rule is to be interpreted with flexibility. If a reaction retraces just 20% of the previous primary movement but it lasted 3 months, then I’d tend to label such movement as a full secondary correction in spite of not having retraced 1/3 of the prior movement.

If we look at the numbers, we see that only the Transports have underwent what we could call a secondary reaction.


Last primary leg primary movement up



Amount primary


Correction until August 31, 2012.


Last low recorded

pullback down
qualifies as a correction

total prim. mov.

total correct

% secondary


As we see the transport have undergone a pullback exceeding 3% (3.87 to be exact) from its latest highs at 5194.38. Furthermore, the Transports have retraced 58% of the previous primary move.

However, the same does not apply to the Industrials and the S&P. Neither of them has undergone a decline exceeding 3%. Nor have any of them retraced at least 33% of the previous primary move in each index.

Hence, we have to conclude that under Dow Theory we are under (a) A primary bull market movement; (b) no official correction has been detected yet.

Tomorrow before the open I will post one chart and the data on which I base my conclusions.

The Dow Theorist

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