Stock markets forming a „line“: What does it mean under Dow Theory?

Follow up to the Dow Theory update for Oct 3

As I said earlier this evening I see that the SPY and the Industrials are forming a so called “line”. What’s a line?

I will use Rhea’s definition to understand what a “line” is under Dow Theory. According to him:

“A line is a price movement extending two or three weeks or longer, during which period the price variation of both averages move within a range of approximately five per cent”

“Lines” or trading ranges imply a period of accumulation or distribution. If the upper boundary is broken, it has a bullish implication of secondary character. If its lower boundary is violated, it has a bearish implication of secondary character.

The five per cent guideline doesn’t mean that the trading range must equal this amount; rather 5% is the limit. If this percentage is exceeded then we are dealing with a full-fledged secondary reaction against the primary trend. Thus, narrower trading ranges qualify as a “line” as well.

Here you have a chart displaying the lines. The blue rectangles on the Industrials and the SPY are the “lines”. 

Under Dow Theory the SPY and the Transports have formed a line

Rhea advised the Dow Theorist to keep an eye on volume inside the line. This is what I do:

Volume inside the line slightly bearish: Suggests distribution

Here you can find the detailed calculations:

 

	SPY	INDUSTRIALS	TRANSPORTS
High point	147.24	13596.93	5215.97
Low point	143.29	13413.51	4910.59
% from high to low	2.76%	1.37%	6.22%

So what are my conclusions under Dow Theory?

1.      It is clear that the Industrials and the SPY are forming a line. Such line is undisputed since it has been confirmed by two indices.

2.      The Transports are not forming a line since its movement exceeded 5%. 

3.      This line began 13 trading days ago, so it clearly fulfills Rhea’s duration requirements.

4.   In the last 13 days, we have had 7 bullish volume days and 6 bearish volume days (including a monster bearish volume day on 09/21/2012). However, in the last 9 days bearish volume has clearly prevailed.

Under Dow Theory, it is not possible to anticipate whether the upper boundary or lower boundary will be broken. Furthermore, it is inconsequential to us, followers of the primary trend. However, once it is broken we will be able to derive conclusions as to the likely intermediate trend of the market. Thus, if the lower boundary is violated, we will be able to announce that the market is experiencing a secondary reaction against the primary trend. Conversely, if the upper boundary is broken, then we will conclude that the secondary movement is bullish and confirming the primary bullish trend. 

And here you have the figures for the day:

Data for October 3, 2012
DOW THEORY PRIMARY TREND MONITOR SPY
			SPY
Bull market started		06/04/2012	128.1
Bull market signaled		06/29/2012	136.1
Last close		10/03/2012	145.09
Current stop level: Bear mkt low			128.1
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
6.61%	13.26%	6.25%
DOW THEORY PRIMARY TREND MONITOR GOLD (GLD)
			GLD
Bull market started		05/16/2012	149.46
Bull market signaled		08/22/2012	160.54
Last close		10/03/2012	172.41
Current stop level: Bear mkt low			149.46
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
7.39%	15.36%	7.41%
DOW THEORY PRIMARY TREND MONITOR SILVER (SLV)
			SLV
Bull market started		06/28/2012	25.63
Bull market signaled		08/22/2012	28.92
Last close		10/03/2012	33.51
Current stop level: Bear mkt low			25.63
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
15.87%	30.75%	12.84%
DOW THEORY PRIMARY TREND MONITOR ETF SIL
			SIL
Bull market started		07/24/2012	17.08
Bull market signaled		09/04/2012	21.83
Last close		10/03/2012	24.72
Current stop level: Bear mkt low			17.08
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
13.24%	44.73%	27.81%
DOW THEORY PRIMARY TREND MONITOR ETF GDX
			GDX
Bull market started		05/16/2012	39.56
Bull market signaled		09/04/2012	47.77
Last close		10/03/2012	52.72
Current stop level: Bear mkt low			39.56
Unrlzd gain %	Tot advance since start bull mkt	Max Pot Loss %
10.36%	33.27%	20.75%

Sincerely,

The Dow Theorist