Tuesday, January 19, 2016

Dow Theory Special Issue: Very long term trend turned bearish as per the Dow Theory when applied using weekly bars

Dismal technical picture

In my post of September 7, 2015 I said that, the August scare notwithstanding, the very long term trend as gauged by weekly bars remained bullish and that the recent decline that started in July and bottomed on August was merely a secondary reaction against the long term bullish trend. This article focused on the usefulness of applying the Dow Theory rules based on weekly, rather daily bars.

I wrote that I didn’t advise to use “weekly bars” as the main “timing” device, rather as an instrument to technically determine the very long (call it “secular” if you wish) term trend.

More about the intricacies of the Dow Theory when using weekly bars here:

However, for people with big drawdown tolerance or who for any reason are very limited in the number of trades they can make (i.e. institutional constraints), applying the Dow Theory with weekly bars may be a useful way of aligning oneself with the very long term trend, while avoiding big bear markets.

I applied the Dow Theory rules (with weekly bars) to the period ranging from 1993 to date. Trades are sparse. During this period just three times the Dow Theory signaled a “bear market” (whatever that is under “weeklies”). The exact dates are 2/25/2000, 1/4/2008, and, guess, 1/8/2016.

Here you have the spreadsheet displaying the signal, the SPY level at each signal and the gain made when the very long term was bullish:

So, if we are to believe the Dow Theory when applied to weekly bars, we see that the US stock market is in a bear market since January 8th, 2016. I don’t call it “primary bear market”, because the word “primary” pertains to the bull/bear markets when ascertained using “daily” bars. In past instances, the Dow Theory (“weekly”) has been good at correctly gauging the long term trend. I don’t want to call it “secular” trend, or just a big “cyclical” bear market either. Names are immaterial to me. What is clear to me is that, when using “weeklies”, we get signals very seldom and just some days ago we got a bearish signal. Not a good omen.

In case we had some doubt as to the signal issued on January 8, last week, on January 15th, all three indices, closed, once again, below the lows. Hence, it is clear a change in the long term trend. Here you have an updated chart:

After a long multi-year bull swing the Dow Theory when applied to weekly bars turned bearish
If the August absolute (not closing) lows are finally violated on a weekly basis, then the last line of resistance will be broken.

All in all, while nothing is certain, when we appraise the technical condition of the US stocks market with the Dow Theory, we get a bleak picture. Both the “daily” and “weekly” bars confirm the existence of a bear market.

The Dow Theorist

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