Alternative (and truest ) "classical" interpretation as per Page 77 of Rhea’s book “The Dow Theory”
Please
mind that I am writing before the close. Things might change.
In
the past two post I analyzed the trend as per the classical/Rhea Dow Theory.
The first post showed Schannep’s interpretation (not of his own “Dow Theory”
but the “classical” according to him). According to this reading the primary trend was bullish since 9/7/2016.
The
second post gauged the trend with the stricter reading followed by other Dow
Theorists (three weeks at least for a secondary reaction to exist). According thereto, the primary trend was bearish as the Industrials
had failed to break up their secondary reaction highs. Update: Recent past
action by the Industrials resulted in their breaking up their secondary reaction
highs, and hence confirming the Transports and accordingly signaling a primary
bull market on the close.
However,
there is a third way to apply the Rhea/Classical DowTheory which would
have signaled a primary bull market in stocks on October 5th, 2016.
According to Rhea (“The Dow Theory”, page 77 Fraser Edition), “when a series of such rallies and declines
have penetrated the highest points previously attained in a primary bull
market, it is generally safe to infer that the primary bull trend will continue
for a considerable period of time”
If
you look at the chart below you will see that a primary bear market was
signaled by the Classical/Rhea Dow Theory on June 24th, 2016.
A primary bull market signaled on October 5th, 2016: Last recorded primary bull market highs broken out |
The
primary bull market highs were made on 4/20/2016 by the Industrials and
Transports. Thereafter, a secondary reaction developed (more than three weeks
of declining prices) as shown by the red rectangles. A rally (blue rectangles
next to the orange ones exceeding 3% set up stocks) for a primary bear market
signal. The secondary reaction closing lows were jointly violated on 6/24/2016,
and hence a primary bear market was signaled (red arrows).
Following
the primary bear market signal a rally set in. If we are to strictly apply
the “Rhea/Classical” Dow Theory no secondary
reaction formed until 9/8/2016 (when the Transports finally deigned to confirm
the Industrials' rally). Thereafter, there was a pullback exceeding three percent which
set up stocks for a primary bull market signal. The Transports broke up their
secondary reaction highs on September 30, 2016 fully unconfirmed by the
Industrials, and hence no primary bull market existed on that date and in the
following days (until 11/11/2016 when the Industrials finally broke up above
their secondary reaction highs. The chart below displays the situation
described on this paragraph.
The
takeaway from is clear: No primary bull market signal would have been signaled
until 11/11/2016 if we were to appraise the Dow Theory exclusively based on the breakout
of secondary reactions.
However,
if we go back to Rhea’s book, the
breakup of the last recorded primary bull market closing highs constitutes a
valid primary bull market signal. In other words, we don’t have to wait for a secondary
reaction to develop (or for its closing highs to be broken out) in order to
declare a primary bull market.
Please
look again at the very first chart of this post (scroll up!). The red horizontal lines display
the highs of the last primary bull market. On 7/8/2016 the Industrials broke up
above their last recorded primary bull market closing highs. The Transports,
though, did not confirm. On 10/5/2016 the Transports finally confirmed, and
hence, according to this interpretation of Rhea’s Dow Theory a primary bull
market was signaled. Blair Wagner
writing for “Downside Hedge” punctually signaled the existence of a primary
bull market on October 5th, 2016. While he did not elaborate as much
as I do, the diagnosis was fully right.
Thus,
any way you cut it, according to the “Rhea/Classical” Dow Theory the primary
trend is bullish.
On
the other hand, according to Schannep’s Dow Theory, the primary trend is
bearish, as was reported here.
If
the SPY (SP500) manages to break up its last recorded primary bull market
closing highs of 8/15/2016, then the primary trend would turn bullish as well.
Hitherto, both the Industrials and Transports have done so. However, as per
Schannep’s Dow Theory we need triple confirmation for a new primary bull market
to be signaled.
I
insist that we are living highly noisy (lack of a clear trend) and volatile
(repeated ups and downs) market. Hence, it is no surprise that there is no
unanimity when it comes to applying the “classical” and “Schannep’s” Dow
Theory. Eventually, though, both will be in unison. Please mind that it is
fully normal for both Dow Theories to occasionally disagree. Otherwise, they
would be the same thing and there would be no way for Schannep’s Dow Theory to
build its outperformance versus the classical Dow Theory (more about the Schannep's Dow Theory outperformance here)
Sincerely,
The
Dow Theorist
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