Friday, January 11, 2019

Dow Theory Update for January 11: Stocks under primary bear market according to the “Rhea/Classical” Dow Theory since 12/10/2018

I am posting this article before the close of January 11th, 2019

On January 8th, 2019 I wrote that the primary trend according to Schannep’s Dow Theory turned bearish on 10/24/2018. The explanation in depth here.

Well, today we are going to discern the trend according to the “Rhea/classical” Dow Theory. As a reminder the “Rhea/classical” Dow Theory uses only two indices, the Industrials and the Transports and, with a certain degree of flexibility, require a somewhat longer time for a secondary reaction to be declared. A comparison between the two Dow Theory flavors here.

On August 31st, 2018 I wrote the according to the “Rhea/classical” Dow Theory the primary market was bullish. Both Schannep’s and the classical Dow Theory were in gear.

Here you have the chart I posted on August 31st, 2018. At that date the Industrials and Transports were rallying handsomely. 

At August 31st, 2018: Primary bull market as per the classical Dow Theory

On 9/14/2018 the Transports stalled. On 10/03/2018 the Industrials did also made their last highs on a closing basis. Thereafter a decline followed. As per Schanepp’s Dow Theory on 10/11/2018 a secondary reaction had been completed which later after a rally and subsequent decline resulted in the primary bear market signal of 10/24/2018. More about the entrails of that signal as per Schannep’s Dow Theory here

Here you have an updated chart:

On 12/10//2018 a primary bear market was signaled as per the "Rhea/classical" Dow Theory
However, under the classical Dow Theory no secondary reaction could be discerned as the Industrials had only declined 6 trading days and, at the very least and with a very generous interpretation, 10 trading days (2 weeks) are needed on a confirmed basis. All in all, the classical Dow Theory needed a more sustained decline.

The Transports and Industrials declined until 10/29/2018. The Industrials declined for 18 trading days. The Transports did so for 31 trading days. Hence, the time requirement of 2 or 3 weeks of confirmed decline required by the “Rhea/classical” Dow Theory was met. As to the extent requirement both indices declined much more than 3%. The spreadsheet below shows the extent of the secondary reaction


Thereafter both indices rallied for 7 trading days and more than 3% which set up stocks for a primary bear market signal.

The chart below displays the secondary reaction with orange rectangles on the right side. The rally that followed and setup stocks for the primary bear market is shown with blue rectangles.

On 11/23/2018 the Industrials violated their secondary reaction closing lows unconfirmed. On 12/10/2018 the Transports confirmed and hence a primary bear market was signaled.

We can see that, albeit the classical Dow Theory was not so timely declaring the change of trend as was Schannep’s, it did react soon enough to get investors out of the market before the big decline stared. More exactly, following the primary bear market signal the Industrials further declined by -10.77% and the Transports -12.72%. Furthermore, we still don’t know whether the final lows have been made and, thus, we could even witness more declines in which case the primary bear market would be reconfirmed.

The Dow Theorist.

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