Thursday, October 24, 2013

Dow Theory - fresh signals

Some people say the Dow Theory does not work anymore. I do not think so. These "old" methods, in my opinion, are still valid and each investor / player should, from time to time, look at what the two averages (Industrial and Transportation) are saying.
So, let us look at the chart below:


We can easily spot that on October 16th the Dow Jones Transportation Average broke out above its resistance level (green line). But the Dow Jones Industrial Average did not. It is still in the trading range commencing in July. This is a classic non-confirmation pattern.
But watch out - I have not said this a sell signal. This pattern only says that not everything is O.K. with the market...and that's it. Be careful.

Generally, the market cycles end this way:
1. First, the market internals are worsening (e.g. less new issues highs at the market record price highs during the bull run).
2. Then we see the Dow Theory patterns saying that something wrong is in the market.
3. And then we see the number of the classic Technical Analysis signals: trend lines and technical supports being broken during the bull run, special patterns seen, e.g. Head and Shoulders etc.).

Where are we now ? Probably at the the stage 2.

No comments:

Post a Comment