Today's technical outlook: Dow theory put to the test

Posted Feb 4th 2009 9:30AM by Sam Collins

I'd like to make a comment on the "Dow Theory" today: Since there were several write-ups circulating Tuesday about a new "bear-market signal" given by the theory on Monday, it is worth addressing.

Some analysts were all atwitter, saying that Monday's close on the Dow Jones Industrial Average and the Dow Transports broke under the January lows. Thus, they said, a new Dow sell signal was triggered.

The theory states that if a double confirmation occurs, (i.e., that if two of the three Dow averages make a new high or low) then a trend is confirmed.

Well, the Transportation Average did fall below both its January and November intra-day low and closing low. (I mention January only because one report said that it is relevant -- but it actually has no significance at all.) And the Industrial Average did break the closing low of January -- but that is irrelevant, since the market's lows were made in November.

Even at their lowest point on Monday, the Industrials were more than 400 points from the November low. In other words, one of the averages, the Transports, did break but the Industrials did not. And since then, the Industrials have turned away from the support line at 7,774 and may be triggering what Dow theorists call a "non-confirmation" -- and that is a very bullish signal.

You are correct if you have perceived me to have turned from an aging bear to a very cautious calf.

One stock to keep on your radar is my trade of the day, F5 Networks (NASDAQ: FFIV).

Sam Collins is a contributor to OptionsZone.com.

Tags: dow jones average, dow theory forecast, dow theory forecasts, dow transports, DowJonesAverage, DowTheoryForecast, DowTheoryForecasts, DowTransports, sam collins, SamCollins

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Reader Comments (Page 1 of 1)

2-04-2009 @ 10:23AM

toogeorge said...

I don't think you can predict anything on a few days market performance.....Here's why...TAKE A LOOK AT A DOW CHART, ADJUSTED FOR INFLATION(=in constant value dollars) since its inception, in 1896....YOU WILL SEE A 30-35 YEAR CYCLE(except fo 1929-32 when it fell about 90% in 3 years.......I THINK WE ARE ABOUT 9 YEARS INTO THE 17 YEAR BEAR PART OF THAT CYCLE, IF HISTORY IS REPEATED, SO THERE WOULD BE ANOTHER 8 YEARS TO THE BOTTOM(the Dow peaked in constant dollars in Jan 2000)........You can find these inflation adjusted charts by entering 'Dow chart inflation adjusted' on Google...Note that the Y-axis is logarithmic and if there are more then 4 cycles you tend to lose the cyclic nature(Wikipedia has this defect)....'Fred's intelligent bear site' shows the 30 year cycles well.