Dow Theory Gets Tested
Now looks like a good time to revisit the recent apparent Dow Theory sell signal.
With the Dow approaching its breakdown point of 11,865, the bulls’ resolve could get tested, particularly with a seasonally weak six weeks ahead of us. But a strong move above that level could be the first sign that the bears are losing control.
As we noted earlier this month, major bear markets are rare if the NYSE advance-decline line tops out at the same time as the market, as happened earlier this summer. How rare? We can find only two bear markets – 20-25% declines in 1946 and 1977 – where the NYSE A-D line didn’t top out before the market, in data going back to 1926. (Thanks to Tom McClellan for help researching that.)
Sentiment is turning market-positive here, with Investors Intelligence bears on the rise and commercial future traders long the big S&P contract.
But with September and October still ahead, caution would be wise for now.
Paul Shread is a Chartered Market Technician and co-author of the book “Dow Theory Unplugged: Charles Dow’s Original Editorials and Their Relevance Today” from W&A Publishing.
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