Charles Dow's Original Editorials and Their Relevance Today

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How the stock market escaped its most dangerous period without a bear market

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By Paul Shread, CMT
The stock market managed to make it through the weakest part of the four-year cycle without a bear market — and a single indicator could be the biggest reason for that.

The NYSE advance-decline line never broke down this year as it did in 2007. In fact, it continually made new highs this summer even as the stock market was slow to recover (see chart below). If the market has broad-based strength, it’s hard for sell-offs to become much more than garden-variety corrections.

NYSE

Compare that to October 2007, when the advance-decline line made a lower high as the major indexes hit new highs (see chart below). There was no such negative divergence this time.
NYSE

The current Dow Theory signal remains the buy signal from June 2009. Some called the cycle of lower highs and lower lows set by the Dow and Transports this summer a sell signal, but the June rally in the indexes wasn’t long enough to count as an intermediate term move (see charts below).

Dow Transports 2010

Dow Transports 2010

Dow Jones Industrial Average 2010

Dow Jones Industrial Average 2010

Martin Pring, author of “Technical Analysis Explained,” takes the view that a reaction should be at least a month in duration, so there was no Dow Theory sell signal on the subsequent new lows in July. Pring’s conservative approach to Dow Theory works well, so his rules bear restating here: Both the Industrials and Transports must confirm a new trend with an intermediate move in a new direction followed by a one-month reaction and then new highs or lows in the new direction. Simple but effective.

We are now entering the strongest part of the four-year cycle for stocks, so stocks should be able to avoid significant weakness over the coming months. However, it’s not clear if sentiment will allow significant upside from here. The weekly Investors Intelligence survey, which has provided reliable sentiment data for 40 years, is showing a high level of bullishness already (45-24 bulls to bears), so the market may have already seen a good portion of its rally off the midterm election year low that was likely set in early July.

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.

Welcome to Dow Theory Unplugged

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Dow Theory Unplugged book

Dow Theory Unplugged

Dow Theory Unplugged: Charles Dow’s Original Editorials and Their Relevance Today is the most complete collection of Charles Dow’s original writing ever assembled. Dow Theory is widely credited as the basis for modern technical analysis. Yet its origins, Charles Dow’s original writings, have been all but forgotten. Dow Theory Unplugged contains a critical selection of 220 original Wall Street Journal columns from more than one hundred years ago, the raw material that led to the development of Dow Theory and remains relevant for the twenty-first-century trader.

In addition, top Dow Theorists, including Richard Russell, Charles Carlson and Paul Shread, CMT, contribute modern-day analysis to help you apply Dow principles to your trading practice today.

Charles Dow understood the markets better than anyone in his own time, and perhaps any time since. As co-founder of the Wall Street Journal and the Dow Jones Indexes, he developed the framework for monitoring market movement that we have been using for the last century. Dow also wrote hundreds of columns in the Journal outlining a groundbreaking market strategy that became the first chart-following systematic approach to investing.

Dow’s columns are reprinted here as they originally appeared in the Journal and organized by topic around the six modern-day tenets of Dow Theory:

  • The averages must confirm each other.
  • The averages discount everything.
  • The market has three trends.
  • Major trends have three phases.
  • Volume must confirm the trend.
  • A trend continues until signals reverse.

Market movements are really a reflection of human nature on a massive scale. And Dow was as astute a judge of human nature as they come. Taking in Dow’s editorials can help you see your trading from a new perspective, from the original master of technical analysis.