Dow theory telling us a new bull market is now underway

By Duru

August 23, 2003


In an earlier missive I excitedly heralded the potential confirmation that a new bull market is underway. This call was based on an old investing technical signal and methodology called "Dow Theory." It was developed by a combination of people in the early 20th century. Charles Dow was the creator of the Dow Jones Industrial Average in 1895, and his friend A.J. Nelson formally named his ideas of investing "Dow Theory: in a book called "The ABCs of Stock Speculation" (1902). Robert Rhea expanded some of these ideas until his death in 1939. (Historical information from "Trader Vic - Methods of A Wall Street Master" by Victor Sperandeo).


While there are many gears and screws to this thing, the main lesson it teaches is that when the Dow Jones Industrial Average and the Dow Jones Transportation Average each make new highs or lows, they then confirm the market trends underway. Back when I declared on Thursday, August 21 that the market has nearly complete a set-up for a major correction in the Fall, I neglected to note that these two averages finally made new highs together - thus technically signalling that a new leg of upside is right around the corner. Given the convincing sell-off from the highs on Friday, I am not willing to get excited all over again and jump on the bullish bandwagon. But I am noticing that it SEEMS no one has picked up on this major moment. Thus, the overall message is mixed, and I will stand by my original pronouncement. This bullish indicator tells me that we have potentially added yet another piece of the puzzle to lull the bulls to sleep and forget about the building risks in the market.


Note that none of what I have said is a short-term trading call. I am looking out to prognosticate about the remainder of the year may hold for us.


For your reference here is a good definition of Dow Theory from my trusty reference book called the "Finance & Investment Handbook" by John Downes and Jordan Elliot Goodman:


"...theory that a major trend in the stock market must be confirmed by a similar movement in the Dow Jones Industrial Average and the Dow Jones Transportation Average. According to Dow Theory, a significant trend is not confirmed until both Dow Jones indexes reach new highs or lows; if they don't, the market will fall back to its former trading range. Dow Theory proponents often disagree on when a true breakout has occurred and, in any case, miss a major portion of the up or down move while waiting for their signals."


That last sentence is key - the bull market may be finally confirmed just as it is reaching its top....


Ó DrDuru, 2003