Dow Theory - How does a Bear Market Become a Bull Market?

In a word, stay the course and watch the weekly closes of the indexes.

Over the past two years, the Dow Jones industrials and S&P 500 have been in a bear market (kind of ... more below). But recently, they started hitting new all time highs over and over again. The Dow Transportations stopped confirming the new all time highs being made by the Industrials a full two years ago. The Transportations subsequently lost 27% of their value between December 2014 and June 2015. That's the classic definition of a bear market.

Transports Make New all Time High! Bull Market Confirmed

Here are a couple more scenarios that could unfold in the near future.

#1 The Dow could fall to it's last reversal level, which was 17888.28 and the Transportations could fall to 8018.55 before reversing course and heading higher again.

#2 The Transportations could make new all time highs, which would then signal the continuation of the bull market we're already in.

#3 The Dow could continue rising while the transportations stall out just shy of making new all time highs. The higher the Dow climbs, the harder it will fall in this scenario. We are looking at a potential 17% decline in the Dow if the Transportations don't make a new all time high soon. That number gets bigger the longer the Dow climbs while the transports stay stalled out. Getting in near the bottom of that kind of decline would be awesome, because the primary trend is still UP. If the Dow climbs much higher, I will be looking at profit taking and perhaps even shorting the markets. We'll see.

The Dow Transportations will make new all time highs!

According to Dow Theory, now is the time to buy into the large cap indexes. For this, I will be purchasing units of TD US index - I

Another good option if you have a larger chunk to invest with is the iShares core S&P 500 ETF

Happy investing :)

So Close! Or is it? Here are The Possibilities

It's funny how the relationship between the Dow Jones Industrials and the Dow Jones Transportation indexes can mirror what I'm already seeing.

You see, I do quite a bit of research even though my posts are short. After I've completed my research, I look at the Dow relationship and I am often surprised that this one index relationship mirrors what I've been concluding based on my research. It could be confirmation bias, but then again, I've made some 'surprisingly' accurate calls. This isn't an accident, nor am I some sort of magician. It all comes back to Dow Theory.

Changes to the Funds Page

Check them out, and enjoy!
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Get Ready! December Might be Totally Awesome

9199.65

That's the number we want to see surpassed on the Dow Transportation Average.

May I re-iterate?

Now do you see why I haven't made an update in a while? I was waiting for confirmation, which we got today. Bear market is the new trend.

Bear Not done yet

There's a chance that the Transportation stocks will catch up with the industrials, and we'll be on the way to new highs. I highly doubt this will be the scenario.

What I think will happen is that both the industrials and the transportation stocks will fall, and I'll be looking for them to move to new intermediate lows before I jump back to 100% long.

Time will tell.

Let the ***** market BEGIN!

Ok, that last post was a tease.

December 11th, 2013 - Transports close: 7057.47
Today's close: 7053.75

Dow Jones, Dec 12th 2013 close: 15739.43
Today's Close: $15372.80

Both indexes broke down officially. You know what that means???

Dow Jones Dead Bounce - January 30th

Mark these words: today was a dead bounce. In the markets, 0.65 points can make the difference between confirmation and divergence.

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The trend is down.

The sell off should accelerate, according to my research.

What the F@#$! Dow Jones?!

oookkkkkkkaaayyy

The transportation sold off and breached support at the base of their last major rally. By all accounts, this market should head lower. I don't see how it won't.

But the Dow industrial failed to breach the same base, thus not confirming a new intermediate bear market.

Yet.

Shoot, Willis, I haven't a dang clue what's happnin' here!

Well, I do actually have some clue. I think we're seeing HFTs in action, capturing stock on good news from euroland.

But I'm not buying it.

Not yet.

So Stay Strong!

If you're a worrier, consider continuing buying small tranches of your favorite indexs; preferably the ones that have lost the most in the past few months. I'm personally not going to buy now, but if you are already buying regular amounts in regular intervals, don't stop the plan just because some quack on the internet told you that he thought a 100 year old theory is signalling a much greater sell-off. Even though he's probably 100% correct, there's always the risk that he'll be 100% wrong. Such is the nature of stock market analysis.

I hope you Bought VXX

I did.

woo hoo!!

Funny Dow Jones Mayhem Today

hahahaha!

While the market worries about everything, we should be secure in the knowledge that we totally knew without a shadow of a doubt that this was coming.

Let's see where this heads. I'm looking for a bottom to form above 15,500. If not, then above 14,776.

R

Dow Industrials will fall hard and fast soon - Jan 22, 2014

Based on Dow's theory, an intermediate bear market is not only a definite, but imminent. At this point, it looks like a minor bear market will ensue. If this start to look bad on the weekly charts, then it means the bear market will get really bad. I'm not putting any stock into "maybe", only into what I know as of right now.

Buy a minor position in VXX today. I reckon it will pay off nicely in about a month, and will offset losses in equities.

Dow Jones Industrials Today - HAWK EYES!

It's become really clear to see that the Dow jones Here and the Transportation Average here are not conforming one another's movements on a closing all-time high basis. The italics part is VERY important.
A second very important part is that it is the transportation average which has been trending higher. Historically, this has meant that a correction is all-but coming soon.

Here's a close-up of the past two months of daily closes - December 2013 to the present.

  

Every time the transportation average hit a new all-time high this month (January), the move wasn't confirmed by the Dow - but they had previously confirmed one another's movements to new highs after the transportation average failed to break support as the dow moved higher. As a result, right now, it means a correction of some magnitude is not just possible, but definite in my opinion.

I expect this to play out over the next couple of weeks, if not sooner.

Something's not Right with the Dow Jones Industrials

I was shocked to see the Dow Industrials rally all the way back up after selling off. I was fairly certain that a new sell off was imminent. I guess that's why trying to time the market exactly is a fool's errand.

However, I'm almost completely convinced that if the Dow doesn't make another new high this week, it's game over for buying stocks --- for a little while. The Transportation average hit another new all time high today, and the Dow industrial failed to confirm. This simply means we need to continue to watch the Dow LIKE A HAWK. But I'm growing more and more confident that the time to make big one way bets either way on stocks is a bad idea.

For now, I'm placing all broad market bets on hold.

We won't know if the new trend is 100% confirmed for a little while, but we can start researching now about how we will approach a market sell-off. That way, when the new trend is confirmed, we won't be caught off guard and we can pull the trigger with confidence.

I bought the Vix a while back, as I thought "for sure" there would be a market sell-off 'soon'. What I wasn't considering is that there was no technical or logical basis for a sell-off, given a number of factors including increasingly positive job reports, and an expanding monetary base. I should have waited for confirmation instead of buying with my emotions. Now I'm stuck in a trade and am down 50%. Yuck.

Lesson learned.

NEVER short the market unless you know with a high level of confidence that is based on real evidence that you'll win.

New Short-Term Intermediate Cycle = Down

I didn't sell my position in the VXX, and that may prove wise. As of today, the Dow Industrials failed to attain a new high, and the transportation average did. This means an intermediate correction is on the way. The size of this correction depends on the behaviour of the indexes on a weekly basis.

So here's the next thing to watch for. On the weekly charts, the Dow industrials and the transportation average are neutral. The bull market is thus still in tact when viewed from a weekly basis. If there is a breakdown on the weekly charts, we'll know it because the transportation index will continue to surge while the dow falls. Should this happen, you will want to ensure you are short the market.

For now, I remain pessimistically long, because there's an outside chance that this daily behaviour will produce nothing more than a small correction that will quickly find support.

This is getting exciting!

Watch the Dow Jones LIKE A HAWK

The Transportation index is flirting with new highs, as is the Dow Jones industrials. If the transportation average hits new highs, and the dow fails to confirm (I'm talking about daily closes), it is a sure sign that we are in for an intermediate correction. If that pattern is repeated in the weekly close, then you can know that the correction will be on the scale of the one that happened late in 2011 when the greek debt crisis finally blew up in investor's faces.

Now, because both indexes are flirting with all time highs, and because the movements are not dramatic, I will venture a guess and say that both indexes will go on to make new highs in the next week and beyond. I could be wrong, but I sense that all of this money printing is going to continue to inflate stocks and corporate balance sheets, especially of the banks, will continue to expand.

Click the picture to enlarge the chart

 

There you have it - are you all in?

I'm still all-in on stocks. Fantastic gains in a very short period of time.

Remember: A 6% gain on $50,000 put into a "conservative" investment like a total market ETF is MORE in $$ terms than a 100% gain on a $2,000 "risky" small cap investment.

Risk comes not just from the nature of the investment, but on the amount of money you put into an investment vehicle.

Using dow theory, we can reliably make HUGE conservative bets on the direction of the stock market - and thus gain potentially more real-world dollars than we could making a bunch of small bets based on a 'diversity' model.

If the Dow hits a new high ...

I will go all in on equities. However, I suspect we may be headed down to around 12,000 first. The vix is unusually low and needs to be re-set before new highs can emerge. Also, the transports have continued making new highs not being confirmed by the Dow. That is worrisome. The markets may be heading for a self fulfilling prophecy borne out of fear.

Right now is what I would call a transition period. The Dow is at a tipping point. It can either break out to new highs via a market catalyst, or it will stoop lower if no catalyst emerges. I think right now people are still scared because of the US government shutdown, but honestly, unless everyone wakes up to the reality that all the debt we've accumulated HAS to blow up one day, stocks are not going to significantly reverse course. What. I mean is, we might see a 20% drop if people get scared enough, but that will only represent a wicked awesome buying opportunity.

I think the most likely scenario is that we are at the beginning of a secular bull market in stocks. I don't see any other reasonable option with all of the money the government has created.  If all of that money hits the street, we will be dealing with huge inflation. The fed does not want that at all. But if it hits the stock market in increments via the big banks making big bets, inflation will remain subdued and the economy will continue to muddle through, until banks are no longer scared to lend money. At that point, i believe we will see a major economic explosion followed by a severe crash.

For now, I'm very bullish on stocks.

Transports are at New all time highs. Will the Dow Follow?

If (and it's a BIG if) the Dow reverses course right now, that would be a clear sign to begin cashing out of long positions and start piling on the short positions on general equities. It would also be a sign that assets inversely related to stocks and bonds would make good investments.

Time will be the ultimate revealer, but I've now got one eye on the Dow Jones to see what happens.

One curiosity which we've seen before is that on a weekly basis, the Dow is weakening while the transports , have consistently strengthened. On a daily basis, however, both indexes have been consistently making new highs until now.

Be careful over the next few weeks, but don't be hasty in buying OR selling. I view this time as a holding period since the evidence is neither for or against a major market decline or rise. This makes the primary trend still UP. Don't forget that. I am holding because the primary trend remains up.

I am still biased to the upside, as I believe that the billions of dollars on Bank balance sheets will make their way into the stock market, propping it up even further. With bond yields still low, and most Dow components not far off of their 52-week highs, I don't see any reason (other than logic and the real world .. but both are being defied at the moment) for the Dow not to hit new highs. Everyone is still skeptical of the stock market, and that alone gives me good reason to believe we will see new all time highs soon.

R