Wednesday, July 19, 2017

Revisit Dow Theory Today

The first great technician in the stock market in the US has to be Charles Dow. He realized that man acted in similar fashion throughout history and the gyrations in stock prices just mirrored man's internal thinking. This concept settled on the two forces of greed and fear.
He formulated a theory that took into effect the two most important aspects of the market. In the Dow Index(became immortalized) he listed the main corporations that produced product. Yes, at one time we were a producing nation. The other index he named after its purpose: Transportation. This included mainly railroads at the time, but like his other index, companies come and go. In fact, GE is the only surviving company in the original formula.
* His first point stated that the Market discounted the future. Today, this isn't true. When Trump won the election, the Dow's futures rallied as did the market. Prices climbed 2,000 points to the Dow Index. The movement was based on favorable market policies. I wonder what Charlie would have said about that? I feel our illusion and greed has taken control of our minds over substance or earnings within the market.
*His next point stated that there are four conditions or phases in the market. Today, we use the term cycles to describe the same aspect.
His basic premise is that the market goes up.
It reaches a top.
Then, it moves downward.
Until it reaches a bottom. This leads to rising prices and the cycle begins a new.
* These cycles soon become part of a bigger picture or direction. Today, we call this a trend.
He concluded that the Primary trend is a result of fundamental aspects. This is the longer direction of the market.
*There is also a Secondary trend which could go against the primary trend or in conjunction with it. This is shorter in duration.
The action of investors causes the cycles to move within their patterns. The Bulls find reason to buy. They cause prices to rise. Other investors want to gain in the profits, and they buy too. This causes excess from the original information which caused the Bulls to buy in the first place. Today, we call this irrational exuberance. This leads to the top and the ultimate decline. It is just like they say on the old detective show, "The names have been changed(to protect the innocent), but the facts remain the same." Companies that didn't exist 100 years ago have replaced the departed, but human actions remain the same. When people buy on illusion and greed, the top has been reached. I'm seeing that in the action of the market.
With my opinion being what it is, the present market still is in sync with Dow Theory. The main point of continuing rising prices is centered upon the two indexes moving up together. At the moment both indexes are climbing to new highs, however I still say, Caveat Emptor! 
With that said, look for this great other technical tool. If prices decline, follow the MACD. This oscillator index has a slow moving and fast moving price line by time duration. If the fast line crosses the slow line in a downward manner, the climb in prices is over. This is called, "The Death Cross."