For someone who uses Dow Theory every single day, it’s not something that I write about much. I may indirectly reference certain tenets all the time, but rarely do I write specifically about the 130 year old Dow Theory. I think I pretty much laid it all out earlier this year in my post: 5 Things Every Investor Should Know About Dow Theory. The simple minded choose to stick to the Dow Jones Transportation Average and Dow Jones Industrial Average either confirming each other or diverging from one another. And while this may in fact be a one of Charles Dow’s tenets (although they were Railroads back then, not the Transports we have today), it does not even make it into my top 5 most important tenets. [Read more…]
Last week I shared with you guys a “Mystery Chart” without any labels on it. The point of this exercise is to eliminate any biases and focus only on facts. The only truth in the market that we can count on is price. Sell side analysts are going extinct because they offer little value, the media is often either wrong or lying to you, the same can be said about C-level executives, and the list goes on and on. None of these people are reliable. This is why the only thing we can count on is price. It’s just math. So we prefer to focus on that and ignore the rest of the noise.
Today we’re looking at a rare development in economically sensitive assets that I think have much broader implications for stocks and commodities moving forward: [Read more…]
In this week’s members-only letter we discuss the following topics:
- What Is The Bullish Case For U.S. Stocks
- Why I Am Still Leaning Towards The Bearish Side For Stocks
- My Favorite Short In U.S. Stocks
- Why We Want To Be Long Volatility
- What The Relative Strength In U.S. Banks Means To Me?
- Why Commodities Have Been The Best Place In The World
- What If The U.S. Dollar Rallies?
- What Do We Make Of The Historic Extreme Bullish Sentiment In Bonds?
We’ve just witnessed one of the most epic rallies in the stock market that we’ve seen in a long time. Remember, this has been dominated by global indexes, particularly Emerging Markets, not U.S. Stocks. We could not be happier to see this rally progress so well as we’ve been pounding the table to be long since late January. By mid-February, the U.S. and other developed markets put in their bottoms and started to play catch up to the rest of the world. But the underperformance of the U.S. has continued anyway.
Today’s Chart Of The Week represents what could potentially be the start of a major structural improvement for U.S. Stocks: [Read more…]
We’ve been pretty neutral the majority of the U.S. Stock Market indexes over the past couple of weeks since they first starting hitting our upside targets. Some of them, like the Nasdaq100 and Mid-cap400 had yet to reach out upside objectives, but we are approaching those now. I will argue, though, that the developments we’ve seen are constructive, both in price behavior and in the breadth itself.
Here is what I think we need to keep in mind with each of the major Indexes. We’re using only bar charts today in order to put extra emphasis on price for this particular exercise: [Read more…]
Thursday morning I was on the Benzinga morning radio show chatting with the guys about the S&P500 as well as some individual stocks and commodities. I really enjoy doing this show because they like to focus on the market and price behavior, as do I. The sector rotation we’re seeing makes me a lot more bullish than what the frustrating sideways action in the major averages might indicate on the surface.
Here is the audio in full:
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One of the recent developments that we’ve been noticing is the outperformance out of the Dow Jones Transportation Average over the past week or so. We’ve been hearing all year about the Dow Transports struggling compared to some of the other major stock market averages. At the beginning of the month, the Dow Jones Industrial Average was up over 2.5% while the Transports were negative Year-to-date. Where markets close at the end of the year is a number completely arbitrary, so discussing year-to-date returns is one of the more useless exercises performed by market participants and market watchers. But regardless, the headlines were mostly about the Transports underperforming. Not only has this flipped over the past week or so, but bigger picture all the Transports do is outperform. Since 2012, it’s not the DJ Industrials that are leading, it’s the DJ Transports.
Since the Fall of 2012, the Dow Jones Transportation Average has more than doubled the performance of its Industrial counterpart. Here is a comparison chart showing the Transports up over 80% during that time while the Industrials couldn’t return half that:
More importantly, in my opinion, the ratio between the two has been trending beautifully within a very well-defined uptrend channel. The year-to-date headlines don’t tell the whole story. It’s not sexy. But all we’ve seen this year is a tiny correction in the ratio towards the lower of the two parallel trendlines. A buying opportunity is what it looks like from here:
So don’t worry so much about arbitrary year-to-date numbers. They really mean absolutely nothing when it comes to supply and demand dynamics. I think this outperformance out of the Transports should continue. I don’t like to fight the primary trend, that’s Dow Theory. Charlie Dow knew what he was talking about 120 years ago. Who are we to dismiss him?
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Tags: $DJIA $INDU $DIA $YM_F $TRAN $IYT $DJT $DJI
Coming into 2015, the major US Stock Market Indexes like the Dow Industrial Average and S&P500 were not areas where we wanted to be putting new money to work. Not only did we have failed breakouts around the holidays which is always a bad sign, but I felt we needed some consolidation, or digestion, of the gains over the past few years. Markets can consolidate gains in one of two ways, either with a downside correction in price or sideways through time. The latter is obviously the healthier version of the two.
Today I want to take a look at a few of the Major US Stock Market Indexes to show how these averages have been consolidating over the past several months. The first one is the S&P500 representing 500 of the largest corporations in America. Look at price trading within these two converging trendlines and essentially at the same price that it was in early November:
The next chart is the Dow Jones Industrial Average which includes 30 humongous US Stocks. Notice how similar this pattern is to the S&P500. Prices are right where they were in early November and trading within this symmetrical triangle looking formation defined by two converging trendlines:
The Nasdaq100 is more of a tech heavy index containing 100 of the largest companies that trade on the Nasdaq. In this case, we don’t have a symmetrical triangle, but more of a sideways range. Notice once again how prices are right where they were in early November:
And finally here is the Dow Jones Transportation Average. This index contains 20 big market-cap stocks related to transportation including airlines, railroads, shipping companies, etc. One more time we can see prices near where they were in early November and trading within a 3 month range defined by two somewhat parallel trendlines:
I think the main takeaway here from these 4 large-cap Indexes is that we are stuck in a range. Although it might seem frustrating to some short-term traders, this is not necessarily a bad thing bigger picture. Now what we want to see are breakouts above the upper trendlines in each of these charts. Until then, I don’t see any reason to be involved in the major averages.
To me, it’s important to look at each of the averages and compare them to one another. Are they telling different stories? Or are they telling us the same thing? There is no Holy Grail when it comes to the market. It’s more of a weight-of-the-evidence kind of thing. And right now, the weight-of-the-evidence suggests that tactically there are better places to be that in the major US Stock Market Indexes. Until we break above the upper end of those ranges, I would expect more choppiness. Who needs that?
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Tags: $DJIA $DIA $SPY $SPX $ES_F $YM_F $NDX $QQQ $NQ_F $TRAN $DJT $DJI $IYT
This week we hosted a live event where we took a look at stock markets around the world along with other non-correlated asset classes to find the most optimal risk/reward opportunities. There was a lot of intermarket work done comparing international stock markets, to commodities, to sectors here in the United States and down to individual stocks and pair trades. Rather than going over my process, like in previous webinars, this video focuses more on the results of the process. There are some nice trends already in place, and other situations that are setting up nicely for potential positioning in the future.
This is how I approach the marketplace. I hope the video can add some value to your process:
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Andrew Nyquist over at SeeItMarket.com asked me to contribute to his most recent series of Market Masters. It really is a privilege for me to be able to share some of the things that I’ve learned from my predecessors as well as from some of my own mistakes over the years. I absorb and take in so much from my technical predecessors, that it’s an honor for me to add even just a little bit of value. In last year’s Market Masters series I focused on how we come up with our near-term price targets when a market is in uncharted territory. This year I thought it would be beneficial to discuss the power of the big base. In addition to the price action itself, there are some momentum and sentiment characteristics that could add to the already explosive nature of these price patterns.
Market Masters: Identifying Strong Bases For Explosive Trades
April 11, 2014
by J.C. Parets Today I want to talk about bases. This is something that rarely gets discussed for whatever the reason, but I think they can provide some of the most explosive opportunities in the market. The old saying goes, “the bigger the base, the higher in space”. But what exactly constitutes a base? What are some of the characteristics that we should look for as market participants? And why is it that the resolution from strong bases is so explosive?
First of all, what is a base? It can be described in a number of ways but I like to phrase it simply as an extended period of time where prices remain within a well-defined range with a fixed floor and a fixed ceiling. Whenever prices reach the upper end of the range, the sellers come in, but when prices get down to the bottom of the range, the buyers step up. This goes on for a longer than average period of time until it resolves itself in one direction or another.
These ranges can be sideways, or slightly inclined, but the supply and demand dynamics that create the explosive resolution remain the same. Another important aspect to remember is that these can come on time frames of all kinds. So regardless of whether you’re a long-term investor or a short-term trader, there are bases for everyone on daily, weekly, monthly and even down to intraday charts. Also, these can be found across asset classes. This is strictly a supply and demand phenomenon so the strategy can be implemented in bonds, commodities and currencies, not just in the stock market.
A recent example of a breakout from a well-defined base was in the Dow Jones Transportation Average back in early 2013. In this case, the base was declining slightly, but the upper and lower boundaries were well-defined. I think this is a great example because while the Dow Industrials were trending higher in 2012, the transports remained flat. Imagine how frustrating it must have been to be in that market?
The resolution out of this base consolidation was explosive. The Dow Transports were the big winners in 2013 and got the year off started really strong. Look how nice that uptrend became. There were barely any pullbacks for months. In fact, Transports rallied 50% from December of 2012. For an index to do that in such a short period of time is very impressive and provides us with a great example of the power of strong bases.
You see what happens in a case like this is that both the bulls and the bears become frustrated for an extended period of time. No one is winning and they just start to give up. That’s when the explosive move occurs; leaving everyone in the dust that had decided to throw in the towel. My friend Brian Shannon at Alphatrends.net has an old saying that, “if they don’t scare you out, they’ll wear you out”. I think the psychology behind these bases has a lot to do with the fact that participants are just worn out of that market and recognize the opportunity cost they’ve had to endure while waiting for a resolution. By the time the market breaks out, it’s just been too painful to remain in the trade. And that’s when you get the explosive move.
Tags: $STUDY $DJT $IYT $TLT $TNX $ZB_F
Dow Theory is the grandaddy of all technical analysis. Back in the late 1800s, Charlie Dow did not think of his “theory” as a forecasting tool for the stock market, or even as a guide for investors, but rather as a barometer of general business trends. The basic principles of the theory, which were later named after him when he died, were all laid out by him in the Wall Street Journal.
There are a 10-12 basic tenets of Dow Theory, depending on who you ask. Some of these include the fact that the market averages discount everything, stocks move in trends (Primary, secondary and minor), closing prices are the most important, etc etc. Today we’ll turn our attention to the Principle of Confirmation. Charlie Dow, referring to the Industrial and Rail Average (“Transportation” Average today), meant that no important bull or bear market signal could take place unless both averages gave the same signal (“Confirming” each other). He felt that both averages must exceed their previous peaks in order to confirm the continuation of a bull market.
The Dow Jones Transportation Average made a new high this month but the Dow Jones Industrial Average did not. This leaves a Dow Theory non-confirmation still in place:
The sell signal comes if/when both averages put in fresh closing lows. Based on the recent action, the bears want to see the Industrials and Transports both close below their February 3rd lows. This would tell us that the trend has changed. Until then, it’s more of a red flag (a big red flag).
Tags: $DJIA $INDU $DIA $TRAN $DJT $IYT
Today’s market video focuses on two separate names using different time frames. The first one is a short-term look at shares of Twitter $TWTR where we can see prices coming down to the key $50 level. The risk/reward here is skewed nicely for the bulls. The setup in Kohls $KSS is based on a much larger time frame. We’re looking at a multi-year base that looks an awful lot like the Dow Transports towards the end of 2012. We could see a monster rally develop in this name.
I hope you find value in this video:
Tags: $DJT $IYT $KSS $TWTR $SPY $TRAN