Back in the late 1800s Charles H. Dow wrote down all of his Tenets about the market in the Wall Street Journal.
These articles ultimately became known as Dow Theory.
One of the basic tenets that many are familiar with is the confirmation of the Dow Jones Industrial Average and the Dow Jones Transportation Average (which was simply known as the Railroad Average when Charlie was around).
If one of the two indexes is making new highs and the other is rolling over, something is wrong, and the trend is likely changing.
Now, if one of the two indexes is making new lows within an ongoing downtrend, and the other is already putting in higher lows, that bullish divergence is evidence of a change in trend.
The Industrials are the companies who make the goods and the Transports are the companies who deliver those goods. That’s the thought process here.
You can find plenty of examples over the past 130 years of these divergences showing up at critical turning points. The dot com bubble top was one of my personal favorites. But there are, of course, plenty to choose from.
Funny, after the tech bubble crash of 2000-2001, the market eventually put in its bottom in 2002-2003.
While the Dow Jones Transportation Average was still making new lows into Q1 of 2003, the Dow Jones Industrial Average was already putting in a higher low, marking a historic bottom for stocks.
They ripped from there and Charlie Dow nailed it again, over 100 years after he originally figured it out.
And so here we are, finding ourselves in a very similar predicament in Crypto.
If you consider Bitcoin & Ethereum equivalent to the Industrials and Transports, then here you go.
Lower lows in BTC while Ethereum has already been making higher lows. Dow Theory Divergence 101:
Does it get cleaner than that?
Now, the Dow Theory stuff is mostly just for fun. We obviously don’t have the data that goes back very far and we only have a few key turning points in history to analyze.
But the “theory” is exactly the same. And whether you think it’s bullshit or not doesn’t even matter.
It’s already helping us make money, and that’s all that is relevant here.
Take the Microstrategy trade, for example.
After observing this potential Dow Theory Divergence over the past few months, and isolating several favorable risk vs reward setups, the trades were there.
You either took them or you didn’t.
Maybe the probabilities weren’t the highest, considering all of these were still in downtrends. BUT….and this is a big BUT…. the risk vs reward propositions were very much skewed in favor of the bulls. AND most importantly the risk was very well-defined.
So of course we took the trade. Why wouldn’t we?
Our first target in $MSTR was just hit this week:
This has been an ASC Trade Idea off the lows against 133. The potential support could not have been any cleaner.
And we also walked through this trade on the Compound & Friends podcast a couple weeks ago with our friends Josh Brown and Michael Batnick.
I don’t think this is over. This is probably the beginning, just like Charles Dow originally wrote it up.
There have been, and continue to be, opportunities across the board in stocks that are related to Bitcoin and Crypto, including $HOOD, $RIOT, $ARKK, $COIN and others.
We’ll be going over all of them Tuesday night on our Live Mid-Month Conference Call.
This is where we’ll discuss all of the Major US Indexes, each Sector, Breakdown the Industry Groups and walk through each of our favorite trade setups, on both shorter-term and longer-term timeframes.
This is a multiple-timeframe approach that we incorporate, so there’s something in here for everyone.
Premium Members make sure to REGISTER HERE if you haven’t already.
We have a lot to talk about. But make sure to bring your questions and comments. Let’s make this one the best Live Video Conference Call ever!
Call Mary if you have any questions or for whatever reason still don’t have access to the registration form: +1 (323) 421-7910
See you there!