The Dow Theory: Does It Still Work?

Does the Dow theory work; Lets take a test drive and see

Does the Dow Theory Still Work? 

Updated Feb 29,  2024

 Recognizing the cyclical nature of history, we begin by illustrating our point using historical examples and conclude with our most current perspectives.

The reality is that central banks are artificially propping up the markets through unconventional monetary policies such as quantitative easing and low-interest rates. This has created a massive market distortion and led to a disconnect between the real economy and financial markets. Despite the obvious signs of a looming economic collapse, the crowd still blindly follows the old Dow theory and fails to see the writing on the wall. It’s time for a new approach, a more contrarian view that takes into account the changing dynamics of the markets.

Our stance remains in favour of an alternative approach over the Dow Theory, which we find somewhat irrelevant in the present times.

Nevertheless, the primary reason we don’t foresee a market crash is that the overall trend is still upward unless a change in direction occurs. Consequently, any significant pullbacks should be perceived optimistically through a bullish lens.

Tactical Investor’s Version of Dow Theory

The Tactical Investor Alternative Dow theory, which seems to hold up almost 13 years since we first published it, states that the Dow utilities lead the way up and down. The Dow Industrials and Transports then follow suit, so it would pay to keep an eye on the utilities as it will give us an idea of what to expect from the Dow. On the weekly charts, the utilities are trading in the extremely overbought ranges and will soon move to the insanely overbought ranges, so a pullback shortly should not come as a surprise.

The MACDs in the Dow transports, just like those in the  Dow industrials, have both not experienced a bullish crossover yet, proving that the Dow alternative theory still works. The MACDs in the Dow utilities have already experienced a bullish crossover, and IDU traded to a high of 149.41 in March 2019.  Hence the odds favour that both the Industrials and transport will surge to new highs sooner or later.  Market Update May 7, 2019 

According to the Tactical Investor Alternative Dow theory, the Dow utilities lead the way up or down. The utilities are holding up just fine and are based on the ETF IDU; they just put in a new high; Translation, the Dow is likely to take the same path, and the same holds for the Dow transportsMarket Update May 20, 2019

The Dow utilities traded to new highs, and according to the TI alternative Dow Theory, the Dow industrials should be next in line, and that’s precisely what took place. Once again, this theory we put forward years ago is still valid.  Market Update June 23, 2019

The Dow Utilities Are More Important In Updated Dow Theory

According to the Dow theory, the primary relationship exists between the Dow and the Transports. However, we believe that the utilities play an even more significant role. The first chart below shows the Dow transports, the second displays the Dow industrials, and the third represents the Utilities.

This chart starts from 1969 and continues until November 1981. If we go back three years to 1966, we see that the Utilities put a high first in 1966 and then kept testing the highs, forming a triple-top pattern. The Transports set a new high in the middle of 1967 and then traded sideways. The industrials only established a new high towards the end of 1969 before entering a correction phase.

The charts below reveal that all three indices corrected around the same time but topped at different times. As we mentioned earlier, there is a relationship between all three indices, with the utilities having the best interaction with the other two around market bottoms but not so much at market tops.

Tactical Investor Dow Theory Yields Better Results

After what appeared to be a complex correction in the mid-1970s, the industrials and transports managed to bottom out. However, the utilities did not experience a significant correction during this period. Although they saw some gains after bottoming out, they failed to reach new highs and traded sideways from 1971 to 1973. This indicated that a more severe correction was on the horizon.

Let’s pause momentarily to examine what happened with the Dow and the transports after they corrected and bottomed out in the mid-1970s. As before, transport led the way up and hit new highs nearly a year before the industrials. Subsequently, the transport started to correct just as the Dow was busy setting new highs. This clearly illustrates that the transports lead the Dow not only during advances but also during corrections.

The irrelevant Dow theory and the better alternative

What Every investor should know about the Dow theory

Alternative Dow theory is Superior t0 the Orignal Dow Theory

 Tactical Investor Dow theory is a better predictor of trend changes.

As previously mentioned, the utilities play a critical role in predicting market bottoms in conjunction with the other two markets. While the Industrials (Dow) and Transports trended upwards, the utilities traded sideways, and once the Dow put in a new high, the utilities began to correct. The correction gained momentum, resulting in both the Dow and Utilities plummeting to a new 13-year low. Interestingly, the Transports put in a higher low, hinting at a bullish run shortly.

The Transports best represents the bullish pattern, while the utilities reflect the bearish pattern. The Transports went on to put in three new highs, one at the beginning of 80, another towards the end of 80, and one in 81, while the Dow and utilities traded sideways and accumulated energy for the next move up. We have always emphasized that the longer the channel formation, the more potent the final move will be. The charts below illustrate the explosion in both the Dow and utilities to the upside from 1976-1986.

Dow theory forecasts that the Dow theory no longer works

Dow Theory Unplugged-why it no longer works and what Investors need to know

The Ins and Outs of The Dow Theory 

Throughout history, the stock market has been subject to various theories and approaches, each attempting to decipher the market’s mysterious ways. One such theory is the Dow Theory, which posits that the Dow Jones Industrial Average and Dow Jones Transportation Average move harmoniously to indicate market trends.

However, an alternative Dow Theory Forecast has emerged, proposing a more nuanced approach to identifying new trends. By examining the relationship between the Dow, utilities, and transportation sectors, a new pattern has emerged, suggesting that transportations lead the way. In contrast, the utilities serve as a confirming agent.

Looking back at historical data, we can see this relationship play out repeatedly. In the 1970s, the transports topped way in advance of the Dow, and when the Dow followed suit, the utilities failed to confirm the highs, indicating a severe correction was in the works. A similar pattern emerged in the 1980s, with the transports leading the way and the utilities serving as confirming agents.

By recognizing this pattern, investors can make more informed decisions about when to enter and exit the market. And while the original Dow Theory has its merits, the alternative theory appears to offer a more reliable and accurate way of identifying market trends.

A Closer Look At The Dow Theory Alternative

Let’s dive into the intriguing world of the markets and analyze the movements of the Dow Jones Industrial Average, the Dow Jones Transportation Average, and the Dow Jones Utility Average. We can gain valuable insights into their future directions by examining their patterns and trends.

First, let’s focus on the Utilities. They have been on a remarkable uptrend for the past three years, while the Dow and the Transports remained stagnant for 12 and 15 months, respectively. The Transports were locked in a tight channel formation from Nov 05 to Nov 06 while the Dow was enclosed in the same position from Nov 05 to about Feb 06. This indicates that Utilities has been leading the way, and any move it makes will likely impact Dow and Transports.

 How the Dow and Transports Followed the Utilities’ Super Uptrend

Looking back at history, we can observe a similar pattern in the 1972 and 1973 eras. As the Transports and the Dow broke out, the Utilities began a complex correction. Once again, the Transports led the Dow and put in new all-time highs first, and about four months later, the Dow went on to put in a new all-time high. While this was happening, the Utilities were moving in a tight channel and had just recently broken out. The 1st chart below is of the Dow, the 2nd of the Transports and the 3rd is of the Dow utilities.

This trend has recently repeated, with Transports leading the Dow to new all-time highs, followed by Utilities breaking out of a tight channel formation. This development suggests that a new high for the Dow and Transports is in the making, but not before they undergo a significant correction.

The data points to the possibility of a hard and fast correction, much like the one in October 2005, where the Utilities corrected 13.66% in less than a month. Any correction now would likely lead to several negative divergences and a potential new all-time high for the Dow and Transports.

The lesson from this analysis is that utilities are crucial in determining the market’s direction. By studying their patterns, we can make more informed investment decisions. The complexity of the markets can be daunting, but with careful observation and analysis, we can uncover hidden insights and identify trends that others might overlook.

 

 Historical Perspective: The Dow Theory Alternative In Action 

How investors can make money using the Dow Theory sell signal

Dogs of the Dow & Dow theory no longer work- better alternative

Dow chart

What is the Alternative Dow Theory predicting 

All three markets continue to trend upward. However, it’s important to note that the Utilities may have recently broken out of a channel, though this breakout could be a false signal. Significantly, they have recently achieved another all-time new high, and a correction now could result in several negative divergences. As the Dow utilities typically lead the upward and downward movements of the markets, the Dow and Transports are likely to follow suit by achieving new highs after a correction.

If the markets follow the same pattern as in the past, this correction is expected to be sharp and swift. For example, consider how quickly the Utilities corrected after achieving a new high in October 2005. In less than one month, they dropped from 440 to 380, a significant correction of 13.66%. They then moved sideways until August, when they tested their old highs and broke into new ground.

Proof that it Pays to Monitor the Dow Utilities

Through careful analysis of the Dow transports and utilities, it becomes clear that the transports have already undergone correction while the utilities remain strong. The transports started correcting in July after the utilities began their sentence in May.

While they have since moved higher, they have not yet hit a new all-time high. This lag in performance means that the Dow industrials may need to experience a correction before the next leg up. However, if this old pattern holds true, the transports and the Dow industrials should rally to set new highs. By carefully studying patterns and data, we can uncover valuable insights others may overlook.

Can The Alternative Be Trusted? 

The alternative Dow Theory represents a compelling option for investors seeking to identify new market trends. Rather than fixating solely on the original Dow Theory, investors can benefit from exploring this alternative approach and the valuable insights it provides.

By carefully examining the data and charts presented in this article, investors can gain a deeper understanding of this simple yet effective pattern without the need for complex cycles or waves. We encourage investors to take the time to read this article multiple times and seriously consider the alternative Dow Theory as a means of improving their investment strategies and achieving more tremendous success in the mark.

 The Dow Theory: Updated Views

The Dow theory Alternative Update June 2018

Despite the recent pullback in the Dow industrials, the utility sector has remained remarkably resilient. When considering the added volatility created by geopolitical factors such as trade wars and political polarization, utilities’ strong performance is awe-inspiring.

The utility sector has not yet traded to new lows, and according to the alternative Dow Theory, the Dow will not drop to new lows until this occurs. However, it is essential to note that many supposed financial experts are little more than clowns, and economic sites often create sensational headlines without any substance to back up their claims.

Rather than relying on such sources, investors should focus on mass psychology and analyze the sentiment driving market trends. By identifying the emotional factors that influence the behaviour of the masses, investors can gain valuable insight into the overall direction of the market. This way, investors can make informed decisions and potentially achieve significant gains amid market turmoil.

 It is the masses that move the markets, and if you can determine the emotion that’s driving them, you can determine the trend of the market. Sol Palha

Dow transports prove The Dow Theory alternative is valid

When examining the Dow transports, we see they have shown resilience in recent times. Unless the transports fall below 9500 every month, the overall outlook remains bullish.

It is important to remember that in investing, the trend is your friend. By following the prevailing market trends and recognizing deviations, investors can identify critical opportunities for profit. As the current trend is positive, any significant deviation from this trend may represent an even more attractive opportunity for investors. By remaining vigilant and monitoring market conditions, investors can capitalize on potential opportunities and achieve long-term success in the market.

Dow Theory March 2020 Update

XLU Utilities Select Sector SPDR Fund daily Stock Chart

The pullback of utilities in recent times has been significant, and as they often lead the way in market trends, it is essential to pay attention to their behaviour. The utility sector is showing signs that a market bottom may be near. If this proves accurate, we may soon see a similar trend emerge in the Dow industrials.

Despite the current turmoil, this sell-off represents a once-in-a-lifetime buying opportunity for long-term investors. Investors can reap significant future rewards by carefully evaluating potential investments and taking advantage of current market conditions. It is essential to remain vigilant and informed and recognize the possible benefits of investing during challenging times.

COVID or other chaotic events set to follow are part of the demand destruction process. The top players you have never heard of are outstanding trend players. Unfortunately, they understand the concept of Mob Psychology too well; they know precisely what must be done to make the masses feel that what’s occurring is all but inevitable.

Revealing Insights: Dow Utilities vs. Dow Theory

July 2023 Update

Dow Utilities 2023

As per the Tactical Investor Alternative Dow theory, the utility sector leads in both upward and downward movements. On the monthly chart, the utilities sector shows a consolidation phase, suggesting that the ongoing market rally might lose momentum. Investors should closely monitor this sector for a clear buy signal, as it could indicate a potential turning point. Any subsequent corrections, ranging from mild to significant, should be embraced. Until such a signal appears, market volatility is likely.

A potential sign of a market bottom could be a bullish crossover in the MACD indicator (the first indicator).

As of July 25th, 2023, intelligent investors are advised to consider taking profits in the overheated AI tech sector. They can use pullbacks as opportunities to accumulate or initiate positions in the healthcare sector and strong stocks within the Industrial sector.

The Dow Theory Flaws

While the Dow Theory is a widely used technical analysis approach, it has limitations and may not always accurately predict market movements. One criticism of the Dow Theory is that it relies on a relatively small number of data points, namely the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA), which may not always provide a comprehensive market view.

In addition, some investors and analysts have proposed alternative approaches to the Dow Theory, such as the Dow Utility Theory or the Tactical Investor Alternative Dow Theory. These approaches suggest that Dow Utilities, rather than Dow Transports, can provide more accurate signals about the market’s direction. The Dow Utilities better reflect the broader economy, as they are less sensitive to short-term fluctuations in the transportation industry.

 

Random Thoughts on the Markets and Life

Amidst the chaos and disorder of the current environment, succumbing to the noise surrounding us can be tempting. At first glance, the situation may seem nonsensical and overwhelming, leading one to contemplate throwing in the towel. However, it is essential to recognize that this is precisely what the big players want – for the masses to lose faith and abandon their investments.

Remembering that being wealthy does not necessarily equate to being astute is crucial. Even the most seasoned players can fall victim to the sharp teeth of financial predators. It is essential to remain focused and vigilant, filter out the noise, and carefully evaluate investments based on well-researched, objective analysis. Only then can one make informed decisions and confidently navigate this turbulent market.

False Premises

The best way to rob a man is to make him believe he has only a set of given choices and to make him choose from those false sets of options.  All those choices lead to a negative outcome, but it creates the illusion that one has a choice when one does not. The way out of this loop is to look outside the presented options. How do you do this? First, I don’t think you accept anything being pushed out by the media. The media’s only function is to make the masses believe the false narrative is true. Once that is achieved, the groups have no choice; they have the illusion of choice.

The attack against the masses will be brutal, so be prepared to deal with a tremendous amount of negativity, and the world will end type of hyperbolic predictions.

To know yet to think that one does not know is best; Not to know yet to think that one knows will lead to difficulty. Lao-Tzu BC 600-? 

 

References

More Questions Raised About Dow Theory, Barrons

Dow theory does not work anymore, HuffingtonPost

Sir John Templeton’s Template for success, Templeton.org

Five pieces of advice from John Bogle, NY Times

The armchair millionaire Lewis Schiff

Dow theory does not work, how to invest in stocks, Tactical Investor

Extraordinary Popular Delusions and the Madness of Crowds, Charley Mackay

 

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The first 9 charts were provided  courtesy of prophetfinance.com