Dow theory Forecasts: Alternative could be better

Dow theory Forecasts

The Accurate Alternative to Dow Theory Forecasts

Updated May 26, 2023

This article has been updated on May 26, 2023, with additional information appended at the end to provide you with more comprehensive insights for making informed decisions. Despite this, history remains an invaluable teacher, and as the saying goes, those who fail to learn from it are destined to repeat its mistakes. Therefore, we will present real historical examples, culminating with our latest perspectives.

The transport topped out in November of 2014, and according to the Dow theory, this is a big negative;  the Dow industrials should have followed suit. Instead, the Dow soared higher, paying no heed to this theory proving to a large degree that this argument has lost its value. After all, it is a theory, and the definition of a theory is a supposition or a system of ideas intended to explain something, especially one based on general principles independent of the thing to be explained.


Dow Theory In Technical Analysis; proof that the original is broken

Dow Theory Forecasts: Alternative Might be Better?

That is why way back in 2006, we offered an  Alternative that proved far more accurate and reliable than the Dow theory.  Just to let this sink in, the transport topped out almost two years ago, and instead of trending lower, the markets have surged to new highs. If you look at the above chart, the Transports appear to be finally gathering momentum and breaking out. In the Dow theory alternative, we stated that the Utilities led the way instead of the Dow transports; well, let’s see if that holds.


Dow utilities far better than the Dow theory

The Dow Theory Signal is Malfunctioning?

In the chart above, the utilities pulled back after the Dow transports, let out some steam and then soared to new highs. Even though the correction appeared vigorous, the Dow utilities held above the primary uptrend line.  We can see that the Dow utilities are a better barometer of what one should expect from the markets.
The Utilities topped in Feb of 2015, and after that, the Dow trended sideways before correcting, illustrating that they follow the lead of the Utilities and not the Dow transports. The Dow utilities bottomed towards the end of August 2015 and rallied until Nov of 2015 before pulling back again. The Dow followed in the utility’s footsteps. It bottomed in Jan of 2016, while the utilities bottomed in Dec of 2015, again leading the way.  After that, utilities rallied until July 2016 before pulling back.

Dow Theory signal is broken and it just a theory nothing more

The Dow rallied until Aug of 2016, proving that the utilities are a better indicator of market direction than the Dow transports.  At this point, the utilities are building momentum to take off again. If the pattern holds, then the Dow should follow its path.

It is also interesting to note that after almost two years of doing nothing, the Dow transports also attempted to break out.

Paying attention to what the utilities are doing in the future could be rewarding.  Once the Dow utilities start to trend upward, it should serve as a strong signal that the Dow will follow in its path.

Using Original Dow Theory In Technical Analysis Leads to Bad Results

The Dow utilities and the Dow industrials traded to new highs; this means that rather than leading the way up, the Dow transports propel individuals to draw the wrong conclusion. The Dow Theory ceased to work correctly a long time ago, and in the era of hot money, it has a hard time trying to be relevant.

Using the alternate Dow Theory in technical analysis, where the focus is on the Dow utilities, yields better results. Maybe it is time to put this 100-year-old theory to rest and try something new; we will let you be the judge.

 Dow Theory Limitations: Why It Often Fails to Predict the Market

The Dow theory is an investment strategy based on the Dow Jones Industrial Average movement. While it has been effective at times, there are several reasons why it does not always work:

1. The market is complex: The Dow theory assumes the market moves in predictable cycles, but in reality, the market is influenced by countless complex factors that the theory does not account for.

2. Emotions impact the market: Investor psychology and emotions significantly impact market movements, which the Dow theory does not consider. During market extremes, the theory often fails.

3. The indicators are lagging: The Dow theory uses indicators like price and volume, which tend to lag actual market movements. When the indicators signal a move, the move may already be underway.

4. It relies on the past: The Dow theory assumes past market patterns will repeat, but the market is always evolving and past patterns are not guaranteed to repeat.

5. It ignores external events: The theory largely ignores external events that impact the market, like geopolitical tensions, economic data releases, and company-specific news.

Some examples of when the Dow theory failed include the 1987 stock market crash, the 2000 dot-com bubble burst, and the 2008-2009 financial crisis. In these extreme market events, the Dow theory signals either failed or lagged the actual market moves significantly.

The Tactical Investor’s Alternative Dow Theory: May 13, 2023 Update

The Dow Theory has been a reliable tool for market analysis for over a century. However, it has limitations, and we believe a far better alternative is available today.

 The Tactical Investor’s Approach

The Tactical Investor offers an innovative approach that monitors Dow utilities to predict market performance. By analyzing the oversold range and forming a bottom, the Tactical Investor’s Alternative Dow Theory produces a more precise market analysis than the traditional Dow Theory.

 Incorporating Mass Psychology and Contrarian Investing

We recommend incorporating mass psychology and contrarian investing in enhancing the signal issued by the Tactical Investor’s Alternative Dow Theory. Groupthink psychology refers to the behaviour of the masses in the market, which can significantly impact market trends. Investors can profit from market inefficiencies created by overreactions to news and events by taking a contrarian approach.

 Achieving More Profitable Outcomes

By incorporating mass psychology and contrarian investing into the Dow Theory, investors can make more informed investment decisions and identify market trends accurately. We believe that the Tactical Investor’s Alternative Dow Theory, combined with mass psychology and contrarian investing, offers a more refined and elegant approach to market analysis. By adopting this approach, investors can achieve more profitable outcomes.

Impiety. Your irreverence toward my deity.

Ambrose Bierce

Dow Theory  Forecasts FAQ

Q: What is the Dow Theory, and who created it?
A: The Dow Theory, created by Charles Dow, is a late 19th-century theory suggesting the stock market reflects the economy’s overall state.

Q: How does Dow Theory work, and what are its limitations?
A: Dow Theory relies on the Dow Jones Industrial Average (DJIA) and market trends identification. Limitations include historical data reliance and the inability to consider external factors.

Q: What is the Alternative Dow Theory, and how does it differ from the traditional Dow Theory?
A: The Alternative Dow Theory focuses on Dow utilities for more precise market analysis, differing from the traditional Dow Theory’s reliance on DJIA.

Q: Is the Dow Theory still relevant today?
A: Dow Theory remains relevant but has limitations, such as reliance on historical data and potential forecasting inaccuracies.

Q: What are the benefits of incorporating mass psychology and contrarian investing into Dow Theory Forecasts?
A: Incorporating mass psychology and contrarian investing enhances Dow Theory Forecasts, enabling more informed decisions and accurate market trend identification.

Q: How can investors incorporate mass psychology and contrarian investing into Dow Theory Forecasts?
A: Investors can incorporate mob psychology and contrarian investing by researching, developing investment plans, and adopting a measured approach.

Q: What is contrarian investing, and how can it profit from market inefficiencies?
A: Contrarian investing involves opposing prevailing market sentiment, allowing investors to profit from market inefficiencies caused by overreactions.

Q: What is mass psychology, and how can it impact market trends?
A: Mass psychology refers to market participants’ collective behaviour, significantly impacting market trends and informing investment decisions.

Q: What are the traditional Dow Theory’s limitations?

A: Traditional Dow Theory limitations include reliance on only two indices and inaccurate short-term market fluctuation predictions.

Q: What is the Tactical Investor’s Alternative Dow Theory, and how does it differ from the traditional Dow Theory?
A: The Tactical Investor’s Alternative Dow Theory focuses on Dow utilities for market predictions, offering more precise analysis than the traditional Dow Theory.

Q: What are the benefits of adopting the Tactical Investor’s Alternative Dow Theory and incorporating mass psychology and contrarian investing?
A: Adopting the Tactical Investor’s Alternative Dow Theory and incorporating mass psychology and contrarian investing lead to more profitable outcomes and informed decisions.

Q: How can investors make informed decisions based on research and analysis?
A: Informed decisions require thorough market research, target audience identification, clear goals, resonating messaging, appropriate marketing channels, and campaign success measurement.

Q: Is the Dow Theory Signal malfunctioning?
A: The Dow Theory Signal isn’t malfunctioning but has limitations, as demonstrated by the Dow transports topping out in November 2014 without the Dow industrials following suit.

Q: Does using the original Dow Theory in technical analysis lead to bad results?
A: Using the original Dow Theory can lead to bad results, while the alternate Dow Theory focusing on Dow utilities yields better outcomes.

This article was initially published on September 30, 2016, and has been continuously updated since then. The most recent update was carried out in May 2023

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