Dow Theory: Next Stop 12,000?

Includes: DIA, IYT
by: New Low Observer

On October 16, 2009, I wrote an article on titled “Stock Market Projections,” where I attempted to predict the next low point for the Dow Industrials. In that article I said:

After I ran the numbers, the cycle analysis method indicates that from January 24, 2010 to February 15, 2010 is the next expected low.

Eerily, the Dow Jones Industrial Average managed to hit a major low on February 8, 2010. This is almost exactly in the middle of the range where, based on cycle analysis, the Industrials were expected to go. At the time it was my assertion that after hitting the low in February 2010 we could expect that the next move upwards would be to the 12,000 level.

The case for the move upward has been bolstered by the fact that, according to Dow Theory, the Industrials and the Transports have exceeded their January 2010 highs based on the closing price of March 18, 2010. However, as the Industrials have exceeded their March 18th closing price the Transports have not followed through so far. This type of divergence between the two indexes is generally considered to be a non-confirmation.

The great Dow Theorist Richard Russell (Dow Theory Letters) has spoken at length about non-confirmations in the indexes and how to interpret the trend of the market in this context. According to Russell:

It is a reasonable practice in areas of non-confirmation or divergence to give precedence to the primary direction. Thus, after a rally in a bear market, when one Average refuses to confirm the other on the upside, the strong presumption is that the next direction of the market will be down. More positive proof is provided if the two Averages then retreat below previous minor decline lows. The converse of this is true in a bull market, and many impressive advances have been “tipped-off” in areas where one Average refused to follow (confirm) the other through an important low point."

Richard Russell, Dow Theory Letters, Issue 102, May 2, 1960, page 2.

We would not be totally satisfied with the bull market indication (within a secular bear market) until the Transportation Index is able to go above 4422.50. However, until that time, we would consider this a bull market that is waiting for a confirmation rather than a potential bear market in the making. While we’re still sticking to a projected Dow Industrials of 12,000, the market has seemed to run out of the explosive bursts on the upside that it once had. Despite this concern, we wouldn’t be surprised if the market truly melted up from the current level.

  • The article on Seeking Alpha titled “Stock Market Projections” is here.
  • For better viewing, the chart in the article is here.

Disclosure: No positions