CYCLES

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To Find Out, Examine The Basic Principles

Did Dow Theory Fail?

 by Tim W. Wood, CPA

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Here's a look at the chain of events that have taken place since 2002 and what we can learn from them.

AS the Dow Jones industrials topped out in 2000 and plunged nearly 38% into the 2002 low, every indication, according to Dow theory, was that an extended secular bear market had begun. In addition, because of Dow theory phasing along with the normal bull and bear market relationships, indications were that this was the rally separating phase I from phase II of a much longer-term bear market. So what went wrong? I will examine the chain of events that have transpired since the 2002 low and in doing so look at where we are and what we have learned.

BASIC DOW

Let's begin with a basic and nonsubjective principle of Dow theory. According to Dow theory, confirmation of a primary uptrend occurs when both averages better their previous "secondary high point." At the opposite end of the spectrum, confirmation of a primary downtrend occurs when both averages fall below their previous "secondary low point."

When I say "both" averages I'm talking in Dow theory terms, and this refers to the industrials and the transports only. The utilities are not and have never been a part of Dow theory. In fact, the utilities did not even come into existence until 1929, some 33 years after Charles Henry Dow developed the industrials and what was at the time known as the "rails," what later became known as the transports.

...Continued in the April issue of Technical Analysis of STOCKS & COMMODITIES

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Excerpted from an article originally published in the April 2008 issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.

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