Systems
have been used by traders for at least the past hundred years. Early
systems were not automated but some were just as detailed as anything a
trader could develop today. One of the best-known systems from the late
1800s is the Dow Theory [1]. Developed by Charles Dow, this trading system buys when both the Dow Jones Industrial Average (DJIA) [2] and the Dow Jones Transportation Average (DJTA) [3] are both at new short-term highs. The theory sells when both indexes break to new lows.
Dow Theory is based on the concept that the economy [4] and stock price movements are related. When the economy is growing, manufacturers should be profitable and the DJIA should be moving higher. The transports will [5] be bullish [6] when manufacturers are accepting deliveries of raw materials and shipping finished products to market [7].
In order to automate the system, precise definitions of high and low need to be used. In The Encyclopedia of Technical Market Indicators [8], Robert Colby, CMT, showed that a buy signal should be taken when the DJIA reaches a new 9-day high and the DJTA [3] sets a new 39-day high. According to test results shown in the book, this strategy outperformed a buy-and-hold [9] investment [10] by 5,637% during the 20th century.
With ETFs [11], it is easy to spot [12] new signals and trade the Dow Theory. SPDR [13] Dow Jones Industrial Average (NYSE: DIA [14]) turned bullish on Nov. 23 using this rule, and iShares [15] Dow Jones Transportation Average (NYSE: IYT [16]) confirmed the uptrend on Dec. 18. Using the rules defined by Colby, this trade would be closed when DIA falls to a new 22-day low and IYT falls to a new 166-day low.
While Dow Theory says we could see a bull market [17], the chart of IYT is less clear. In addition to breaking out to a new high, IYT is above its 26-week moving average [18].
The chart below also shows the Momentum of Comparative Strength (MoCS) indicator, which converts relative strength [19] (RS) to a MACD-style histogram. That indicator juts signaled a buy. After this signal, IYT has been up one month later 73% of the time.
On the negative side, RS is still below 70. Once that indicator moves above 80, the bullish breakout would be confirmed.
It is very rare to have all indicators in agreement, but RS is one of
the most reliable indicators in the market, and until it is bullish,
meaning it is above 80, traders should remain cautious. While this may
seem like an ambiguous market call [20], it is actually reflecting a market that is at a potential turning point.
Major market averages are almost unchanged over the past nine months and are near the levels where they peaked in 2007. A significant price move is likely to begin soon and the RS of IYT could be the best indicator to watch for clues as to whether that move will be up or down.
Action to take: Watch for RS in IYT to confirm a bull market for stocks or signal a breakdown in the market.
In addition to the Dow Theory, I follow a number of other systems. My favorite is the 26-week rate of change [21] (ROC [21]) system that has been beating the market since it was first detailed at the end of May. This system doesn't give many trade signals because it tends to hold winners for several months.
There are no changes in the portfolio this week and it continues to hold ETFs in three asset [22] classes:
Dow Theory is based on the concept that the economy [4] and stock price movements are related. When the economy is growing, manufacturers should be profitable and the DJIA should be moving higher. The transports will [5] be bullish [6] when manufacturers are accepting deliveries of raw materials and shipping finished products to market [7].
In order to automate the system, precise definitions of high and low need to be used. In The Encyclopedia of Technical Market Indicators [8], Robert Colby, CMT, showed that a buy signal should be taken when the DJIA reaches a new 9-day high and the DJTA [3] sets a new 39-day high. According to test results shown in the book, this strategy outperformed a buy-and-hold [9] investment [10] by 5,637% during the 20th century.
With ETFs [11], it is easy to spot [12] new signals and trade the Dow Theory. SPDR [13] Dow Jones Industrial Average (NYSE: DIA [14]) turned bullish on Nov. 23 using this rule, and iShares [15] Dow Jones Transportation Average (NYSE: IYT [16]) confirmed the uptrend on Dec. 18. Using the rules defined by Colby, this trade would be closed when DIA falls to a new 22-day low and IYT falls to a new 166-day low.
While Dow Theory says we could see a bull market [17], the chart of IYT is less clear. In addition to breaking out to a new high, IYT is above its 26-week moving average [18].
The chart below also shows the Momentum of Comparative Strength (MoCS) indicator, which converts relative strength [19] (RS) to a MACD-style histogram. That indicator juts signaled a buy. After this signal, IYT has been up one month later 73% of the time.
On the negative side, RS is still below 70. Once that indicator moves above 80, the bullish breakout would be confirmed.
Major market averages are almost unchanged over the past nine months and are near the levels where they peaked in 2007. A significant price move is likely to begin soon and the RS of IYT could be the best indicator to watch for clues as to whether that move will be up or down.
Action to take: Watch for RS in IYT to confirm a bull market for stocks or signal a breakdown in the market.
In addition to the Dow Theory, I follow a number of other systems. My favorite is the 26-week rate of change [21] (ROC [21]) system that has been beating the market since it was first detailed at the end of May. This system doesn't give many trade signals because it tends to hold winners for several months.
There are no changes in the portfolio this week and it continues to hold ETFs in three asset [22] classes:
No comments:
Post a Comment