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New Dow Idea Confirmed Promote Sign

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OK, so we all know the market goes down. And, save for a mid-summer bear market rally, the S&P 500 and Nasdaq have been in pretty constant downtrends.

Final week, I highlighted the extreme bearish readings in the AAII Survey (it is price noting that this week NAAIM Exposure Index additionally reached its lowest degree since March 2020) and we have additionally coated the weakening breadth situations. Immediately, I wished to share the latest verify on the “confirmed bearish market” guidelines. The New Dow Idea registered its first promote sign since June, confirming a broad market decline.

So what’s the new Dow Idea?

It begins with Charles H. Dow, who really laid the foundations for contemporary technical evaluation. He pioneered the idea of market indexes and created instruments and measures which have advanced into the follow of trend-following.


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One in every of his core ideas was to measure the energy of the market by contemplating two teams of shares: the Industrials (the producers of products) and the Railroads (the distributors of products). The concept was that if these two predominant components of the financial system had been in good condition, then the market was sturdy, but when one facet was trending greater whereas the opposite index didn’t verify that pattern, then one thing was damaged.

The Railroad Index finally grew to become the Transportation Index, and that leads us to the chart of what we name Conventional Dow Idea.

In final weekend’s report back to my premium subscribers, we talked concerning the Dow Idea promote sign, which was confirmed when each the Dow Industrials and Dow Transports made a brand new swing low. However whereas these indexes each made new lows final week (together with many particular person shares, I’d add), the S&P 500 and Nasdaq Composite had not accomplished so. This brings as much as the New Dow Idea, which I might counsel is a modernized model of what Charles Dow was actually attempting to seize.

Right here we’re reviewing the patterns for the “previous financial system” shares (S&P 500) vs. the “new financial system” shares (Nasdaq Composite). If each of those verify new highs, as they did in April 2021, then the market uptrend is confirmed. If one makes a brand new excessive however the different doesn’t (see January 2022!) then it’s thought-about a non-confirmation and a possible reversal.

What can this chart inform us of the present market atmosphere? Nicely, as of this Friday’s shut, each the S&P 500 and the Nasdaq have made a brand new swing low, as they each undercut their low from June 2022. Meaning we now have a New Dow Idea promote sign.

However did not we all know the market was already happening? Completely. And which means you’ll most probably have continued promote alerts, as we did in January and Might and June. Each time these indexes each make a brand new low, it confirms the path of the general market pattern.

What would a market backside possible appear to be, utilizing this chart? Ideally, there could be a bearish non-confirmation on the backside, that means one of many indexes makes a brand new low whereas the opposite makes the next low. It doesn’t all the time occur, to make sure, however when it does happen, it tends to be an excellent sign of a possible inflection level.

Probably the most fundamental method to make use of this indicator is to search for them each to make a brand new swing excessive. Which they did again in August, simply earlier than each indexes discovered resistance on the 200-day shifting common. We highlighted this sign again in August, main us to very a lot contemplate the prospects of upper costs forward.

In the long run, the market pattern was as soon as once more outlined this week, as a brand new promote sign indicated that, for the foreseeable future, the pattern is down. Which signifies that, till we get a sound purchase sign, the trail of least resistance stays down.

RR#6,

Dave

P.S. Able to improve your funding course of? Take a look at my YouTube channel!


David Keller, CMT

Chief Market Strategist

StockCharts.com


Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your individual private and monetary state of affairs, or with out consulting a monetary skilled.

The writer doesn’t have a place in talked about securities on the time of publication.   Any opinions expressed herein are solely these of the writer, and don’t in any method characterize the views or opinions of some other particular person or entity.

David Keller

In regards to the writer:
, CMT is Chief Market Strategist at StockCharts.com, the place he helps traders decrease behavioral biases by means of technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness strategies to investor choice making in his weblog, The Aware Investor.

David can also be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency targeted on managing threat by means of market consciousness. He combines the strengths of technical evaluation, behavioral finance, and information visualization to determine funding alternatives and enrich relationships between advisors and purchasers.
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