Crunch Time For Dow Theory

It’s crunch time for Dow Theory. We’re still in a long term bull market, but only about 4% away from a bear market signal. If the August closing low of 15666 on the Dow Jones Industrial Average (DJIA) is broken to the downside we’ll have a confirmed long term down trend underway. Currently, DJIA has retraced about 65% of the rally out of the August low. This is about as far as a “normal” secondary low carries. Any further lows in the market will increase the odds that 15666 will be broken. So what we really want to see (if you’re bullish long term) is a resumption of the long term up trend soon (and without much more price damage).

So if Dow Theory signals a bear market what does that mean for portfolio management? For me, it means that I’ll be more willing to wait for a 15% dip in the longs before rebalancing the longs and shorts. Conversely, I’ll be quicker to sell profit from the longs and firm up the shorts on rallies. For trading, I’d be looking for shorting opportunities rather than dip buying opportunities. But, as always I’ll wait until I get a real signal before changing my opinion.