Over the past few weeks I have been watching the DOW and Transportation index closely because it looks and feels like the Dow Theory may play out this year and the stock market could take a 15% haircut.

I think the US stock market is setting up for a sharp selloff. And it will look a lot like the July 2011 correction. If my calculations are correct this will happen in the next 3-9 weeks and we will see a 15% drop from our current levels. Only time will tell, but I have a way to hedge against this with very little downside risk to you.

The Dow Theory Live Example for ETF Portfolio

The daily chart of the SP500 index below shows our current trend analysis with green bars signaling an uptrend, orange being neutral, and red signaling bearish price action. Currently the bars are green and we can expect prices to have an upward bias.

However, the Dow Theory could be in play. When both the Transports (IYT) and the Dow Jones Industrial Average (DIA) cannot make higher highs and start making lower lows, according to the Dow Theory, the broad stock market is topping. The S&P 500 could follow and turn lower. 

We are watching the market closely because they have both made lower highs and lows. This rally could stall in the next couple weeks and if so we expect a 15% correction.
 



 
Take a look at the 2011 Stock Market Crash



The chart above shows how fearful traders have a delayed reaction to moving money from stocks to a mix of risk-off assets.

The choppy market condition during August and September clearly helped in frustrating investors and created more uncertainty. Because we have a Dow Theory setup, our risk levels are clearly defined as to when to enter and exit trades. Subscribers to my ETF newsletter will benefit from this move.

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