I don't like sharing stuff I see in EWI's updates directly (and always give credit if I do...) because they work their asses off at what they do and they should be compensated for it. Their price for a basic subscription of STU and EWFF is something like $60/month which, even if somewhat high level and not provided daily, are well worth that price if you have any real money in the markets. So again I suggest that anyone who is not versed in doing their own EW stuff to subscribe to at least their STU (Short Term Update). Keep in mind that I always create my own charts first and then use EWI as a sounding board only. They have been wrong more than once before (haven't we all?). In fact, people who don't understand the EW model concept of triggers are all over the web taking cheap shots at them. IF you read these things then consider that wave the most important aspect of wave modeling is that it will tell you quickly when you are wrong. Anyone who does take the EWI service will also know that my counts are often far more detailed than EWIs. I will try to call exact bottoms and they can't do that with a service that is only delivered 3x per week. I very often catch huge percentage gains that they only note after the horse has left the barn, especially with these hyper leveraged, fast moving ETFs.
Having plugged them like that I will repeat one thing that I just read there on Monday which, while not rocket science or novel in any way, could still turn out to be an an important indicator going forward based on Dow Theory. The particular aspect that they mentioned was the potential for a nonconfirmation signal. You can read up on Dow Theory on Wiki where the basics of confirmation are covered in item 4. If you think about it, it makes sense. First products have to be manufactured and then transported for sale. If both are going up then you have a bull market economy. But manufacturing (the "industrials") is the leading indicator because you have to make before you can transport. So if the makers cannot reach a new high then that should signal a problem. The fact that transporters put in a new high only shows the lagging nature of transportation to production in the manufacturing and consumption cycle. The transporters are still clearing the pipeline of all the inventory already created by the manufacturers. If the manufacturers then hit a brick wall, the transports will certainly follow.
So the insight provided by EWI was simply that if the transports make a new high and it is not confirmed by the industrials and then both subsequently make a new low then that would be a confirmed Dow Theory sell signal. In that case, every single trading computer on the planet will cough up shares for sale at whatever the market will "bear" (no pun intended but I still think it's funny). EWI pointed this out as a possibility in its Monday issue when transports had not yet made a new high. But as you can see from the chart below, today they did make a new high while the DJIA has not yet done so. I very, very strongly believe, based on the wave count and other technical data, that the DJIA will NOT be able to make a new high. IF it does then all bets are off and we have to reset our thinking. So don't just cast your mind a certain way and let that be that. You have to roll with the punches. But here I think the market, Yellen, the wave count, the recent breakdown of major important support lines going all the way back to Y2K are singing a chorus of funeral music for this old bull.
I read somewhere once that markets always test a new fed chief within 6 months of their appointment. First you have the honeymoon phase but the test always comes due. The markets are about to test Yellen in a big way and I think the disposible fed chairman will fail. I think she will prove that she is confused and clueless but it will not be because she is stupid. She is in fact not stupid at all. But she will suffer from what I have long predicted will happen during the end game of the debt Ponzi: her models will fail her. She will step on the gas and find it connected to the brakes. She will zig when she should have zagged. It's really not her fault. Bernanke or Greenspan would fare no better than bat face Yellen under the same circumstances. Their only skill over her is that they know that the end of the con is near and I don't think she has really internalized that yet. She thinks she is going to manage a wind down as if such a thing is possible. It's not. Pyramid schemes to not have soft landings. They crash with the sound of breaking glass. Yellen's test begins tomorrow IMO.
Riddle me this: how can a Victorian theory like Dow's be taken seriously in a more globalized economy over a century later? Were it extended to include stock indexes of global companies it might still have some leg, but it's not. The DJIA and DJTA are still made up by American companies, most with no global presence. Moreover, neither the DJIA nor the DJTA quite reflect industrial or transportation companies, when the former has banking and insurance and the latter, rental car and passenger companies in their make up.
ReplyDeleteBesides, I believe that there's also a fundamental mistake in the assumption that DJTA lags DJIA. Don't industries need raw materials before production to be transported? Surely finished goods are less dense, requiring more volume in train cars or containers per tonnage, than raw materials. Yet, it could be argued that an increase in the DJTA could be due to more raw materials leading to an increase in the DJIA.
Perhaps the Dow Theory doesn't have to mean anything with a factual foundation. People care about it and will read in it whatever its tea leaves tell, according to the general mood. And this is why it could be still relevant today, but to Elliott Waves Surfers (EWS) only.
Nice question. But since it is all one market I don't think we need multiple major indicators. If the US catches a cold, the ROW catches Ebola. We are the debt based consumers of the world. As we go, the world goes. The data is backing this up. The French export machine hit the bricks months ago and now the German export numbers are showing significant signs of weakness.
ReplyDeletehttp://www.thelocal.de/20141029/german-exports-to-russia-collapse-by-a-quarter-ukraine
I didn't create Dow Theory, I only interpret it. But I suspect it is built into the algorithms of millions of trading computers. The old ways are the old ways because they worked for a long time. I have no doubt that a Dow Theory sell signal will be respected by the markets, most of which use legacy TA and not EW AFAIKT.