Replies to post #3524 on QID - QLD TRENDS (fka )

[JLS]

Dow Theory is used only for identifying primary trend reversals -- Bear and Bull markets -- and not for secondary trends, such as corrections. What we had last summer was a correction in the S&P and Dow. Keep in mind that during C.H. Dow's days there were only the Industrials and Transportation indexes. There was not a Utilities index, and there wasn’t an S&P and Nasdaq, either.

The problem with the definitions of primary and secondary trends is that the Nasdaq is a large market in itself and it has a high beta compared to the S&P. Because of the high beta of the Naz, last summer's correction in the other markets was a virtual Bear for the Naz.

I would like to introduce a new thought for rumination. What appears to be forming (or perhaps already two-thirds formed) after the quick advance seen in the market after last August's low is a modified (or sloppy) head-and-shoulders pattern. Modified or sloppy because of year-end trading effects, in particular the typical low volume during the long holiday season. Could this portend a correction this summer in the Dow and S&P, and a summer Bear for the Naz? I think so, but not because of this pattern.

[JLS]

Regarding your "Dow Theory Bull Market confirmation" question: the Bull market we are currently in was confirmed in March of 2003. By definition, new primary market trends are confirmed at the beginning of their trends, not somewhere in the middle or at the ends.

I had an ongoing argument with some guys several months ago who kept insisting that the current Bull Market started in October of 2002, because that was the market low. One could say that was the beginning of the Bull Market, but only after the fact and not according to Dow Theory. Dow was smart enough to know that you will never know the low of a market until it has been confirmed -- that indeed, without confirmation, the next low may be even lower. If the next low is lower than the prior low, then all that has happened is a secondary trend change, but the primary trend is still that of a Bear market. One valid criticism of Dow Theory is that it is always "too late".

Confirmation of a new Bull market does not have to be in the form of a double bottom. A single bottom would do if there were also extraordinary high volume/price action. For most people I know who understand Dow Theory, that didn't happen in October. Another pattern which could be used to call a bottom is an inverse head-and-shoulders.