Critical Dow Theory Announcement – A ‘New Henceforth’ Arises (TPOR, DUSL)

Today’s trade locks in a minimum win of $3.20 on nothing expended.

There’s much to say about Dow Theory, but, unfortunately, now is not the time. For those with the inclination, we’ve written about it in varying degrees of depth HERE, HERE, HERE, HERE and HERE. Google it, if you’re not satisfied with our rather brief talking points – again, entire books have been written and whole blogs dedicated to the proposition that market direction can be determined by the relationship between the Dow Industrials and Transports. It’s worth investigating. We’ve seen enough evidence in our nearly thirty years in the markets to know that it’s worth abiding.

What is it?

In two sentences –

• The two averages – the Industrials and Transports – will move together, generally with the trannies in the lead.
• When they confirm one another (either higher or lower), the market will move for an extended period in that direction.

Again, that’s a back of the napkin sketch – don’t judge us on brevity. The question, of course, is whether it’s tradable. And the answer is both yes and no.

What the…?

No, we’re not trying to be smart-alecs – it’s like this… The primary trend of a Dow move is generally years-long; it’s often referred to as the ‘secular’ trend.  Within that primary move, there may be retracements that last months or longer – even much longer.  So it’s hard to trade the theory on a short-term basis. For the most part, Dow Theory offers the broadest framework for those wishing to trade the market.  It’s not for swing- or day-traders – nor even for we who trade the intermediate trend, though we find it very useful, indeed, in our daily deliberations. It’s rather for those who wish to know if we’re in a primary bull or bear market. That’s it. And that’s information it pays to know. We’re going to map things out for you in more detail below, but first an apology to all those yet-to-subscribe who are now reading. This is big. Too big to just give away to those who haven’t yet paid for it. So, we apologize, good Jews and Noahides. Torah is first, of course.  And after that good health.  Then comes parnassa. Both yours and ours. HERE’s a link to our membership page if you want to have a look at what follows. If not, again, we apologize for the withholding. And consider well: there’s $3.20 on the table NOW for those who initiate the trade today.  And possibly much more. Take a look – There are a few things to take note of –

1. First the rise to the top.  Both the Transports and the Industrials struck new highs last November (circled, in green).  That was an indication that the primary BULL trend was still in force.
2. But at New Year’s, the Industrials marked a new high, while the Transports failed to confirm (circled, in black and green).  Dow Theory students took note of this, as a ‘non-confirmation’ can be the first sign of a break in the primary trend.  It can also be an indication that we just have to be patient – that the confirmation from the second average (in this case, the transports) was just delayed.
3. In any event, the confusion was partly clarified in early March, when the Industrials plunged below their former retracement lows (circled, in red).  That provided additional evidence – though not conclusive – that the primary trend was turning.
4. The final nail in the coffin arrived just six sessions back, when the Transports confirmed with a dive below their former retracement lows (also in red).  That sealed the deal.
5. Since then, we’ve seen a bounce, and a lot of excitement has ensued that the decline has run its course, that we’re in the clear, that it’s time to buy the dip, etc., etc.
6. But all that is very unlikely, unless both averages can rise more than 2500 points, retake their former highs, and prove that this was a false signal, a bear trap that was but a flash-in-the-pan.
7. We don’t see it.

And that means lower prices over the long term – with retracements, of course – and the following no-lose trade to profit from the bear that’s now upon us.

A Jew and His Gold recommends you consider selling one lot of the Direxion Daily Industrials Bull 3X Shares (NYSE:DUSL) for $31.35 and buying a protective DUSL December 16^th 39 CALL for $4.10.  Then, set a synthetic short* on the Direxion Daily Transportation Bull 3X Shares (NYSE:TPOR) using the December 16^th 32 strike for a debit of $4.20 (5.50/9.70).  Purchase a protective TPOR December 16^th 39 CALL for $5.20.  Total credit on the trade is $17.85.

[*Sell the 32 CALL and buy the 32 PUT.]

Rationale: this one really works out wonderfully, as we’ve locked-in a worst-case-scenario profit of $3.20. How so? From our initial credit we took in $17.85.  We stand to lose a maximum $7.65 on the short sale of DUSL (39 – 31.35) and a maximum $7.00 from the synthetic short on TPOR (39 – 32). Take $14.65 (7.65 + 7.00) off the initial $17.85, and you pocket $3.20 – in a worst case scenario!

Does it get any better than that, folks? Does the G-d of Israel provide? Please, good Jews and Noahides, pony up and walk home with your $3.20 mimimum! Maximum gain on the affair is $49.85 (17.85 + 32.00).

You can’t lose!

Many happy returns! Matt McAbby

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