Posted on October 19, 2020
Dow Theory doesn’t get a lot of attention these days.
At one time it was the only “technical” game in town.
But that was nearly a century ago.
In any event, Dow Theory still has its uses, and we monitor it – as we do nearly all approaches to the investment game – in order to glean every possible edge available.
That said, Dow Theory developments over the last few days are proving interesting.
Take a look here at the Transportation Average for the last three years –
As you can see, the index just posted new highs – its first since September of 2018.
According to the theory, the primary trend of the market will be UP if and when the Dow Industrials confirm the Transport’s highs with a high of their own.
But that hasn’t happened.
The Industrials enjoyed several bumps higher since their September 2018 crest, with all-time markers set again this February at 29,568.
But thereafter, the Batflu struck, and both indices sunk to new major lows.
Which means we’re now in a period of ‘Non-Confirmation’.
More on that in a moment.
But first, take a peek at the Industrials –
The Industrials have not been able to squeeze out new highs of late, and that means the next intermediate move will tell the tale.
Either way, though, a resolution to the current impasse has to materialize.
And we’re playing it like this –
A Jew and His Money recommends you sell the IYT March 19th 215/220 CALL spread for $1.40 (11.50/10.10) and use the funds against the purchase of the DIA 290/295 CALL spread for $3.20 (13.55/10.35). Total debit on the trade is $1.80.
Rationale: we believe the Dow’s non-confirmation situation will resolve directly after the election – or, at the very least, within a few months of it (depending upon the degree and duration of Washington shenanigans).
The chaos that we’re expecting will either provide sure cover for a steep rise in the indices, or will trouble the system to its core, resulting in a meltdown.
We see the overbought RSI read on the Transports as a sign that they’re unlikely to push higher in the near term.
We therefore expect better relative strength from the Industrials vis-à-vis the Trannies.
The pairing attempts to capitalize on that premise by going long an Industrials CALL spread and short a Tranny CALL spread.
Maximum gain on the trade is $5.00.
Maximum loss is $6.80, and would occur if the two indices diverged significantly
(Transports higher, Industrials lower).
With kind regards,
Hugh L. O’Haynew