Market Thoughts: Ambiguity Amok, The Fed Dilemma, and Reality -vs- Qe.

by Rasool Cunningham
Trading Editor
Philadelphia, PA (DYDD)

Recently, I expressed my confusion on these markets in a twitter thought train that I won’t dig up now only to say the same thing later in this post. This is an attempt to clear up some of that confusion by organizing some thoughts.

But first, the markets: The efficient market hypothesis has been proven wrong on the margins. Sometimes everything isn’t reflected in the market’s price at any given time. Sometimes the markets are distorted by outside forces. Realizing when these forces are at work, and what part of the process you are in at any given time is an edge for the studious market participant.

Currently we have QE. It has inflated asset prices to record levels. Not businesses or consumers around the world buying a record level of things, but a flooding of bank reserves that banks use to make loans and create money. Yes, banks create money when they make loans. U.S. stock margin debt is at $500 billion because banks create money.

Not because people have been so successful in their endeavors, accumulated lots of money, put it in banks; swelling bank reserves leading them to make more loans. But by The Fed creating reserves through buying bonds from banks. This means you can’t believe anything you see right now.

It’s all distorted. It’s like the Shanghai composite on June 3rd 2015. On the way to new highs no one should have believed:


We need to see what managers can do in a normal setting. Normal interest rates, normal competition for capital, normal market dynamics. What the Fed means by “Normalization.”

Who can run their businesses (their ship) when the waters get rough?

This is what we need to know before we can make any determination as to what the future looks like for these public companies that make up the market of stocks. (Saw that in a headline the other day. “it’s a market of stocks, not a stock market.” smh.) There are about ten or eleven public companies that you must buy if you see blood in streets. Outside of them, we really need to see who’s a good manager. Who’s innovating enough to withstand the down turns that must happen in any business or industry?

The oil managers are being tested now. The best of them will thrive in this environment. Money will flow to those companies. Seeing who can still produce profits when market conditions aren’t at their most favorable is part of evaluating whether a company is a great investment or not.

The best leaders relish these moments. They know these are really just opportunities to win again. Market share is up for grabs, whole companies are up for grabs. I saw a tweet that relates to this:


It’s cliche, but true. Good leaders feel this way. These are the companies we want to own. Until we get back to a normal monetary world we won’t get the answers to these questions. This is where some of the confusion comes from. Some people are bearish because they can’t answer this question, not because they hate stocks or the markets. Others can’t understand why anyone would be bearish on a market that’s up 300% over the past six years. You get different perspectives clashing in the markets. The other part of the confusion is the mixed messages coming out of the Fed, BoE, ECB, BoJ and all the other alphabet central planners. This is leading to mixed messages going into / coming out of markets.

Ambiguity Amok.

The Fed meant to be more transparent when it started writing longer more detailed FOMC statements. They’ve only become more opaque. Secrecy is key to monetary policy because people will front run you. The Dollar is up before the Fed has hiked. Now we’re getting the price action and market effect we would have gotten if the Fed had hiked; everywhere except the stock market.

The drop in gold would signal a major change in the way the Fed has been conducting monetary policy. It says the Fed is hiking already. There are more Dollars in the world than ever before and all of them are strong. So the Fed has a dilemma: How do you reach your inflation targets with most prices dropping? How do you hike rates with the dollar surging? How do you not hike rates with job growth as high as it’s been in modern times? If you don’t hike rates soon, how will the reversal of a strong dollar play out?

I can go on and on with these. The Fed is dammed if it does and damned if she doesn’t. For all the reasons mentioned above: the Fed must get the market back to normal. Think of it like a patient under anesthesia for too long. The effects can be deadly. If that Dollar fall is triggered by bad U.S. econ data the Fed could be faced with a situation where they can’t raise rates whether their inflation target is hit or not. Central bankers don’t like that type of shit. Rigidity of monetary policy is not a good thing.

One can’t really know what the Fed is watching right now.  Best guesses say they’re watching inflation. But if that’s the case, why haven’t they openly said they wouldn’t be hiking interest rates this year at all because commodity prices have gone to shit in a hammock? Why keep saying you think the data will be good enough to warrant a rate hike this year? Even as the whole world sees prices falling? This is where the Fed induced confusion comes in. Half the market doesn’t believe the Fed can raise rates.

Technology has lots to do with the price dynamics of global commodities. Even gold has Bitcoin to compete with. The Dollar rise also has a lot to do with those dynamics. The Fed keeps wording their statements to reflect a rate hike this year because they can’t be seen as rigid in their policy.

That’s a bad way to make your monetary policy, though. Even if it seems necessary, it’s not good to make these types of decisions based on how it will look. If the market loses faith in the Fed’s ability to hike, the reversal in the Dollar could be strong enough to push inflation up enough to hit the Fed’s target right at the exact time that U.S. econ data starts turning down. Fed Chair Yellen testified to Congress that she wouldn’t hike rates if she thought it would tip us into recession. But what if that’s her only choice?

What if by being so transparent the Fed has given itself only two options: Low rates or recession? The market knows transitioning from zero interest rates is a tricky, so, once that process begins the market (and business managers) need to salvage as much cash in realized gains as possible; wait out the transition, and have better chances at catching good deals on good companies. Companies that have proven they provide products and services people need, not just want.

There’s been lots of debate about bubbles here or there. Now we have to add another asset to the bubble talk: Is the Dollar now in a bubble?

We won’t know what’s in a bubble until the Fed normalizes (or doesn’t normalize) interest rates. But if the Fed depends on good econ data and doesn’t get it, it can’t hike. This means the Dollar is too strong. That should be good for the U.S economy, but the lag between when the Dollar falls and when its fall has a positive effect on the U.S. economy is long enough to give a central banker vertigo. They will be out of step in the beginning. They would truly be out of ammunition. Regular ammunition that is, they could go nuclear. Qe5 would be nuclear. It would also be to the detriment of Japan and Europe, and for different reasons, the U.K.. The IMF has asked the Fed not to hike this year, wonder what they would think of another Qe?

I’m still confused on the markets. I still can’t see a reason to buy or sell stocks here. The Bull case is: The Fed can’t hike, so the punch bowl is still full. That’s a bad reason to buy stocks. The bearish case is: none of this is real, and it will end badly. That’s a bad reason to sell  stocks. Even if we know it will end badly, we can’t be sure when it will end. So for now: I’m still neutral on stocks. As for the Dollar I’m leaning towards neutral there also. Looking for chop in the Dollar index. Each major Dollar Forex pair is a blog post of its own, and this post is already too long. So…

I’ll end it with thanks for reading, I hope it helps, and good luck this week traders!

Ambarella, Inc. ($AMBA) Charts & Fundies..

by Rasool Cunningham
Trading Editor
Philadelphia, PA (DYDD)

First off, I do not currently own any $AMBA shares, nor am I short the stock, nor do I have any options to buy or sell this stock.

Ambarella , Inc is a semiconductor chip manufacturer. They make  a chip that process audio and video using just the one chip. This saves space and energy. Their chips also enable better HD video than their competitors. This allows cameras like GoPro to capture good HD video using a relatively small camera. With everything from police cams, to cars, to garden variety surveillance cameras needing to get better quality video, Ambarella , Inc has many potential customers and repeat customers. There’s no wonder $AMBA has been one of 2015’s hottest stocks. The heat from the run up in the stock, along with recent market turmoil (Greece! China!) leads some to wonder if it’s time to take some chips off the Ambarella table. To answer this question, let’s look at some $AMBA fundamentals, and then look at the stock charts.

When you look at $AMBA’s fundies you can’t help but be impressed. Gross margin 64.2%, Operating margin 26.7%, ROE 31%, ROA 26%, earnings per share this year 84.7%, sales quarter over quarter 73.6%, and earnings per share quarter over quarter 229%! The problem with these numbers are: we don’t know how much of them are due to Ambarella’s great products, or easy money (QE). I say that because QE pulls demand from the future into the present. When you look at $AMBA’s fundies the future numbers don’t look nearly as well as past / present numbers. Earning per share (EPS) for the next five years are projected to come in at 20%.  EPS projections for next year are at 18.5%. Begs the question: has all or most of $AMBA’s product demand been pulled from the future into the present and past? I don’t know, but one has to ask and wonder.

All of $AMBA’s fundies aren’t great. One that jumps out at me is the P/E ratio which stands at 51.9! Forward P/E is only 27.68. This means that while $AMBA’s earnings may not fall off a cliff, what people are willing to pay for those earnings could fall a lot. Another red flag is the recent insider selling. People sell for too many reasons for insider selling to carry too much weight in buy and sell decisions, but they should always be noted because: the people who know the company best are the insiders. Over the past twelve months there have been four insider buys and eighty-three sells. I don’t like that. Over the past three months there have been no buys and twelve sells. Again, I do not like that. While it can’t hold a lot of weight, it is a red flag and shouldn’t be ignored.

Last fundie red flag is the PEG ratio, or Price to Earnings To growth ratio. A broad rule of thumb is a PEG ratio of 1 or under means a stock may be undervalued. Above one, says a stock may be over valued. $AMBA’s PEG ratio is 2.6! PEG ratios vary from industry to industry, sector to sector; you have to look at the whole sector to discern whether a stock’s PEG ratio is high, or just normal for its sector. Out of forty-three stocks in its sector, only nine have a PEG ratio over 2.0. This says that $AMBA’s is high. This means it looks like $AMBA’s earnings growth, or price to earnings multiple expansion is at or near a peak. Ambarella just did a small acquisition last week which could boost earnings, but as of right now it doesn’t look great on future earnings.

Now, the charts. 

Ambarella is up 99.5% year to date. That’s not a typo, that’s a crazy gain for a company this large. Here’s how it looks on the daily chart:




An almost 100% move in the fist six months of the year is enough to make anyone feel like taking some chips off the table (do you see what I keep doing here? Chips? Chip maker? Never mind.)  But the technicals aren’t screaming sell at the moment. The time to sell was on June 19th when the stock went down a little over 6%. If you missed that signal, on June 22 the stock opened for trading down 5%, and added another 16% to the drop by the end of the day!  Wow, that’s brutal price action. What was even more brutal was volume on which this price action happened! Nine million shares traded on June 19, and twenty-five million shares traded on June 22! To put this into perspective the stock has an average trading volume of 2.9 million shares! All these exclamation marks are warranted. These were monster sell days. So strong that all the selling may be done for now. I drew a Fibonacci retracement on the weekly chart, and transferred it onto the daily chart, to give us an idea if there may be more selling to come. Here’s how it looks on the daily chart:


This makes things a lot more simpler. A close below 96.08 would signal a sell for me. (again, I do not currently own any $AMBA shares, nor am I short the stock.) I didn’t go directly to the charts and say this, because I think most chart signals are backed up by fundamentals. $AMBA’s current fundies suggest that new selling would be backed up by fundamentals. I have a rule where I sell any stock that drops 5% – 6%, so I would have been out of this by now. But, Under normal circumstances (Greece! China!) I wouldn’t be surprised if this stock went higher from here. Here’s where I would sell if price went higher:


I drew a resistance Fib from the bottom, or close of June 22 to the top, or open of June 19. If price went higher from here I would move my stop above every fib level price got above. The Greek crisis makes this a different time for analyzing stocks. We could see indiscriminate selling as stock holders sell to front run anyone else who may need to sell. At a time like this you may not be able to wait for a close without getting hosed, so, selling on a close below $96.08 isn’t practical at times of stress. In this case, any price trade below the June 22 low of $93.06 would signal a sell. This isn’t financial advice, just a run down of what I think about $AMBA and how I would probably trade it. I hope this is helpful, if it is helpful thank @Kem312 for asking me to look at this stock.. Thanks for reading, and good luck this week traders!

Don’t Kick the Dog. Posted on June 27, 2015 #ag #farming, #farmers

This is a re-post from  sellis1994’s Blog


Don’t Kick the Dog

Sitting here on a rainy Saturday morning feeling blessed for having a good start to the growing season. Reading about the destruction of yield in the Midwest I felt like I could add a few lessons I have learned from living through a drought every 3-4 years of my farming life.

First: Breath… Easier said then done, but realize: you have no control, you can’t make it stop raining. Or start raining, so freaking out won’t help you get through it.  You can’t kick your dog and snap at your wife but once or twice.  Then they’ll be like:  I don’t need this crap…..and see whether the neighbor is in a good mood.   Breathe and relax.  A clear mind serves you more than anger ever will.

Second:  Calculate

Get out the pencil or the calculator… You must figure how much income you can reasonably generate with crops + insurance.   This is what you will have, more or less.. And this year for some of you it is less.. But know what your pie is so you can figure the best way to slice it.  If you have your aph, your %coverage, and price; then you have a hard figure as minimum income..this number is important.   Then: add up your expenses. All of them. Even beer and ice cream sandwiches.  You got to know where you stand…   Some of you have last years crop and will get by this year. Still you need to know the deficit you are creating to know that it will smack your ass next spring.
So now you have a rough idea of where and how much you are short…


Yep, somebody won’t get paid on time. Don’t let that be the landlord….they MUST be paid, without land no one can do this thing that we do.

Then, after they are straight; figure out who is due when, and who can be worked with. If you have a bill due in November that needs you to wait for crop insurance check, don’t make them call you in December… Go to them in September and say: This is the deal, I will pay you. It will just be when the paperwork is straight..  This helps them breathe.  And not kick their dog.  And another thing:  Pay something!!!

You have an 80k bill?  Send 5k. Someone seeing you trying will work with you better than someone assuming they will get stiffed and assume you are  paying for pretty green equipment.

Stop Digging

Don’t buy anything else that isn’t a must have.  Or can generate income.. Fix the combine one more year. Call shop and rebuild the planter..  Just stop living like lotto queens that we were in 2011-12-13.  Everything can’t be new…  (Note to self. “Read this daily”)

If all this doesn’t work.  Sell something

Excess equipment.   Excess vehicles. A lot on the corner…

“Well I would never sell a lot of my farm.  It looks tacky…..”

Well sir. Your 160 acre block that has 10 acres carved off the far corner looks less tacky then the auction for the whole 160 if you don’t pay bills…

Some of you know more about this then I.  Some of you have old money and can handle a hiccup. But I suspect many have lived life, paid bills, and not seen a year with poor crops and poor prices happening at the same time. Then maybe you get one idea (from this post) that helps you get through this with your sanity, dog and wife intact…..not necessarily in that order.


Corn Levels and Analysis.. (for my farmer gang #fg) $ZC_f #ag

by Rasool Cunningham
Trading Editor
Philadelphia, PA (DYDD)

I know nothing of the seasonal swings of corn growing, nor do I know how this year’s crop is turning out. I have farmer friends who are in the thick of things; any questions of that nature should be directed to them. He’s a cool dude, if you ask him right he’ll probably tell you whatever he knows of it, or he’ll ask someone he knows that may know what you want to know.

I’m just looking at the technicals of what just happened with the price of corn today! I don’t even know if it went limit up, as I was not watching this market. It doesn’t even matter. The price action today was signaling a breakout. Here’s how $ZC_f (corn futures contract zcn5) looks on a daily chart:


That’s what strong price action looks like. Notice the close on the highs! I drew a Fib retracement I think is useful; here that is:


$387 looks like a target. There’s no need to chase this if you’re not already in it. I don’t think it will run far away from $380 without a rest in between. That rest could be brief, and it could come fast. The $372 area looks like a good place to start nibbling on the long side. But the best stop area looks to be below $361, though, so you want to buy as close to $361.80 as possible.  Taking into account that $387 is a first target one would want the lowest price without it looking like we’re catching a falling knife. My stop would need to be in the high$350’s, so I would want an average price in the $360’s.

That’s the best cased scenario. If price holds $372 a buy in the mid $370’s could make sense. I’ll be tweeting about the action later today so check me out here if you want, or have any questions. It’s impossible to say what the future holds for prices in any fairly free market. What we do know is a weak dollar is need for corn’s price to go straight up from here. Don’t see a free fall in the dollar so far, so.. We gotta expect corn’s price to rest a little.

Corn is priced in dollars so there is always a push-pull effect going on between the price (value)  of corn and the value (price) of the dollar. Yet, there are special situations where both can go up at the same time. This Greece situation is a great example pointing out how inflation can be exported or imported. A #Grexit could be driving the price of corn and grains up by the thought of them printing a lot of Drachmas for food. Or maybe people there are hiding their money here in hard assets on a market they know (or are fairly sure) will be liquid.

I’m a speculator, so I speculate…

For all I know corn crops could be getting counted right now and coming up short of expectations. I’ll be asking my farmer friends this same question. Ask your farmer friends. If you don’t have any farmer friends, make some. From my experience, which is forty years of living in the north east part of America where there are a lot of farms and farmers, and also attended many, many  farmers markets (ha!) Farmers for the most part, are pretty cool.

Like I said, I have farmer friends on twitter who teach me stuff all the time.

I’ll have to add to this post as price progresses, but right now it looks like waiting for a price rest is the best course of action. Buying weakness under $380 down as close to $361 as possible with a first target at $387, second target of $396.76, and final target $411.75 gives us a good risk reward profile if our stop is around $358. As I end this post price is slumping a little. No need to rush or chase, but judging from the price action today the direction seems higher from here.  I hope this post and these are helpful! Thanks for reading!

Happy hunting traders! And make a farmer friend!

Using Fib Retracements/ Extensions To get Targets, and Trend Lines To Trade $USDCAD…

by Rasool Cunningham
Trading Editor
Philadelphia, PA (DYDD)

Fibonacci extensions on smaller time frames are a great way to come up with price targets and places to put stops. In combination with trend line analysis and any other technical analysis you use, these tools are powerful. I recently tweeted about a trend line on a short term USD/CAD chart:


That trend line lead to a good trade if you knew when to take profits. Price broke above the trend line signaling a buy. The sell signal is a different story. I tweet a lot of info on trade entries, but I don’t share a lot about the process of coming up with good exits, or targets. I feel like that’s my bread and butter. I feel like if I share that I should get compensated for the hard lessons it took to learn and refine my strategy. But fuck that, because some times I feel like I’m getting people into trades but not getting them out. I feel like most of my twitter followers are traders, so they know when to exit. They (you!) really should have a system in place as I’m never giving investment advice in my tweeting or writing. But we know people do foolish things when they begin trading. We all have done stupid things learning to trade.

So here’s my Fib target system in a nut shell; it’s very simple. Here’s USD/CAD on an hourly chart with the trend line and price breakout:


All I did was draw a Fib retracement on the most recent action that the trend line put a halt to. This is how you draw a Fib retracement when looking for price support. Here’s how it looks on the chart:


Let’s zoom in a little so you can see my start and ending points clearer:


I started at the top and went from right to left ending at the bottom. Notice how I didn’t end at the lows. Let’s zoom in more because this is important:


You must use important, recent price action to anchor your Fibonacci retracements because that’s where price has decided to explode. I usually like to use a closes or opens instead of a wick, or high spike on a bar. The starting point is just as important, so let’s look closer at that now:


Notice I did use the high point or wick in the bar I used for my starting point. Sometimes price moves in a way where it’s better to use the high instead of the open or close. Usually, if a lot of bar spikes (marked by dots above) touch the line, you can use the high from the last up bar or down bar, depending on which direction the move is headed that you’re measuring. But you have to use the last bar in the move  most times. The bar I used was the last bar that prices went up strongly.

Ok, we have the Fib drawn, now what? We wait for a price break out above our trend line. Price did just that not long after my tweet. It ran up all night and spiked out on a 161.8% extension line of our Fib! Here’s how it looked on the chart:


A take profit stop like 10 pips below that 161.8% Fib at 1.23805 would have been a perfect trade if you bought the breakout around 1.22903.

Using Fibs and trend lines to trade price can be a powerful tool in a traders tool box. Price is tricky, though. It doesn’t always happen like this. On smaller time frames it seems to work better. If you look at it, it gives you a natural target. But it get’s even deeper, in that; you can check the solidness of your target with measured moves. If you draw a line measuring the moves we used to draw the Fib, and the move we traded, top to bottom; they should be the same length. Here’s what I mean:


This is the same price action we’ve been looking at in this whole post. I measured the first move with a trend line from top to bottom like this:


Duplicated that line, dragged the duplicate up to the next move putting the top at the top, and the bottom at the bottom. It looked like this:


Not exactly the same, but damn close. I think if I moved it to the exact low and high it would be exact. Either way, you can see the power of getting to know price. There are a million price patterns and tools to measure them, but not many are as simple as this. The key is getting to know price. If we use price as a guide we will rarely go wrong. For sure, price gives false signals. That’s where position size and risk control come in. That’s for another post, though. I hope this is helpful, and if anyone has any questions my twitter DM’s are open. Ask away! Thanks for reading!

Happy Hunting traders!

There’s a 90 Year old Dude Who’s Been Writing About Markets for 57 years.. And Counting. Wow.

by Rasool Cunningham
Trading Editor
Philadelphia, PA (DYDD)

I recently got on a Dow Theory kick after the Dow Transports index started under-performing the broader market.  It lead me to a guy named Richard Russell who has a market service called: Dow Theory Letters. 2015-06-12_0541 He started writing them in 1958, around the time he became the leading Dow Theorist. The guy is 90 years old and still puts something out on the markets everyday! (I’m ashamed of myself for not writing more posts, so I’m writing this post out of guilt, I’m sure.)  I signed up for a free trial and I’m blown away by the sharpness of this guys brain, still! He has others who write there, and their stuff is good, but I’ve went through the archive, and to me, he’s still the best writer there.

Everyone should, at the very least, go there and sign up for the free trial and tell me; is it me, or is this guy a hell of a role model?! I want to be Richard Russell when I grow up. I’ve been trying to start a service here on DYDD for some time now. My latest attempt is starting off a little rocky because I’m doing something wrong. I’m still looking at it as work. I have enough market thoughts running through my head, yet I don’t post every single day. Some days I just stare at the charts with a million thoughts going through my mind. If I get a good trade off I feel more inclined to post something. If I don’t get a good trade off, or get stopped out, I turn Bloomberg radio off, stare at the charts, and don’t feel like writing anything.

I’m not the best writer in the world.  But I’m not 90 years old either. After reading this guys stuff I feel out of my league. At the same time, I feel greatly inspired. I feel like if he can still post something every day (although he gets paid to do it, but he’s 90! Almost 91! And I’m sure doesn’t need the money, but still does it) so can I. I’m writing this post as a little free advertisement to pay homage, and ask the market writing Gods to make me like him. This is my offering to the market writing Gods, now: Please make me more like Richard Russell!

What a ‘Third Phase Climax’ in the Stock Market Looks Like.

by Rasool Cunningham
Trading Editor
Philadelphia, PA (DYDD)

Robert Rhea, the prominent Dow Theorist gave a first hand description of the 1929 top. Here it is:

“All the usual indications of inflation were present. Volume of trading was excessive and broker’s loans were making new peaks regularly – in fact, call money rates were so high that many corporations were finding it profitable to liquidate inventories and lend their cash equivalent to Wall Street at fantastic returns. Pool activities were being conducted on a disgraceful scale, and leading stocks were yielding less than the best grade bonds.

Worthless equities were being sky-rocketed without regard for intrinsic worth or earning power. The whole country appeared insane on the subject of stock speculation. Veteran traders look back at those months and wonder how they could have been caught in the inevitable crash. Bankers whose good sense might have saved the situation had speculators listened to them, were shouted down as destructionists, while other bankers, whose names will go down in history as ‘racketeers’ were praised as supermen.”

History won’t repeat itself because people have seen it before, so we avoid things that remind us of past mistakes. Mark twain famously said history won’t repeat, but it will rhyme. Where we are now seems to me to be rhyming with where we were in 1929. We even have the threat of the return of the dust bowels (area and length of the drought back then is a lot crazier than now, but it rhymes.)  Let’s look at some other things that rhyme:

  • Margin debt is at an all time high.
  • There are cab drivers that think they know the market as well as the pro’s (or better.)
  • Pointing out negative things about the market could get you labeled an Economic Doomsayer!
  • The top five IPO’s of 2015 have had an average first day pop of 134%. This is despite the fact that NONE had positive earnings growth last year. The biggest first day pop, 267%, came in $SHAK, which has -98.45% earnings growth last year. Not saying $SHAK is worthless, but it’s clear that earnings growth didn’t determine the demand for the stock, speculation did.
  • Instead of using all that cash on $AAPL’s balance sheet to build up their business, or buy other great bushiness, or build schools, or infrastructure: Apple Is The new PIMCO and Tim Cook Is The New Bond King.
  • The 30 year U.S. Treasury bond yield is 3.21 right now. The Dow Industrial thirty’s average dividend yield is 2.72

None of this means stocks will crash tomorrow. What it does say is that this market has all the earmarks of a Third Phase Climax market top. What’s a Third Phase Climax market top? Here’s how Robert Rhea described the three phases of a Bull Market:

“There are three phases of a bull market: the first phase is represented by reviving confidence in the future of business; the second is the response of stock prices to the known improvement in corporation earnings, and the third is the period when speculation is rampant and (stock price) inflation apparent – a period when stocks are advanced on hopes and expectations.”

He also said the he would sell if the market had these traits, adding that he wouldn’t wait for the Dow averages to confirm an actual bearish signal because once the bear signal came stocks would often drop so fast that it was impossible to even get good quotes on stocks, let alone sell them.


A Dow Theory Crash Course.

by Rasool Cunningham
Chief Trading Editor
Philadelphia, PA (DYDD)

The market is always to be considered as having three movements, all going on at the same time. The first is the narrow movement from day to day. The second is the short swing, running from two weeks to a month or more; the third is the main movement, covering at least four years in its duration.

That’s from a Wall Street Journal editorial published on December 19, 1900. The time frames Dow gave were specific for his time because time expands and contracts along with price. (As we’ll be learning here on DYDD in the future. Einstein also proved time expands and contracts with his theory of relativity.) So we’ve seen what he describes as “main movements” last longer, and less time than he looked for back in 1900. But the basic tenant that the market has three movements going on at the same time is still valuable info today. Traders get caught on the wrong sides of these movements because they’re either unaware of them, or don’t know how to determine what price action is a part of, or determines what movement. If we don’t know what action is part of what movement we can’t assign value, or importance to the price movements that deserve high priority.

When you can’t prioritize price action you don’t know what price action to ignore or pay close attention to. This way you can’t use price action to maximize profits. If a “narrow move” or day to day move isn’t important, yet you place a lot of importance on it, that movement may lead you to take on more or less risk than you should. We all know a time or a million times we’ve placed too little or too much importance on a price move and paid for it. So how do we know what move is which, and what price action is more important? To paraphrase Dow, he tells us that the most important price actions are higher highs with higher lows, or lower highs with lower lows. He said this tells us what the “main movement” or trend is.

He called a correction a “Secondary Movement” or “short swing.”. So named to imply the move wasn’t as important as the “Main Movement.” Here’s an example of how we use these movements today. Below is a chart with a main move and several secondary moves. A trader would have been better off to hold for the gains from the main move than to try to take advantage of all the short swing secondary moves:


When we hear the phrase “Dow Theory” we think of the indices and index theory that Dow Transports should confirm any major directional movement in the Dow Industrials. But this is only the tip of the iceberg. Beneath the surface, Dow’s theory is time analysis on top of a trend following/ trend determination system. Since Dow never compiled his work into a system, much of the credit for what we now call Dow Theory should go to men with names we don’t hear anywhere near as mush as we hear Dow’s. Men like Samuel A. Nelson, William P. Hamilton, Robert Rhea, and Richard Russell. Men who delved into Dow’s work and put together a comprehensive system based on Dow’s market theories. Dow worked as a partner for a company named Goodbody, Glynn and Dow. They held a seat on the New York Stock Exchange from late 1885 to mid 1891. Long enough for Dow to get an upclose look at the market. But he started and ended, as a newspaper man from Connecticut. He came to New York as a financial reporter. In this work he met a guy named Edward D. Jones. They went on to found Dow, Jones and Company; they published the Wall Street journal, and the rest is history.

The simplicity and staying power of what Dow left is awe inspiring. He said If you’re trading in a bull market a trader should buy on pull backs, and If trading a bear market we should sell on up moves.He said traders should scale into positions in case price goes against them, or takes longer than expected to gain value. He defined what a trend is with the phrase higher highs and higher lows or vise-versa. The old trading axiom “cut losses early and let profits run” comes from Dow. These are things we still heavily use today, and can be found in every trading system known. That’s a big deal to me. A big enough deal to revisit he and his disciples’ original work as much as possible.

It’s impossible to to even outline all the things Dow, and those who expounded on his theory have left us in one or two post. Luckily for you traders, I started a new service today where I’ll be pouring  the rest of my interpretations and applications of this timeless knowledge in a series called: A Dow Theory Crash Course. 

Each one will be titled A Dow Theory Crash Course and be numbered; should be easy to find once they start posting.  I’ll apply everything to current markets with easy to grasp examples and visuals. There will be lots and lots of visuals (so if you think there’s a such thing as too many pictures in a blog post, this probably isn’t for you.) I think a picture says a thousand words, so, they save us (me) time; they help us hack the learning curve. So get the June 2015 password here and check them out as they post!

Thanks for reading traders, and happy hunting!