Date:

Results:

$10,000 becomes:

Dow Jones Level:

Description:

On January 31st,1901 Charles H. Dow compared the stock market to the tides of the ocean when he wrote in the Wall Street Journal  "A person watching the tide coming in and who wishes to know the exact spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market."   If you think of the Dow Jones Industrial Average as being the measure of the tide on one part of the beach, and the Dow Jones Transportation Average as a measure on another part of the beach, both used to determine that the tide is indeed coming in or going out all along the seashore, rather than rogue waves in one place or the other, you will understand what Dow was getting at. Confirmation by both is an integral part of the Dow Theory.

The classic Buy signal is developed as follows: After the low point of a primary downtrend in a Bear market is established, a secondary uptrend (this is the most often debated part of the Theory) bounce will occur. After that, a pullback on one of the averages must exceed 3%, according to Robert Rhea, the great Dow theorist of the 1930’s, must then, ideally, hold above the prior lows on both the Industrial and the Transportation Averages. Finally, a breakout above the previous rally high by both, constitutes a BUY Signal for the developing Bull market.

The above classic BUY (B-1) is outlined as follows:
      1. Market Lows
      2. Bounce
      3. Pullback (hold above the lows)  
      4. Break up (above the bounce high)

The chart represents how the Dow Jones Industrial Average and the Transportation Average might look:

More than one bounce can occur within the confines of the bounce highs and the lows. Any such non-confirmation by the other Average is inconsequential.

While neither the primary nor the secondary trends have been specifically defined, my own research shows that a Bull market primary trend will have advanced in excess of 19% on both the Dow Jones and Standard & Poor’s 500 Indices. A Bear market primary trend will have declined in excess of 16% on both. A review of the Dow Theory signals implies that a secondary trend will usually bounce at least   4% on both the Industrials and Transportation Indices, and usually one or both will exceed 7%. According to The Dow Theory, by Robert Rhea, secondary reactions "usually last from three weeks to as many months, during which...the price movement generally retraces from 33 per cent to 66 per cent of the primary price change.."  In the same book, Dow's successor, William Peter Hamilton, described "secondary reactions...(as) lasting from a few days to many weeks". What is precisely defined is the extent of the "return move", the pullback after a bounce up from a Bear market bottom, or the bounce after a pullback from a Bull market top, and that shall exceed 3% on either of the averages.

A Bear market Sell signal is determined in much the same way, but opposite to a Buy Signal. When a Bull market tops and sets back, and the subsequent rally that goes back up (again, over 3%) and falls short of reaching the previous high and then penetrates the recent lows on the next decline as measured by both the Industrial and Transportation Averages, a SELL Signal is generated indicating a Bear market.

The above classic SELL (S-1) is outlined as follows:
     1.  Market Highs
     2.  Pullback
     3.  Bounce (to below the highs)
     4.  Break down (below pullback)

Other acceptable patterns are as follows:
BUY (B-2)
     1.  Market Lows
     2.  Bounce
     3.  Pullback (one index makes a new low)
     4.  Break up

SELL (S-2)
    1.  Market Highs
    2.  Pullback
    3.  Bounce (one makes a new high)
    4.  Break down

BUY (B-3)
    1.  Market Lows
    2.  Bounce
    3.  Pullback
    4.  Break up (one only)
    5.  Pullback (other makes lower low)
    6.  Break up (over both bounce highs)
 

SELL (S-3)
    1.  Market Highs
    2.  Pullback
    3.  Bounce (one makes a new high)
    4.  Pullback (other makes a new low)
    5.  Bounce (first makes a newer high)
    6.  Break down (below both pullback) 

BUY (B-4)
    1.  Market Low
    2.  Bounce
    3.  Pullback (one may go to new low)
    4.  Lower bounce (on one or both)
    5.  Lower pullback (another new low)
    6.  Break up (over first bounces)

BUY (B-5)
    1.  Market Low
    2.  Bounce
    3.  Pullback
    4.  New all-time highs on both

Other combinations of the above can occur with non-confirmations (divergence) at various points and still qualify as "signals". New all-time highs negate the need for pullbacks to confirm a new Buy.

NOTE: In order to conform with the traditional interpretation of the original Dow Theory I have changed my 9/15/98 Buy at 8024.39 to 11/2/98 at 8706.50. I also eliminated 2 sets of Sell and Buy back signals from 2002-3, all of which are shown in the "Detailed and Complete Record" and can be accessed here.

* These Buy signals would have been improved by an average 3.2% by scaling in when capitulation occurred prior to these signals as shown to Subscribers, and added as a part of  my interpretation in my my book "Dow Theory for the 21st Century".

$10,000

280.90

01/19/54

$10,028

288.27

12/31/54

$14,500

404.39

12/30/55

$18,286

488.40

12/31/56

$18,922

499.47

12/31/57

$19,680

435.69

05/02/58

$19,765

459.56

12/31/58

$25,522

583.65

12/31/59

$30,614

679.36

03/03/60

$27,732

612.05

12/30/60

$28,351

615.89

10/10/61

$28,946

706.67

12/29/61

$30.220

731.14

04/26/62

$28,329

678.68

11/09/62

$28,752

616.13

12/31/62

$30,629

652.10

$36,935

762.95

12/31/64

$43,830

874.13

12/31/65

$50,034

969.26

05/05/66

$46,976

899.77

12/30/66

$48,461

785.69

01/11/67

$48,537

822.49

10/24/67

$53,792

888.18

12/29/67

$54,208

905.11

10/01/68

$55,964

942.32

12/31/68

$56,554

943.75

02/25/69

$54,281

899.80

10/27/69

$56,702

860.28

12/31/69

$53,154

800.36

01/26/70

$51,211

768.88

09/28/70

$53,484

758.97

12/31/70

$59,711

838.92

07/28/71

$63,332

872.01

12/31/71

$64,537

890.20

02/10/72

$64,859

921.28

12/29/72

$73,837

1020.02

3/27/73

$67,346

922.71

12/31/73

$71,014

850.86

11/05/74

$75,239

674.75

12/31/74

$69,424

616.24

12/31/75

$100,251

852.41

12/31/76

$123,025

1004.65

10/24/77

$102,668

802.32

12/30/77

$103,646

831.17

06/06/78

$105,974

866.51

10/19/78

$105,763

846.41

$107,286

805.01

12/31/79

$119,173

838.74

$124,762

816.89

12/31/80

$151,586

963.99

07/02/81

$155,981

959.19

12/31/81

$166,666

875.00

10/07/82

$181,721

965.97

12/31/82

$199,169

1046.54

$250,165

1258.64

01/25/84

$245,650

1231.89

12/31/84

$268,893

1211.57

01/21/85

$270,113

1261.37

12/31/85

$343,695

1546.67

12/31/86

$436,295

1895.95

10/15/87

$554,916

2355.09

12/31/87

$561,465

1938.83

01/07/88

$562,537

2051.89

12/30/88

$616,083

2168.57

10/13/89

$753,498

2569.26

12/29/89

$765,670

2753.20

$792,621

2935.19

$748,234

2809.65

12/05/90

$767,538

2610.40

12/31/90

$776,545

2633.66

12/31/91

$962,222

3168.83

12/31/92

$1,031,694

3301.11

12/31/93

$1,200,377

3754.09

12/30/94

$1,258,595

3834.44

12/29/95

$1,708,794

5117.12

12/31/96

$2,187,770

6448.27

12/31/97

$2,717,210

7908.25

8/4/98

$2,941,652

8487.31

11/2/98

$2,960,668

8706.50

$3,122,169

9181.43

So how does it work out in the market?  The following shows the results for the S&P500 3 months, 6 months, 9 months, and a year after the BUY Signals with the average gains being +5.1%, +11.9%, +14.7% and +20.3% respectively. The average gain to the next SELL Signal was +29.8%.
 

Original Dow Theory BUY Signals and the S&P500 Gain After:
		3 Months:				6 Months:		9 Months:		1 Year:			To Next Sell Signal:
Date	Level	Level		Gain		Level	Gain	Level	Gain	Level	Gain		Date	Level	Gain
1/19/1954	25.68	27.76		8.1%		29.98	16.7%	31.91	24.3%	34.96	36.1%		10/11/1956	44.70	74.1%
5/2/1958	43.69	47.49		8.7%		51.33	17.5%	55.21	26.4%	57.65	32.0%		3/3/1960	54.78	25.4%
10/10/1961	68.11	68.96		1.2%		68.56	0.7%	67.05	-1.6%	(1)			4/26/1962	67.05	-1.6%
11/9/1962	58.78	66.17		12.6%		70.35	19.7%	70.48	19.9%	73.36	24.8%		5/5/1966	87.53	48.9%
1/11/1967	83.47	88.88		6.5%		92.48	10.8%	96.37	15.5%	94.42	13.1%	(2)	10/24/1967	94.42	13.1%
10/1/1968	102.86	103.86		1.0%		97.98	-4.7%	(3)					2/25/1969	97.98	-4.7%
10/27/1969	97.94	88.17		-10.0%	(4)								1/26/1970	88.17	-10.0%
9/28/1970	83.86	91.09		8.6%		99.95	19.2%	97.74	16.6%	97.07	15.8%	(5)	7/28/1971	97.07	15.8%
2/10/1972	105.59	105.42		-0.2%		111.05	5.2%	113.73	7.7%	114.68	8.6%		3/23/1973	108.88	3.1%
11/5/1974	75.11	78.95		5.1%		90.08	19.9%	86.23	14.8%	89.15	18.7%		10/24/1977	91.63	22.0%
6/6/1978	100.32	105.38		5.0%		99.33	-1.0%	(6)					10/19/1978	99.33	-1.0%
5/13/1980	106.30	123.28		16.0%		136.49	28.4%	126.98	19.5%	130.55	22.8%		7/2/1981	128.64	21.0%
10/7/1982	128.80	145.18		12.7%		151.76	17.8%	167.56	30.1%	170.8	32.6%		1/25/1984	164.84	28.0%
1/21/1985