Posted
Apr 10 2008, 08:19 AM
by
Richard Schwartz
TECHNICAL VIEW. Thrusday, April 10th, 2008
“A ‘line’ is a price movement extending two to three weeks or longer, during which period the price variation of both averages move within a range of approximately five per cent.” (Both averages meaning the Dow Industrials and Dow Transports.) The above quote is from Robert Rhea, the early 1900s, well known Dow Theorist (or by Dow Theorist William Peter Hamilton who came just before Rhea, both disciples of Dow Theory originator Charles Dow himself) and leads off Chapter XIV of Rhea’s 1932 book: THE DOW THEORY. Mr. Rhea follows with the comment that when both averages break out of a line simultaneously, the break predicts a substantial market movement to follow, up or down, and writes that this portion of Dow Theory has proved so dependable it’s almost deserving the designation of “axiom” rather than “theorem.” Then Mr. Rhea observes that since lines don’t happen very often traders many times see them when they aren’t there. So maybe the line I was seeing forming last week and this wasn’t there. Maybe I was just seeing shadows since the Dow Transports fell some -3.5% yesterday alone (after trading in a somnolent 0.5% range over the previous six trading days). Let’s see if the trannies quiet back down or not today or soon since the Dow Industrials, while falling -0.39% yesterday have remained quiescent, the last seven days trading in just a 1.4% total percentage range. Obviously the reason I’ve been watching this potential trading line form, prior to yesterday, so carefully, is because breaking a line has been so reliable in the past as an indicator of future action, some big move in the market. After big investors accumulate or distribute. Mr. Rhea, and Mr. Hamilton, who wrote a lot about these accumulation and/or distribution lines in his regular columns in The Wall Street Journal say market watchers also have to consider “the prevailing activity of price speculation” and compare it “with the violence or lack of violence of preceding fluctuations” as they decide what the “allowable price variation” should be, say more or less than 5%. As recently, stocks have been incredibly volatile as I reported to you a few days ago we have to go back al the way to 1938 to find similar first quarter volatility, that may allow some extra leeway in the 5% range (which hasn’t been broached yet anyway). Plus yesterday’s negative news coalesced so perfectly and quickly for the truckers and the airlines, that the transports just couldn’t weather this sudden storm or gale. Finally, both Dow Theorists report that one shouldn’t jump ship if just one average breaks out of a line, up or down, and in fact cite an example of just that proving to be a red herring. Wait for both the Dow Industrials and Dow Transports to break in the same direction. That’s a basic tenet of all Dow Theory. Schwartz View: So, I’ll just keep watching both Dow averages to see if any line does exist or not. And give the range for this line some leeway because we’re certainly been in a very volatile market. Quieting down makes the line in fact. And finding out what is going on under the surface by the big money. Again, the concept behind a line forming is that either big money is accumulating shares, as I’d say Bob Doll, centered right in the midst of the big money, has been saying. I’m a little skeptical of swallowing whole what big money so easily makes public. OR whether the big money is now distributing (selling) lots of shares on this bounce. Could be that a line is in the early days of forming, quieting down as we move through earnings season.