Wednesday, July 29, 2009

How Now Brown Dow (Theory)?

Today's column was on Dow Theory and how I do not believe it fired a buy signal. Thanks to a professional chat room, I was referenced to Robert Colby's research on the topic - He did not register a buys signal in February as many experienced practitioners did and that actually adds to my argument back then that any signal people thought had occurred was garbage.

And now, Colby said the buy signal did indeed fire last week. But even when a guy who actually proves what he says thinks a signal fired I do not believe it is useful for investors. The rules of the market don't change but the way we apply our tools certainly must. Markets do not stand still.

I still abide by the math thing I've been writing about where normal markets (whatever that is) have formulas similar to geometry. Perhaps the reader remembers way back to high school math and the formula y = mx +b. Here, m is a variable and b is a constant.

Normally, that constant is negligible. Let's make something up like it is 1/2 Dow point. But when the markets are not functioning properly that constant can balloon to 500 Dow points. It can easily overwhelm the analysis and since most of us assume it remains negligible we are thrown way off by the formula's results. Crash, credit market freeze, negative interest rates, false breakouts, wacky sentiment, you name it.

So, what really makes up that "b?" How about government intervention? It is certainly not negligible now.

1 comment:

Ramu said...

Since, the last time Dow theory gave a wrong sell signal in FEB (the market went another 12% down and rocketed higher) maybe this time it will go up 10 to 15% higher before plummeting down. I guess B is 12% here ;). Watch out GDP tomorrow. I hope that will change something.