Richard Russell on Dow Theory

Periodically, after crucial and unexpected turns in the market, the study of Dow Theory gains renewed attention from the public. Because a handful of Dow Theorists correctly interpreted last year's reaction and also predicted this year's historic advance, a good deal of interest has been revived today in this oldest and most indispensable method of forecasting price movements and economic trends.

Now just what is the Dow Theory? Basically, it is a system based on the premise that the closing prices of the Dow-Jones Industrial and Rail Averages give us a complete index of all the knowledge, hopes and fears of everybody who knows anything about financial matters. Each investor, acting on what he knows of his own business and the economy, is represented in an emotionless balance which we call the Averages. For this reason, the effects of coming events (excluding acts of God) always are anticipated by the movements of these two indicators.

Talleyrand, the famous French foreign minister, once remarked: "I know somebody that knows more than anybody, and that is everybody." Financially speaking, that "everybody" is the market. When the majority of informed opinion feels that factors favorable to business are in the offing, stocks are purchased and the market advances. Conversely, when informed opinion feels that conditions are deteriorating, cash is preferred to equity and stocks are sold, thus touching off a decline.

Richard Russell, The Dow Theory Today (December 1, 1958 article)

[Here is another quote from the same book pertaining to this subject]

The basic premise of the Theory is that the averages discount everything. The closing prices of the Dow Jones rail and industrial averages give us a complete index of everything known by anybody that can possibly affect the economy and corporate profits (excluding acts of God). "Consciously or unconsciously, the movements of prices reflect not the past but the future. When coming events cast their shadows before, the shadows fall on the New York Stock Exchange." (Hamilton)

Richard Russell, The Dow Theory Today (February 16, 1959 article)

[Another great quote from same book]

In determining the trend, it is never to be forgotten that the movements of both averages must be considered together. The movement of one average must always confirm the other (although not necessarily on the same day), and conclusions drawn from the action of one average unconfirmed by the other are usually deceptive. The confirmation principle is based on logic. If there is to be a valid increase in manufacturing and production, there will also be an accompanying increase in shipping and transportation. Goods produced, if they are not to sit idly in the warehouses, must be distributed to their destinations. If distribution occurs, some of it will be by rail. Regardless of the fact that other forms of transportation are now competing with the rails, an increase in shipping must affect the rails to some favorable extent. It is not necessary for the rail average to move to new highs in each succeeding bull market, but within a given bull market rails must merely advance above preceding high points to confirm.


Richard Russell, The Dow Theory Today (February 16, 1959 article)

KC Zieg on Fundamental Analysis

Investing involves a very limited number of decisions:

What stock (futures contract, equity option, index option, or other item) should I buy?
When should I buy it?
Having purchased it, where should I sell it?

To be a successful investor, one needs to do more than just select the best stocks or commodities to own. They must be purchased correctly. The investor must then employ appropriate exit strategies to stop losses and let profits run.

Most investors, investment services, newsletters, advisors, and brokerage firms select stocks to purchase through the use of fundamental analysis. Fundamental analysis involves the study of the quality of the company, its sales, earnings, management, and other factors relating to how the company has recently performed, how it should fair in the future and how it compares with other firms within its industry. There are hundreds of factors, ratios, and indicators that can and are employed to track past performance, anticipate future results, and measure one company against its peer group. A few of these fundamental factors for stocks are listed in Exhibit 1.1***. The goal of fundamental examination is to determine what stock to buy.

Fundamental analysis of commodities involves an entirely different set of factors often unique to the futures product being reviewed. For example, in studying soybeans one would consider weather, planting intentions, crush, storage levels, import/export, feedlot activity, carry charges, and the like.

***Included in the exhibit are: asset turnover, beta, book value growth, book value per share, capital spending growth, capital spending per share, cash per share, current ratio, debt to equity, debt service to EPS, dividend growth, dividend rate, dividend yield, EPS% change, EPS growth rate, float, free cash flow per share, gross margin growth, gross margin, PE, historic relative PE, insider ownership, institutional ownership, interest coverage, inventory turnover, last split date, last split factor, payout ratio, receivables turnover, return on assets, return on equity, return on investment, return on sales, revenue growth, revenue per employee, revenue per share, shares outstanding, short interest, short interest ratio.

KC Zieg, Point and Figure Commodity and Stock Trading Techniques

Martin Pring on Point and Figure Charting

Point and figure charts differ from bar charts in two important ways. First, bar charts are plotted at specific time intervals regardless of whether there is any change in price. A new plot on a point and figure chart, on the other hand, is made only when the price changes by a given amount. Point and figure charts are only concerned with measuring price, whereas bar charts measure both price (on the vertical axis) and time (on the horizontal axis).

The second major difference is that bar charts record every change in price for the period they are measuring, but point and figure charts ignore all price movements that are smaller than a specified amount. For example, if a box is set at price movements of 5 points for the Dow Industrial Average (DJIA), only price changes in excess of 5 points will be recorded, and smaller fluctuations will not appear.

Martin Pring, Technical Analysis Explained

John Murphy on Point and Figure Charting

The first charting technique used by stock market traders before the turn of the century was point and figure charting. The actual name "point and figure" has been attributed to Victor deVilliers in his 1933 classic, The Point and Figure Method of Anticipating Price Movements. The technique has had various names over the years. In the 1880s and 1890s, it was known as the "book method". This was the name Charles Dow gave it in a July 20, 1901 editorial of the Wall Street Journal.

Dow indicated that the book method had been used for about 15 years, giving it a starting date of 1886. The name "figure charts" was used from the 1920s until 1933 when "point and figure" became the accepted name for this technique of tracking market movement. RD Wyckoff also published several works dealing with the point and figure method in the early 1930s.

The Wall Street Journal started publishing daily high, low, and closing stock prices in 1896, which is the first reference to the more commonly known bar chart. Therefore, it appears that the point and figure method predates bar charting by at least 10 years.

John Murphy, Technical Analysis of the Financial Markets

Types of Sentiment Indicators

This link -- if you scroll down to the bottom -- provides a nice summary of the 9 or so different types of sentiment indicators available to traders.

They are listed as

1. Volatility Measures
2. Put/Call Ratios
3. Breadth Ratios (Are these really sentiment indicators?!)
4. Rydex/Proshares Mutual Fund Asset Flows
5. Sentiment Surveys
   
6. Commitments of traders
7. Short Sales Analysis
8. Coroporate Insiders
9. Cash Levels

Adam Hewison, My Hero

About Adam Hewison

Adam Hewison is a former floor trader and past member of several major exchanges including the International Monetary Market (IMM) a division of the Chicago Mercantile Exchange in Chicago, Index and Options Market (IOM) Chicago, New York Futures Exchange (NYFE) and The London Financial Futures Exchange (LIFFE). Adam is the author of “Right on the Money, The Definitive Guide to Forecasting Foreign Exchange Rates” and numerous other financial ebooks and web videos. Adam is frequently seen on CNBC and Bloomberg TV as the credible expert on crude oil analysis. Adam is sought after and interviewed by the financial press including the Wall Street Journal, Investors Business Daily, The Financial Times, Reuters, Dow Jones and Associated Press for his views on the market.

Adam founded INO.com in 1995 and was a champion of using the web as a delivery mechanism for financial quotes and charts. In addition to trading, Adam continues to enjoy educating others in how to trade the markets successfully.

His latest project along with his partner, David Maher is MarketClub, a new website dedicated to catching big moves in the markets using Adam’s “Trade Triangle” technology.

Adam and his wife live on the shores of the Chesapeake Bay and summer at their home in Maine.

John Murhpy on Dow Theory

... an understanding and appreciation of Dow Theory provides a solid foundation for any study of technical analysis. Much of what is discussed in [this entire book] represents some adaptation of Dow's original theory. The standard definition of trend, the classification of a trend into three categories and phases, the principles of confirmation and divergence, the interpretation of volume, and the use of percentage retracements (to name a few), all derive, in one way or another, from Dow Theory.

John Murphy, Technical Analysis of the Financial Markets

Good Info on Graphing Software

Just wanted to post this link to suggestions of graphing software that outstrips MSFT Excel.

Edward Tufte (on the link) says:

"Now and then some of my students have been able to hack Excel to do good graphics. But for serious data analysis and publishable graphics, use a high-end statistics package such as Origin 6.0 (good review in Science, July 16, 2000; Windows only, reads into Adode Illustrator); SYSTAT; Datadesk; STATA; SAS; SPSS; SigmaPlot; or the like. All these programs will give you excellent data analysis and statistically competent displays more or less suitable for scientific publication or serious presentations.

For the highest level graphics (elegant, custom, expensive), enter the crunched data or the graphical output into Adobe Illustrator. Or have all your graphical templates designed and set up in Illustrator. This program gives complete control over typography, line weight, color, grids, layout--just what we need for doing graphical work. It is a serious, complex design program; you may want to work with real graphical designers who will surely know their way around Illustrator. The graphics for the medical interface in my book Visual Explanations (pages 110-111) were done first by scaling the medical data with custom software, and then those statistical results were brought into Adobe Illustrator to produce the complex data/image display on page 111. The output from Illustrator is directly publishable.

More generally, set up a few really good templates for tables and graphics. Use these really good architectures for everything you can. Also when you see excellent graphics, find out how they were done. Borrow strength from demonstrated excellence. The idea for information design is: Don't get it original, get it right."

Sentiment Indicators

This post from another blogger (an author) seemed to be too good not to take note of on my blog.

Margin Debt as a Contrarian Indicator

Note the important reference to www.pinnacledata.com

Interesting Quote on Dow, the Man

Charles H Dow was the founder of the Dow-Jones financial news service in New York, and founder and first editor of the Wall Street Journal. He died in December, 1902 in his fifty-second year. He was an experienced newspaper reporter, with an early training under Samuel Bowles, the great editor of the Springfield Republican. Dow was a New Englander, intelligent, self-repressed, ultra-conservative; and he knew his business. He was almost judicially cold in the consideration of any subject, whatever the fervor of the discussion. It would be less than just to say that I never saw him angry; I never saw him excited. His perfect integrity and good sense commanded the confidence of every man in Wall Street, at a time when there were few efficient newspaper men covering the financial section, and of these still fewer with any deep knowledge of finance.

Hamilton, 1922

RMMS Recommended Reading List

Rocky Mountain Mystery School Reading List

Alice A. Bailey

• Initiation, Human and Solar
• The Reappearance of the Christ
• Letters on Occult Meditation
• The Destiny of the Nations
• The Consciousness of the Atom
• Glamour: A World Problem
• A Treatise on Cosmic Fire
• Telepathy and the Etheric Vehicle
• Problems of Humanity
• The Soul and Its Mechanism
• The Externalisation of the Hierarchy
• The Unfinished Autobiography
• Discipleship in the New Age, Vol. I
• Discipleship in the New Age, Vol. II
• From Intellect to Intuition
• A Treatise on White Magic
• From Bethlehem to Calvary
• The Light of the Soul Education in the New Age
• A Treatise on the Seven Rays:
  • Volume I, Esoteric Psychology, Vol. I
  • Volume II, Esoteric Psychology, Vol. II
  • Volume III, Esoteric Astrology
  • Volume IV, Esoteric Healing
  • Volume V, The Rays and the Initiations

Gareth Knight

• The Circuit of Force
• Dion Fortune and the Inner Light
• Dion Fortune’s Magical Battle of Britain
• Esoteric Training in Everyday Life
• Evoking the Goddess
• Experience of the Inner Worlds
• An Introduction to Ritual Magic
• Magical Images and the Magical Imagination
• The Magical World of Charles Williams
• The Magical World of C.S. Lewis
• The Magical World of J.R.R. Tolkien
• The Magical World of Owen Barfield
• The Magical World of the Tarot
• The Magical World of the Inklings
• Magic and the Western Mind
• Merlin and the Grail Tradition
• The Occult, An Introduction
• Occult Exercises and Practices
• Practical Occultism
• A Practical Guide to Qabalistic Symbolism
• The Practice of Ritual Magic
• Principles of Esoteric Healing
• Principles of Hermetic Philosophy
• Pythoness: The Life and Work of Margaret Lumley Brown
• The Rose Cross and the Goddess
• The Secret Tradition in Arthurian Legend
• Spiritualism and Occultism
• Tarot and Magic
• The Treasure House of Images

H.P. Blavatsky

• The Secret Doctrine
• Isis Unveiled
• The Key to Theosophy
• Voice of the Silence
• Mahatma Letters to A.P. Sinnett

W.G. Grey

• Magical Rituals Methods & Seasonal Occult Ritual

C.G. Jung

• Memories, Dreams, Etc.

R. Petitpierre

• Findings of Exorcism

Joseph Campbell

• The Power of Myth

John Dee

• Enochian Magick

Israel Regardie

• A Garden of Pomegranates
• The Tree of Life
• My Rosicrucian Adventure
• The Art of True Healing
• The Middle Pillar
• The Philosopher’s Stone
• The Romance of Metaphysics
• The Art and Meaning of Magic
• Be Yourself, the Art of Relaxation
• New Wings for Daedalus
• Twelve Steps to Spiritual Enlightenment
• The Eye in the Triangle
• Roll Away the Stone
• The Legend of Aleister Crowley (with P.R. Stephenson)

Richard Bach

• Jonathan Livingston Seagull
• Illusions : The Adventures of a Reluctant Messiah
• Messiah’s Handbook: Reminders for the Advanced Soul
• One
• The Bridge Across Forever : A Love Story

Francis King & Stephen Skinner

• High Magic

R.A. Gilbert

• The Sorcerer and his Apprentice

Chic and Sandra Cicero

• Self Initiation into the Golden Dawn Tradition

His Holiness the 14th Dali Lama of Tibet

• Art Of Happiness
• How To See Yourself As You Really Are
• How To Practice: The Way to a Meaningful Life
• The Path To Tranquility: Daily Meditations By The Dalai Lama
• The Path to Bliss
• Imagine All the People: A Conversation with the Dalai Lama on Money, Politics, & Life as it Could Be
• The Art Of Happiness In A Troubled World

Baron Gudni von Thoroddsen

• Cherubim’s Flames
• Advanced Exorcism Manual
• And more…

More Books….

• The Hermetica (**A must for all Initiates**)
• The (A) Book of 5 Rings - written by Miyamoto Musashi
• The Lone Samurai: The Life of Miyamoto Musashi - by William Scott Wilson

Important Dow Theory Quote

The most important quote on Dow Theory (according to Jack Schannep) comes from Dow himself

"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 of the stock market.

The average of twenty stocks is the peg which marks the height of the waves. The price-waves, like those of the sea, do not recede at once from the top. The force which moves them checks the inflow gradually and time elapses before it can be told with certainty whether a high tide has been seen or not."

From Schannep, Dow for the 21st Century

Dow also said, in a related comment (same book)

"There is always a disposition in people's minds to think that existing conditions will be permanent. When the market is down and dull, it's hard to make people believe that this is the prelude to activity and advance. When prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one which make it unlike its predecessors and give assurance of permanency. The one fact pertaining to all conditions is that they will change."

Interesting Mineral Primer

http://www.westonaprice.org/basicnutrition/mineralprimer.html

Interesting Take on Tooth Decay Treatment

Link to Interesting Article on Dow Theory

http://www.safehaven.com/article-5644.htm

Crystals For Chakras

Root Chakra

Lodestone, ruby, garnet, bloodstone, (red jasper)

Second/Sacral Chakra

Carnelian, moonstone, coral

Solar Plexus/Third Chakra

Amber, topaz, yellow citrine, rutilated quartz

Heart/Fourth Chakra

Emerald, tourmaline, jade, rose quartz

Throat/Fifth Chakra

Turquoise, aquamarine, celestite

Pineal Gland/Fifth Chakra

Lapis lazuli, quartz, star sapphire

Pituitary/Seventh Chakra

Amythest, diamond

From Anodea Judith, Wheels of Life

Dow Theory

Who were the Dow Theorists?

Charles H. Dow

William Peter Hamilton

Robert Rhea

Richard Russell

George Schaefer

Jack Schannep (?)

Great Dow Theory Web Sites

Richard Russell -- www.dowtheoryletters.com

Jack Schannep -- www.thedowtheory.com

Richard Moroney -- www.dowtheory.com

Robert Colby -- www.robertwcolby.com

Books on Dow Theory

William Peter Hamilton, The Stock Market Barometer (chapters)

Robert Rhea, The Dow Theory (chapters used)

Richard Russell, The Dow Theory Today (amazon)

E. George Schaefer, How I Helped More Than 10,000 Investors to Profit in Stocks (amazon used)

Jack Schannep, Dow Theory for the 21st Century (chapters)

George Stansbury ,The Dow Theory Explained (?; amazon used)

Fritz and Shumate, Making the Dow Theory Work (?; amazon used)