Dow Theory Letters
Jun 16, 2006
from the Jun 15, 2006 edition of Richard's Remarks
Back in the
'70s I corresponded with a brilliant analyst named James Alphier.
James worked on a market method which he called "prolonged
liquidation." Alphier's work is pretty much forgotten today,
but he discovered a system for identifying major market bottoms.
This is how Alphier's method works. Each week count how many
days the S&P closed up and how many days it closed down.
If there is a day that the index is exactly unchanged, give that
day the sign of the previous day. Forget about holidays or any
day in which the market is closed. Each week go back over the
past 14 weeks and count how many total days are up and how many
are down. If, in the past 14 weeks there are at least 17 more
down days than up days, you have a major bottom and a buy signal.
That "formula" worked amazingly well in calling all
the major market bottoms since 1932.
Does this kind of analysis work on individual stocks or on other
indices? I don't know the answer -- maybe some ambitious subscriber
will do the research. However, I have never forgotten Alphier's
thinking on this subject. Very few analysts calculate the number
of days up or down in the various sectors. I do, in the sectors
that I'm interested in.
For instance, most recently I counted gold rising on 16 out of
19 days. This means that gold rose an incredible 84.2% of the
days over a 19 day period. That was the most "extreme"
or lop-sided rise I had ever seen. I called the rise "ridiculous"
and I felt that we had seen an extreme of outlandish bullishness.
I wrote at the peak of this series that the rise in gold had
to be over.
In general I note that the longer any rise or decline, the more
dependable this method of calling market turns tends to be. The
percentage number I watch is 80% or more of advances or declines
over a specified period of time.
Yesterday I wrote that gold had declined an amazing 8 days in
a row and that gold had closed down on 10 of the last 12 days.
That means that gold was lower on 83.3% of the last 12 days.
This is impressive, but a test period of 12 days is a bit short.
I'd prefer that the study had consumed 15 or 18 days rather than
only 12 days. The longer, the better -- and the more accurate.
But down 83.3% over 12 days is still very impressive and it implies
a downside panic -- even capitulation. Adding to the percentage
study, I noted that HUI and GDX were both up yesterday.
What I'm trying to measure is the degree of fear that has been
generated in the gold picture, just as I tried to measure the
degree of bullishness generated as gold was topping out on May
11. We'll see how this study works, although, as I said, I would
have preferred a longer period of days.
On the basis of the above study, I added to my gold position
lots more follows for
Jun 15, 2006
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