Gold as an investment

Dow Theory: Is It Still Relevant? Editor Of The Dow Theory Says Yes

Sep 30, 2022

Stock market charts


Manuel Blay is editor of, a website that closely tracks the price movements of the Dow Industrials, the Dow Transports and the Dow Utilities, among other indexes. It’s an old-school type of looking at charts that you don’t hear about much when technical analysts gather to compare notes.

Blay says you should be paying attention, there’s lots to be learned. I had a chance to ask him some questions about it and here’s how it went:

John Navin: Dow Theory is an old form of price chart analysis. Why is it still relevant?

Manuel Blay: It is more relevant than ever for three reasons:

1) Because it works. By this, I mean: it cuts drawdowns and outperforms buy and hold. And it performs much better than its trend-following competitors, namely moving averages and breakout systems.

2) Because it was a track record spanning +120 years (for stocks).

3) Because it can be applied to many markets.

Navin: How would you explain Dow Theory? I seem to recall something about if the Industrials are confirmed by the Transports...what is that, why is it important?

Blay: The Dow Theory is trend-following and akin to a breakout system. However, it is a breakout system on steroids, as only relevant highs and lows are selected. We don’t blindly take the “n-day high or low” (which may be irrelevant on the chart), but we take essential pivot points.

We appraise secondary reactions against the primary trend. The appraisal of secondary reactions requires a minimum time and extent. The secondary reaction highs and lows are the relevant points to be broken up or down to signal a change of trend:

The principle of confirmation is essential to the Dow Theory. The Dow Theory singles out the most relevant pivot points, but another index must confirm their breakout.

If you do away with confirmation, you are still likely to outperform on a risk-adjusted basis, but your drawdown will increase (more whipsaws), and outperformance will decrease. I have provided evidence with hard and fast data that confirmation increases the bottom line.

Example of two posts proving the value of confirmation:

For breakout systems:

Dowtheoryinvestment Dow Theory special issue: Why it is a bad idea to apply the Dow Theory to monthly highs and the vital importance of confirmation

For moving averages:

Dowtheoryinvestment Dow Theory Special Issue: Isolating the value of the principle of confirmation and trend following

Navin: Technology seems to have replaced Industrials as the most watched group. Can Dow Theory offer signals for the NASDAQ-100?

Blay: Yes. The signals derived from the Dow Theory applied to the NDQ work exceptionally well even better than with the Dow Industrials. We derive a higher profit factor with NDQ than with the DJI or the SPX SPXC . A higher profit factor implies more accuracy in appraising trends and the corresponding buy and sell points.

Why is such an extraordinary outperformance of the Dow Theory applied to the NDQ? The problem with the NDQ is huge drawdowns when the going gets tough (we are witnessing it right now).

The Dow Theory does an excellent job cutting drawdowns when the trend is bearish and keeping the strong upside potential of the NDQ (ca. 20% annual outperformance versus the SPX) while keeping at bay the horrific drawdowns that plague the NDQ during bear markets.

So, YES, the Dow Theory is particularly well suited to the NDQ.

Navin: What were you doing with your life when you came upon Dow Theory?

Blay: Thanks to a mix of common sense and some market timing, I emerged unscathed from the 2000-2003 and 2008-2009 bear markets. The latter bear market made me aware of the necessity of integrating the trend of the markets into the investment process. No matter how well one chooses individual stocks, there is a right time for buying and selling. “WHEN” is as essential as “WHAT.”

After toying with several approaches to the market, I became convinced the Dow Theory was the approach that made sense to me: Non-parametric, clear rules, replicable, and a long proven track record.

Here, an explanation is in order. I must say that many “fakes” are being touted as Dow Theory. If you google “Dow Theory,” you’ll find lots of claptrap being presented as the Dow Theory. Furthermore, when it comes to U.S. stock indexes, Jack Schannep’s rendition of the Dow Theory is the most accurate by a long shot.

The Dow Theory is not monolithic. There are several “flavors” or schools of thought, and all of them deserve to be named “Dow Theory.” George Schaefer, who aligned himself with the secular trend, is as Dow Theorist as Robert Rhea, who often traded secondary reactions.

As far as U.S. stocks indexes are concerned, I settled with Schannep’s interpretation, named “The Dow Theory for the 21st Century”, whose trades last an average of ca. 1.5 years.

Navin: What would you say to a fundamental analyst who rejects it?

Blay: The market trend will significantly influence the outcome of even the best-selected portfolio. One must acquaint himself with the trend and size positions accordingly. Some will exit all positions when the Dow Theory signals a SELL; some will scale down or at least won’t make new commitments.

Those against market timing argue that it is futile, that it cannot be achieved, and that eventually, good stocks recover to higher highs, so the best thing is to hold and weather the storm. However, real-life investors have to consider three things:

a) Many do not have the staying power to wait for their portfolio to reach newer highs. Many need to withdraw a fixed rate to fund their expenses. A 50% drawdown (which may be deeper with specific stocks) will bankrupt the investor. Game over! When the recovery comes, the investor has depleted their brokerage account, as they dug deeper into the hole by withdrawing money at the worst possible time.

b) Most investors, even those with staying power, cannot withstand the psychological pain that drawdowns inflict. It is easier to see a drawdown on an equity curve chart and think, “well, if it happens again, I will be able to stomach it and wait for newer highs.” However, when under pressure, most investors chicken out in real life. Many will throw in the towel at the worst possible moment. I personally abhor drawdowns, so I need to have some way of limiting my losses.

c) Americans have had, until now, a blessed country that always rebounded from the drawdowns to make higher highs. And I fervently hope she will continue in great shape. Buffet says, “never bet against America,” and I agree.

However, ask any European or Latin American, and they will tell you a very different story that doesn’t have a happy ending. What if the market does not rebound? One needs to know when it is not advisable to be in the stock market. If the recovery comes, the Dow Theory will let us know so that we will be on board again. One never knows when things will change, so blindly sticking to stocks (or any other asset, look at bonds now) because it worked in the past is a dangerous game.

The future is unknowable. We have to be humble and accept that we can be wrong in our judgment. The Dow Theory, in my opinion, is the best trend-following device and will help us be on the right side of the markets.

Do those who shun the Dow Theory know that it protected investors in ALL bear markets? No misses. It worked in 1929, 1937, etc. More recently in 1974, 1987, 1998 (the Asian Crisis), 2000-2003, 2008-2009, the Nov/December 2018 correction March 2020.

Navin: What other forms of price chart analysis do you use?

Blay: We use one of the patterns discussed in Sklarew‘s book “Techniques of a Professional Commodity Chart Analyst” (1980) that help us establish profit tops, like in January 2020 (Letter February 1st, 2020, whose title was “In the Target Zone”). We know what happened after the target was reached. We also are fond of measured moves.

Jack Schannep taught me to bet for a mean reversion exceptionally. He developed, and I use, a “Capitulation Indicator” based on fading extreme deviations from moving averages. This indicator identified many bear market bottoms since the nineties sixties.

Navin: What other asset classes besides stocks do you look at?

Blay: Dow theorist Hamilton wrote in 1922 that “the law that governs the movement of the stock market, formulated here, would be equally true of the London stock exchange, the Paris Bourse or even the Berlin Boerse. But we may go further. The principles underlying that law would be true if those Stock exchanges and ours were wiped out of existence [...]”

However, as far as I am aware, no Dow theorist attempted to prove that the Dow Theory works beautifully when applied outside the realm of U.S. stocks.

Hence, the Dow Theory works great with U.S. Bonds. And I have documented it with hard and fast data. It also works on the short side (even when swimming against a secular bull market). The bond market is much larger than the stock market, and it pains me to see that most bond managers struggle to determine the trend of bonds when the Dow Theory could be helping them navigate.

Mark Hulbert of MarketWatch published in March 2022 an article that shows that bond fund managers have a tough time timing the bond markets.

On the other hand, the Dow Theory does a great job appraising the trend for bonds. Since the Dow Theory is based on the principle of confirmation, we need to use at least a couple of bonds (i.e., I use the ETFs TLT TLT and IEF IEF to appraise the trend, and the trend so appraised can be applied to a variety of bonds, like EDV which has larger volatility, and more potential for profits if drawdowns are cut short with good trend following).

Research on the Dow Theory and Bonds:

Dowtheoryinvestment Dow Theory Update for February 16: Does the Dow Theory work when applied to US bonds? (I)

Dowtheoryinvestment Dow Theory Update: Does the Dow Theory work when applied to US bonds? (II)

Dowtheoryinvestment Dow Theory Update: Does the Dow Theory work when applied to US bonds? (III)

Dowtheoryinvestment Dow Theory Update for April 26: Shorting US bonds with the Dow Theory. Does it work?

The Dow Theory works beautifully with the gold and silver miners’ ETFs (SIL, GDX GDX , SIL SILJ J, GDX DXJ GDXJ J) and does a much better job than moving averages or breakout systems. It also works with gold and silver (again, using two assets to derive confirmation). Finally, it seems it also works with energy. I write “it seems” as I just have a preliminary test with encouraging results.

Research on the Dow Theory and precious metals and their miners’ ETFs:

Dowtheoryinvestment Dow Theory Special Issue: Assessing the Dow Theory's performance when applied to precious metals and their miners (I)

Dowtheoryinvestment Dow Theory Special Issue: Assessing the Dow Theory's performance when applied to precious metals and their miners (II)

Dowtheoryinvestment Dow Theory Special Issue: Assessing the Dow Theory's performance when applied to precious metals and their miners (III)

The Dow Theory can also be applied to time foreign stock markets. Just apply its principles and look for a second related asset to provide confirmation.

Navin: What books and websites do you recommend to others interested in investing or trading?

Blay: There are three outstanding books...

When it comes to trend-following according to the Dow Theory, the best is Jack Schannep’s “The Dow Theory for the 21 st Century”. And I say the “best” because this book makes the Dow Theory something actionable, provides clear-cut rules, and a record, not just a “theory”:

Amazon Dow Theory for the 21st Century: Technical Indicators for Improving Your Investment Results

A great book to integrate relative strength (momentum) with trend following is Gary Antonacci’s “Dual Momentum”.

Amazon Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk

Based on Gary's insights, I developed a Relative Strength system that selects sectors' ETFs coupled with a Dow Theory trend-following filter. We offer our Subscribers the list of the strongest ETFs and the trend filter status.

Finally, an excellent book packed with sound research on “normal” trend following is Greg Morris’s “Investing with the Trend”:

Amazon Investing with the Trend: A Rules-based Approach to Money Management

Any Dow Theorist worth his salt should also read the work produced by other Dow Theorists:

Rhea’s “The Dow Theory” is a classic:

Amazon The Dow Theory

Richard Russell, whose famed “Dow Theory Letters” taught me valuable lessons (I have them all as a coveted treasure), also wrote a book (“The Dow Theory Today”):

Amazon The Dow Theory Today

Hamilton, Charles Dow’s understudy, wrote “The Stock Market Barometer”:

Amazon The Stock Market Barometer (A Marketplace Book)

As for websites:

My blog is free and contains a wealth of research regarding the Dow Theory:

The Dow Theory Search for "blog"

Navin: What are your thoughts about the current market?

Blay: I am not very opinionated, as the Dow Theory is smarter than I. The Dow Theory triggered a Sell signal on 2/22/22. Two days before the onset of war. Talk about timing! Our Timing Indicator (our second tool) gave a Sell signal on 4/11/22.

Both timing systems have an excellent documented track record that has been traded in actual accounts. With our two timing indicators on “Sell” mode, the odds favor further downside, albeit a relief rally within the bearish trend may happen.

Navin: What’s your background?

Blay: I started my career as a lawyer. In 1992, I made my first investment in the stock market and I made a sizeable profit. Since then, I was piqued by the stock market, and I began making sporadic investments and reading more and more books about finance.

In 2006, I was appointed board member of the managing company of an investment fund. Since 2006 and following the recommendation of a colleague in the investment arena, I began to re-read Charles Dow Editorials, Hamilton, Rhea, and Richard Russell. Something was intriguing in the Dow Theory.

In 2009 I became a professional trader in stocks. Since that date, I have been trading every single day. I have been blogging about the Dow Theory since 2012 and became co-editor of “” in 2020. Since January 2022, I have been the Editor.

Navin: Thanks for answering our questions.

My charts and analysis are right here:

Cheapbargainstocks Cheap Bargain Stocks - Find The Most Undervalued Stocks On Wall Street

Not investment advice. For educational purposes only.

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