2 years ago

Think Piece - The coming Bull market

Consult the market about the market

First a short history lesson.

Dow theory is often referred to as a reference method for analysing stock market avaerages.
This method has been developed over many decades form the original observations of Charles Dow,
who started the Wall Street Journal in 1901 originally called the Afternoon newsletter.

From the obervations of Dow early practicioners William Hamilton and Robert Rea refined the method into the
current guidleines market technicians use to this day. The basis of Dow Theory is price movement in the form of
averages of prices, volumes traded and news of the day or said another way, what news is influencing the market.

Interest rates and busines activity also added to the summing up evidence. Dows original observations covered the
two indexes at the time, the Industrials and the Transports. Both of these Indexes are still tracked today.
Observations of how the average moves up or down or sideways in these two sectors is used to make statements about
potential future movements. Which is where the old adage of “what has occurred in the past should occur in the future” came from.

That is until it changes.

And this is what market technicians are constantly looking for, change in the direction of the averages.
It was observed that when the two averages were both exceeding the previous highs the a Bull market was
decleared when the averages were both falling and making new lows the Bear market was declared.
This method is still used to this very day in global markets to declare the market.

Trend Graphic

So with this observation we can make highly probable comments about future market movements.

In the past 40 years with the incoming electronic calculators and computers an amazing number of indicators
have been developed and derived from pure price action allowing for shorter and shorter time frames to be traded.
Our observations of Bull and Bear markets should be taken on longer times frames like Monthly charts or Weekly
charts as this smooth’s out the day to day gyrations of short term reactions to the 24 hour news stream available to every trader and investor.

XJO line

The Average        This Monthly chart of the Index XJO shows the general up trend in the July 13 to July 14 period,
followed by a series of lows. Recently the Index set a higher low, and the price average has moved past the high (1) the uptrend is declared.

This is only one piece of the analysis, volumes indicated at (A) show increased volumes at the onset of the up move.
However this was not followed up by increasing volumes in the following month


Productivity and Interest rates.

Within the market productivity is increasing year on year and currently 102.8, and importantly rising year on year.


Interest Rates Benchmark interest rates are the lever used by Government appointed reserve banks to manage
the speed of money through the economy, by raising rates money slows down and the flow on is a slowing economy.
By lowering benchmark interest rates money speeds up and flows into manufacturing and building projects currently
Australia has historic low interest rates.

interest rates


All of the above information is used for future assumptions about market movements.
This information is ultimately reflected into the companies that make up the Index averages.
And the direction of the average reflects the input of the other factors of Volumes traded, News, Productivity and Interest rates.


In summary When the underlying driver of markets begin to change this is often reflected very quickly
in the average alerting the market participant to potential lower prices of stocks. With the “factors” of interest rates
and productivity and good volumes all pointing to a positive for the economy by way of stimulation the most
important item of the market average is confirming the outlook by making a new high at the right side of the chart.

It can be considered the Australian XJO average is in a Bull market phase.

Gary Burton CFTe