Whereas the technical evaluation toolkit has definitely developed over time, having benefitted from advances in computing and information evaluation, in some ways, the instruments of the trendy technical analyst usually are not removed from the unique work of Charles Dow within the early twentieth century. However an up to date model of his basic “Dow Concept” means that the markets have entered a brand new bullish section, as each the S&P 500 and Nasdaq are making new swing highs.

Dow’s Foundational Evaluation of Markets

To be clear, Dow’s work was all accomplished by way of paper and pencil, a follow which continued properly into the Nineteen Eighties for a lot of technical analysts (or “chartists” as Ralph Acampora loved telling me they had been known as, on condition that a lot of their time was spent creating charts as a substitute of analyzing them!).

One among Charles Dow’s contributions was so vital that now we merely name it “Dow Concept”. He proposed taking a look at two indexes, the Dow Industrials and the Dow Railroads (now developed into the Dow Transports), and seeing in the event that they had been in settlement. If each indexes had been breaking to new highs, the market was robust. If each indexes had been breaking to new lows, the market was weak. If there was a non-confirmation, the place one of many indexes was breaking out however the different was not, then it indicated a possible reversal level. His idea was primarily based on the significance of those two groups–the Industrials because the producers of products and the Railroads because the distributors of goods–as a technique to consider the energy of the financial system.

Dow Concept for the Fashionable Age

Now, in 2023, the Dow Industrials features a pretty various group of companies which can be higher labeled as service-oriented than product-oriented. And the Dow Transports contains shares like JetBlue and Avis Price range Automotive Group. Probably not the distributors of products. Plus, maybe most significantly, names like TGT and AMZN, arguably to be included in each indexes, are literally in neither of them!

So I now desire to make use of a New Dow Concept, evaluating the S&P 500 (representing the previous financial system) and the Nasdaq Composite (the brand new financial system). If each indexes are in uptrends, the market is powerful.

What’s most hanging to me about this chart is the bearish non-confirmation that occurred on the finish of 2021. Discover how the S&P 500 was making a brand new all-time excessive which the Nasdaq Composite was making a decrease excessive?

This sample instructed that the breakout for the SPX was suspect and to be light, not purchased. To be trustworthy, this was one in every of many divergences you will discover throughout this era, together with weakening momentum, weakening breadth, and a decrease excessive for small caps.

New Dow Concept in February 2023

Each the S&P 500 and the Nasdaq Composite made a brand new 52-week low in October of final yr, offering a bearish affirmation. Then, in December, we had the Nasdaq proceed to make decrease lows whereas the S&P 500 bounced larger to realize the next low earlier than year-end. This was a bullish non-confirmation, the place one index makes a brand new low however the different one doesn’t affirm the bearish setup. It suggests the bear market section of 2022 was at a possible inflection level.

Right here in February 2023, you will word how each indexes made a brand new swing excessive as they pushed above their December 2022 peaks. That is what I would contemplate a bullish affirmation, the place each the previous financial system and new financial system indices are confirmed in a brand new uptrend.

Each the S&P 500 and Nasdaq are dealing with vital overhead resistance. Till we see the S&P 500 push above its August 2022 excessive round 4300, and the Nasdaq break above its personal August 2022 excessive round 13,000, then the upside potential for shares could also be restricted past present ranges.

“Do not combat the tape.” That is what I used to be instructed early on in my profession. And the New Dow Concept means that the tape is telling us that it is onward and ever upward for shares. Mixed with renewed energy in breadth indicators just like the McClellan Oscillator, we have now a robust begin to 2023 for the S&P 500!

RR#6,

Dave

P.S. Able to improve your funding course of? Take a look at my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and methods ought to by no means be used with out first assessing your personal private and monetary state of affairs, or with out consulting a monetary skilled.

The writer doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the writer and don’t in any approach signify the views or opinions of some other individual or entity.