Interesting thoughts (one perspecitvie) on the potential of a market correction and its possible signals.

from marketwatch.com/st...tories

Opinion: A Dow Theory sell signal is upon us

Published: Aug 20, 2015 2:19 p.m. ET

Dow Industrials joining the Transports in breaking January lows

MarkHulbert Columnist

CHAPEL HILL, N.C. (MarketWatch)—The venerable Dow Theory—the oldest stock market timing system that remains in widespread use today—is poised to generate a sell signal at today’s close.

The Dow Theory was introduced gradually over the first three decades of the 20th century in editorials in The Wall Street Journal by its then editor, William Peter Hamilton. The three preconditions for a sell signal that he set out are:

• Both the Dow Jones Industrial Average and the Dow Jones Transportation Average must undergo a significant correction from joint new highs.
• In their subsequent significant rally attempt following that correction, either one or both of these Dow averages must fail to rise above their pre-correction highs.
• Both averages must then drop below their respective correction lows

As I’ve written before, the first two of these three preconditions were met earlier this year. Following their sharp declines in January, as you can see from the accompanying chart, the Dow Transports failed to join the Dow Industrials in rising to new highs.

This situation could have been resolved bullishly if the Dow Transports DJT, -2.48%  had surpassed its previous high. That didn’t happen, and instead the third and final hurdle of a Dow Theory sell signal is upon us. It would be officially cleared if the Dow Industrials DJIA, -2.01%   break below the low identified in step #1—which is 17,164.95. In early afternoon trading Thursday in New York, the Dow Industrials were trading 30 points below this level.

Not all Dow Theorists would turn bearish this evening even if the Dow closes below this 17,164.95 level, however. Jack Schannep, editor of TheDowTheory.com, is holding his fire, even though he acknowledges that the original version of the Dow Theory would indeed flash a sell signal if this level is breached. But he has developed a modified version that he believes is superior, and that modified version focuses on the S&P 500 in addition to the two Dow averages.

The S&P 500 has been stronger than either the Dow Industrials or the Dow Transports. In fact, even after recent weakness, the S&P 500 remains 3.0% above its January closing low of 1,992.67. Schannep’s version of the Dow Theory therefore won’t generate a sell signal until the S&P 500 closes below that level.

That could happen quite soon, if the followers of the original Dow Theory are correct.