1. Why the Dow Theory? Multimarket application,
Outperformance, Drawdown reduction, and a
+120 years record
Manuel Blay, Editor of thedowtheory.com
www.thedowtheory.com
March 15th, 2023
2. FOR INFORMATIONAL PURPOSES ONLY: The materials and information on this presentation
have been prepared for informational purposes. It is not an offer to buy, nor sell or a solicitation to buy or
sell any security, product, ETF, service, or investment. The opinions expressed herein are not investment
advice, and independent advice should be sought where appropriate. All information and opinions
expressed herein have been updated until March 14th 2023, and are subject to change without notice.
We are unaware of any readers' personal circumstances, financial condition, risk tolerance, or goals and
objectives, so nothing in this presentation or its materials should be considered advice suitable for them.
Anyone following this presentation, or its materials does so with the understanding that this is strictly
meant as an analytical exercise and does not proffer actionable advice in any way, shape, or form. The
strategies and information contained herein may not be suitable for every situation. While we analyze
past performance in this presentation, past performance should not be considered indicative of future
performance. Trading and investing always entail risk and possible loss of funds and should only be
undertaken after appropriate due diligence by the trader/investor and after consulting a registered
investment adviser. Neither Mr. Blay nor any of his respective affiliates, employees and/or associates
makes any representations or warranties concerning the accuracy or completeness of the contents of this
presentation and its materials and specifically disclaim all warranties, including without limitation
warranties of fitness for a particular objective. Neither Mr. Blay nor any of his respective affiliates,
employees and/or associates shall be liable for damages arising herefrom. No warranty is or may
construed to be created by informational, sales or promotional materials.
Disclaimer
3. Jack Schannep The Book Manuel Blay
(Author/Editor Emeritus) (All about outperforming) (Editor)
Proven track record of
outperforming the stock
market with significant
drawdown reduction.
Started by Jack Schannep
in 1962. Author of the
best-selling book «Dow
Theory for the 21st
Century»
Continued and
expanded by trader
and investor Manuel
Blay
Who we are
4. What’s the Dow Theory?
It is one of the most
accurate trend
following methods.
Long-term approach.
Ave. Trade lasts ca. 1
year.
With a +120-year
successful and
documented record (no
cherry-picked charts)
Originally applied to the
U.S. stock market. It can
be applied to other
markets
5. Does the Dow Theory
Work?
Outperformance vs. Buy &
Hold
Drawdown reduction vs.
Buy & Hold
It can be successfully
applied to many markets
6. Why the Dow Theory
works?
Only relevant pivots matter
Time & Extent requirements
Principle of confirmation
Non parametric nature
10. The Dow Theory vs. Buy
& Hold (II)
The Dow Theory beats Buy & Hold on all counts: Higher performance, smaller
drawdowns, less time in drawdown, and a higher profit factor…
11. Can we do even better?
Yes: The DT21C
Improving on the Dow Theory: The Dow Theory for
the 21st Century (DT21C)
What makes the DT21C superior?
3 Indexes instead of 2 (S&P500 added).
No 1/3 to 2/3 retracements
Shorter secondary reactions
Capitulation & Bull/Bear definiton
12. DT21C rules:
When to Buy
Blue rectangles: Secondary reaction against the bearish trend (A bounce of at least 8 trading days as the
average rally of the three indexes, and >=3% on the S&P500 and one other Index).
Brown rectangles: Pullback of at least 2 days on the S&P500 and one other Index, and >=3%. Such a rally
sets up the stock Indexes for a Buy signal.
Buy signal: Breakup of the secondary reaction highs (blue horizontal lines) by the S&P500 and one other
Index.
13. DT21C rules:
When to Sell
Brown rectangles: Secondary reaction against the bullish trend (A pullback of at least 8 trading days as the
average drop of the three indexes, and >=3% on the S&P500 and one other Index).
Violet rectangles: Bounce of at least 2 days on the S&P500 and one other Index, and >=3%. Such a rally sets
up the stock Indexes for a Sell signal.
Sell signal: Breakdown of the secondary reaction lows (red horizontal lines) by the S&P500 and one other
Index.
14. Capitulation: Calling Bear
market bottoms
• It measures the percentage of divergence between the
DJIA, S&P500, and the NYSE Composite, and their time-
weighted moving averages. Confirmation matters.
• Uncanny ability to pinpoint the end of bear markets (it
called the bottom of the last 10 Bear markets)
• S&P500 ave. return 12 months after Capitulation: 29.2%
• We buy a 50% position on Capitulation day
• Current Bear market has not seen Capitulation yet.
15. The Bull & Bear
market definition
The +/-20% typical definition for Bull and Bear markets does not have enough
forecasting power
Our Bull definition: +19% on both the Dow Industrials and the S&P500. A Bull
definition resulted 93% of the time in advances to over +29%
Our Bear definition: -16% on both the Dow Industrials and the S&P500. A Bear
definition results in a further average loss for the S&P500 of 13.0% with a total
average decline of -34%
Our Bull/Bear definition help us time the market when exceptionally the DT21C
is late giving a Buy/Sell signal. All Bull definitions have been followed by economic
expansions. Bear definitions have been followed by recessions 64% of the time
17. The DT21C beats B&H
and the “classical” DT
The Dow Theory for the 21st Century (DT21C) beats Buy & Hold and the
“classical” Dow Theory: Drawdowns cut by more than half and greater timing
accuracy (higher Profit Factor)
20. Current stock market
situation
From top to bottom charts: S&P500, DJI, DJT
From left to right: Blue rectangles show the secondary reaction against the Bear market followed by a pullback (small brown
rectangles) that set up stocks for a potential BUY. The Deep blue horizontal lines highlight the secondary reaction highs, which must
be broken up by the S&P500 and at least one other Index for a BUY. The BUY signal was triggered on 11/10/22 when the S&P500
finally broke. The yellow rectangles display the first secondary reaction against the new bullish trend, which was successfully
terminated by higher highs. The brown rectangles show the current secondary reaction. The red horizontal lines highlight the lows
of the last completed secondary reaction, which is our current stop-loss
21. Can we apply the Dow
Theory to other markets?
Yes: The “classical” Dow Theory can be applied to other
markets (bonds, precious metals, energy, etc.)
Dow Theorist Hamilton wrote in 1922 that the “law that
governs the stock market” applies to other markets as well
(The Stock Market Barometer”, Wiley Edition, pages 14-15)
My blog reports the successful application of the Dow
Theory to precious metals, their ETF miners (GDX, SIL), crude
oil, and bonds.
The Dow Theory did a better job at outperforming and
cutting drawdowns than moving averages and breakout
systems
22. Can we apply the Dow
Theory to other markets?
Sources:
Dow Theory applied to gold and silver (GLD & SLV) and their
miners ETFs (GDX & SIL):
http://www.dowtheoryinvestment.com/p/dow-theorys-
performance-when-applied-to.html
Dow Theory applied to crude oil:
http://www.dowtheoryinvestment.com/2019/12/dow-
theory-special-issue-hamiltons.html
23. Can we apply the Dow
Theory to other markets?
Sources:
Dow Theory applied to U.S.bonds (TLT & EDV):
1. Dow Theory applied to TLT:
http://www.dowtheoryinvestment.com/2022/02/dow-theory-update-for-february-16-does.html
2. Dow Theory applied to EDV:
http://www.dowtheoryinvestment.com/2022/03/dow-theory-update-does-dow-theory-
work.html
3. Comparing the DT performance with a moving average
http://www.dowtheoryinvestment.com/2022/03/dow-theory-update-does-dow-theory-
work_22.html
24. Can we apply the Dow
Theory to other markets?
Sources:
Dow Theory applied to U.S.bonds (TLT & EDV):
4. Shorting EDV and going long inverse ETF TTT
http://www.dowtheoryinvestment.com/2022/03/
29. Final clarifications
• The Dow Transportation is still necessary for the Dow
Theory. Example: In 2007, the Transports saved our bacon
by seriously diverging from the Dow Industrials, thus
negating a Buy signal when a new Bear market was about
to start.
• Any claim to an improved Dow Theory with more
“modern” Indexes must be backed by a long track record.
Not just anecdotal evidence based on a couple of charts.
• Divergence and lack of confirmation are not the same
and have different implications. However, they are
frequently misunderstood.
30. Final clarifications
Divergence entails a different direction (i.e., one Index makes higher
lows, whereas the other makes lower lows). Lack of confirmation means
the same direction, but one Index fails to better a previous high or low.
31. Additional resources
Shane Skwarek, CMT Association, interviews Jack Schannep (June
13th, 2015):
https://cmtassociation.org/video/the-evolution-of-the-dow-theory-
for-the-21st-century/
Lance Mc Donald, CMT chats with Jack Schannep (May 21st, 2013):
https://cmtassociation.org/video/conversations-podcast-interview-
with-jack-schannep/
Our website (lots of good stuff in also the free area):
https://thedowtheory.com/
Manuel Blay’s blog:
http://www.dowtheoryinvestment.com/
32. To subscribe to TheDowTheory.com:
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Do you have questions? Contact us:
editor@thedowtheory.com
