Premises, Laws, Rules...

... call them what you will... but how do the basic tenants of Dow Theory stack up today... Thanks to Rhea and Russell, here are the 10 principles of Dow Theory and my comments attached.  These were taken from Russell's book, "The Dow Theory Today" and although there is some of my own writing in here, for the sake of respect, assume all the following is direct copies.

1. The Averages Discount EVERYTHING.  The closing prices of the two indexes give us a complete index of everything known by anybody than can possibly affect the economy and corporate profits.
2. The market consists of three movements which operate simultaneously.  Primary (one to many years), Secondary, (one to three months) and Daily.  Daily movements are ultimately irrelevant, except for over time producing primary and secondary trends, but gain the most attention by the general public.
3. A primary bull is a broad upward movement interrupted by frequent secondary reactions.  These have three phases where the first is a return to normal values, the second is caused by bettering business conditions and is usually the longest, and the third is feverish and speculative.
4. A primary bear is a broad downward movement which serves to correct the excesses of the previous bull markets speculative phases and does not end until the worst that may happen, has.
5. Successive rallies and declines must advance or decline past previous points.  For example, in a bull market the next high and low of the secondary movements within the primary must be higher than the previous high and low.  Of course the opposite is true for a declining market.
6. The movements of the two averages must confirm each other.  The logic is that if there is to be a valid increase in manufacturing and production, there will also be an accompanying increase in shipping and transportation.
7. Volume expands in the main direction of the trend.
8. "Lines" form when both averages remain whin an area of about 5% for 2 weeks or longer, indicating a period of very evenly matched buying or selling.  Both averages penetrating their line limits can predict higher or lower prices to come.
9. The word "penetration," under Dow Theory, implies any movement through a given point of one cent or more.  Some scholars demand a one dollar move as a more valid signal.
10. Finally, and most importantly, the primary and secondary movements are NOT susceptible to manipulation.

So that brings me to my question, how do the markets stack up today.  No. 1 I cannot argue with.  As I have argued over the past week, if the averages discount everything, then there is some possibility that there will be some form of news in the short run that is for the purpose of pushing stocks upwards.  If the basic tenants state that if I know it's a possibility, then others also do, then could the professional traders be discounting the news that there will be a QE2 push before elections, and are they setting the market up to require it by pushing prices higher in the short run.

No. 2, I still believe we are in a primary bear trend and a secondary bull trend is currently taking place.  For this to be a primary bull trend we will have to continue to breach previous highs of current moves, but ultimately breach the highs of April and May this year.  Also, the subsequent lows will have to be higher and we have been posting lower lows.  I still argue that we are in a primary bear trend.  This past Monday Russell posted his argument that by the tenants of Dow Theory ONLY, we may be resuming a bull market trend, however, he also said that he more than likely will be staying out of the market.  I will take my first bold statement to disagree, I believe that by the tenants of Dow Theory ONLY, we are in a 1 to 3 month secondary bull and we will not breach the April highs.  I will give further examples as I work through the rest of the tenants.
No 3, this market is clearly neither feverish nor speculative.  It's bored.  In the basic tenants and having read Russell for years now, I would lay out the argument that the only time you can argue buying a bored market is when you can prove we have just finished third panicky stage of a primary bear market.  We have not, and thus this is a toppy and very uninteresting market.
No 4, very simply, the worst that can happen, has not.  Constant posting the "better than expected" statements on earnings does not mean they are increasing.  I can under-promise anything, which means I will always over-perform.
No. 5, obviously favoring primary bear trend as the previous highs and lows over the past few months are subsequently lower.  I will change my tune to bull when our next legitimate low in the market posts above our early July lows.
No. 6, the transports have not set new lows.  And since the movements of the two averages MUST confirm, then we cannot confirm this is a bear.  I still hold to the exception that the averages do NOT have to confirm on the same day.  Although the transports have been successively lower over the past few months with the industrials, they have not breached their Feb. lows.
No. 7, this is the boredom discussion again.  Recently, up days are extremely low volume compared to their 3-month volume averages, where down days are much higher.
No. 8, I haven't drawn any lines since pricing has moved in well over a 5% range for a while now.
No. 9 and 10 are just good ole' fashioned things to remember.

There are multiple points that I would argue tell us we are in a short-term secondary bull trend in an overall primary bear trend, and all that needs to happen to all-but guarantee it is for the transports to close below the Feb. lows.  If this has to be true for me to be correct, than I must argue that in order for the Aden sisters and Russell to be correct it must also be said that the highs must breach the April highs.

So, I'm stepping out on a limb here and most importantly I want to thank Russell for telling me what's most important, and that is that, although he feels the markets seem to be hinting "bull," he's not putting his own capital to work.  Since Dow Theory is never right ALL the time, then rule 11 should be, after you have gone through the first 10, "be cautious, and trust your gut."  His gut says cash and gold for the time being, and so does mine.  Would I play a long position against the secondary trend...??  Would I play a short right now assuming a long-term primary bear trend...?? ...that entirely depends on the specifics of the position itself, but I'm not your trader, I'm just your voice of reason, so don't ask me to actually answer that.  I make my decisions on my assets, you have all the tools available to do the same.