Dow Theory says nothing to worry about ... yet

I've been very worried about the market at large and that what we are seeing is perhaps the beginning of another 2008 type scenario. I wasn't around when the last crash happened, well I was around, I just wasn't involved in the markets (I bought my first share in 2009 - if only I never sold it...). Anyway, I've been looking at the charts and freaking out about the news like most people I suppose and started to really get worried about the world markets at large, thinking that they are about to come crashing down at any second.

This may still be lingering in the back of my mind, although I have found some comfort that we do not yet have confirmation of the end - according to Dow Theory - yet.

One of the rules of Dow Theory is that there needs to be confirmation of new highs or lows on two various indices before one can comfortable say that a new trend is forming. These two indices were once the Dow Industrial Average and the Dow Railroads Average. Times change though and in modern times a more accurate measure of the U.S. markets would be to use the S&P500 and the Russell 2000. Now the basic idea here is for both of these indices to break to new lows roughly at the same time before we can confirm that the overall market trend (primary trend) is changing.

Looking at the S&P500, we can see that the last major low has not been taken out yet.

The most recent major low is indicated by the red line and until that line is broken by price, we cannot say that a major new low has been formed.

When looking at the Russell 2000, we can also see that no major new low has been formed yet.

The most recent major low is indicated by the red line and until that line is broken by price, we cannot say that a major new low has been formed.

So based on the concept of confirmation as stated in Dow Theory and adapted to our more modern market, we cannot say that the Primary Trend has changed yet.

This does little to soothe the nerves, although it does add some perspective. Only one those lows are taken out on both indices at roughly the same time can we confirm that the general market is moving from Bull to Bear mode.

*Note the the red lines (for confirmation) are based on daily closing prices and not on intraday spikes.