July 26, 2003
I was doing a little reading prior to attending my 3rd Springsteen show at Giants Stadium. Ah, it sure has been wonderful. Anyway, here is what I wanted to place on the site. I have been an avid reader of http://www.dowtheoryletters.com . Richard Russell discussed the 50% principle in the July 23, 2003 issue. I have placed some of his comments here. The comments are placed here as a reminder for me and not for any other reason. Of course, you should not invest or sell based on any of these or any other comments that you find on our site.
” 50% Principle — This seems to be a good time to talk about Dow’s 50% Principle. I learned about the 50% Principle from the great Dow Theorist, George Schaefer. Schaefer wrote his Dow Theory reports during the period of 1948 to 1974. I guess you could call Schaefer my mentor. Nobody influenced me more in my studies of the stock market and Dow Theory.
Before he died in 1974, George Schaefer asked me to carry on his work with Dow Theory. I have written about Schaefer at length on my Dow Theory explanation which is located on the home page of my website.
Schaefer had studied Dow’s writings carefully. Schaefer noted that Dow was particularly interested in what the Industrial Average did at the halfway or 50% level of previous major advances or declines. This is why Schaefer called the study “Dow’s 50% Principle.””
” Now let’s turn to the 50% Principle as applied to today’s stock market. The great bull market started with the Dow at 759 in 1980. The bull market continued to a high of 11722 in the year 2000. That amounted to a rise of 10963 points. Half of that is 5481. Adding 5481 to 759 gives us the halfway level of 6240. So 6240 becomes the 50% or halfway level of the entire bull market advance from the years 1974 to 2000.
The 50% Principle is saying that on a big picture basis, as long as the Dow can hold above 6240, the situation is constructive. However, if the Dow breaks below 6240 the picture turns ominously bearish. In that case, I couldn’t discount the possibility of the Dow ultimately testing its 1980 low of 759. To put it another way, a violation of 6240 paves the way for a disastrous wind-up for this bear market.”
” Now here’s the other side of the 50% Principle. On the decline from the January 2000 high of 11722, the Dow sank to an October 2002 bear market low of 7286. This was a decline of 4436 points. Half of that is 2218. Adding 2218 to 7286, we get 9504. So 9504 is the halfway or 50% level from the bull market high to the bear market low. Applying the 50% Principle, we can now say that if the Dow can rally above 9504, this would be a very bullish technical achievement. In fact, if the Dow can advance above 9504, the way would be open for a retest of the 11722 high.”
” However, if, on any and all advancing action, the Dow fails to better 9504, then the odds are that the Dow will, in due time, decline to test its October low of 7286. If 7286 is violated, then the odds increase that the Dow will decline further to test the critical 6240 level. If the Dow violates 6240, the situation is open to a further disastrous decline, perhaps a decline back below 800. So summing up, the big question now is whether on any and all rallies the Dow can better 9504. If the Dow fails to better 9504 then we will watch to see whether the Dow can hold above its October bear market low of 7286.
Somewhere ahead, and I obviously can’t predict the timing, the Dow will either break out above 9504 or the Dow will turn down and violate its bear market low of 7286. So 9504 or 7286 – what the Dow does in relation to those two levels will tell us a lot about the future course of both the stock market and the US economy.”