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PeakTrader.com Economics, Portfolio Optimization, and Technical Analysis
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arthur Guest
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Posted: Sat Oct 30, 2004 6:59 am Post subject: Dow Theory |
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Currently, both the Dow Transport Index and the Dow Utility Index are making new highs, while the Dow Jones Industrials Index hasn't confirmed the uptrend. Consequently, the upward trend is suspect (i.e. Dow Theory). Therefore, I expect one of the following trends over the next few months:
1) The Dow Jones Industrials will catch up with a sharp rally and the two leading indices will rally more slowly or consolidate.
2) The Dow Jones Industrials will rally slowly, while the Transport and Utility Indices consolidate or fall.
3) The Transport and Utility Indices will fall sharply, while the Dow Jones consolidates.
4) All three indices will fall sharply with the Dow Jones falling less than the two leading indices.
Therefore, gains can be made using arbitrage. By using DIA calls, FDX or UPS puts (Transport Index proxies and components), and UTH (ETF) DUK or SO puts (the largest components of the Utilities Index), a large net gain can be made. It may be best to buy 2005, 2006, or Dec in-the-money options (for safety) with an equal value of calls and puts, since the disparity will eventually converge. Below are daily year-to-date charts.
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