We are getting a test of the low from the big decline last Monday which is to be expected as many times it takes multiple tests before support really sticks. This is now the moment of truth as this low needs to hold support or a bigger decline can be expected. There is the 200 dma, the time cycle low and the very high volume spike from last Monday, in the down to up volume chart, that are showing this could be an important low.

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The down to up volume chart shows the low from last Monday had a very large capitulation spike that was the highest since 2012 or so.

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 This market timing method has been the valuable basis of Richard Russell’s work in his Dow Theory Letters – Money Talks Editor

• Buy or sell?
• A simple trick to time the markets
• Plus: Can value investors get technical?

Forget about all of your fancy pants, high-tech trading tools. Sometimes, you just need to go old school to get an accurate picture of the markets… 

So today I’m showing you a simple, old-fashioned market timing trick that can tell you when it’s safe to buy stocks– and when you should probably head to the sidelines for a bit. And even though this trick predates computers, online brokerages, and shady algo trading programs, it still works pretty darn well. 

It’s called “Dow Theory”–and it’s outrageously straightforward if you can follow some simple rules. Dow Theory uses two indexes to measure the market’s primary trend: The Dow Jones Industrial Average and the Dow Jones Transportation Average. 

Now, Dow Theory doesn’t tell us what individual stocks are going to beat the market or anything like that. In fact, it only spits out one of two “big picture” signals: buy or sell. It essentially tells you when it’s safe to buy stocks (when the market’s locked in an uptrend) and when you should think about selling (when there’s a distinct change of trend to the downside). 

Here’s how it works: 

Dow Theory says U.S. markets are in an uptrend if either the Dow Jones Industrial Average or the transportation average breaks out to a new high – and the move is confirmed by the other average. If both the DJIA and the transports are moving higher, the market’s strong. 

The idea behind the theory is that the economy is in decent shape if goods are being made (represented by the industrials) and shipped (represented by the transports). Like I said, it’s a simplistic system.

If both averages are down, though, it’s probably a pretty bad sign for the market. And what if Industrials move higher while transports are stuck sideways? No biggie. That’s still a “buy” as far as Dow Theory is concerned. But what if one average is up while the other is down? Still a buy signal, as far as Dow Theory is concerned. Remember, we would need to see both averages start to breakdown before the switch flips to “sell”. 

So what can it tell us about the stock market right now? 

For that we turn to the charts. Check out a current look at the Dow Industrials and the Dow Transports:

Notice anything interesting?

Well, for starters, the Transports are looking ugly this year. After peaking in December, the trannies are down about 11%.

But the Industrials? They’re holding up just fine… for now.

With the industrials still in positive territory, we’re still in “buy” mode. And let’s be honest, that’s not a terrible place to be. But we’ll have to watch the DJIA closely over the next few weeks… 

Here’s Oppenheimer’s Ari Wald on what it’ll take to trigger a big sell signal:

“The current signal has been on a buy signal since December 2011 and was last reaffirmed in December 2014,” he says. “A bearish reversal would require 1) a lower high by at least one of the indexes and 2) then a breakdown by both.”

In other words, we need to see the industrials close below their January lows before it’s time to start leaning hard on the bearish side of things. And we’re just not there yet.

Dow Theory is a straightforward measure of market strength. And obviously it’ll be late triggering changes in trends. After all, this is a low-tech timing tool. But it’s important to take a step back from the day-to-day volatility of individual stocks to see how these indexes are reacting to longer-term buying and selling pressures. 

We get too wrapped up in high-tech. Sometimes, it’s best to go old-school…

“You two are looking at it in different ways,” a reader chimes in regarding the averaging down debate. “You are a trader, so you follow (technical) trends, whereas the ‘soup connoisseur’ was speaking from a value investing point of view. If you study the work of Peter Lynch, Warren Buffet, and Benjamin Graham they essentially say if fundamentals are good, and nothing changes, yet the price drops, that price drop presents a buying opportunity. So you’re both right, just looking at it differently.” 

I don’t disagree with this sentiment at all. However, I contend that every value-centric investor should add just a few technical trading rules to their toolbox. After all, who wouldn’t want to buy a stock at the best possible price?

In other words, why load up on shares at $10 when there’s a pretty good chance you can get them for $7 sometime in the near future? If you ask me, that’s a no-brainer… 

[Ed. Note: Send your feedback here: rude@agorafinancial.com – and follow me on Twitter: @GregGuenthner]

Last week began with crosscurrents that made it hard to predict. See On Monday, It’s China Versus Greece.

This week is starting with no such ambiguity. The Greeks had their vote and tossed a resounding “NO” at their European creditors. And the markets are not happy:

S&P 500 futures down 1.5% on Greek vote

U.S. stock futures opened sharply lower Sunday night after the Greek people voted resoundingly to reject proposals from their European creditors. S&P 500 futures fell 1.5 percent in early trading after 6 p.m. ET (2200 GMT).

Once the magnitude of the Greek vote became clear, the euro began falling against other major currencies, and European stock futures sank (led by a 4 percent decline for the benchmark German DAX).

Because it’s still early on Sunday, a lot of futures markets have yet to open. But when they do it will be with a bang. So expect, along with plunging European and US stocks, extreme currency swings, lower oil prices and surging equities volatility.

And then comes the real excitement. The Greek vote wasn’t legally binding but it does free the country’s leaders to stand up to its creditors, so expect some big threats to be tossed out on Monday. Here’s a typically evocative headline from Zero Hedge: Greece Contemplates Nuclear Options, May Print Euros, Implement Parellel Currency, Nationalize Banks.

This is a story with legs, of course, but as always it’s important to understand that Greece isn’t the issue. It is to the global financial system what who takes out the trash is to an unhappily married couple: Not the big issue but a perfectly acceptable start to a catastrophic conflict. The real problems are in the quadrillion dollar derivatives market, the debt/GDP trends of five or six major countries, income inequality in the US and elsewhere, and the Chinese shadow banking system. Greece might be where it starts but those other places are where it will end.

1 . All Hell Now Breaking Loose – This Crisis Will Rock The Global Financial System To Its Core

by James Turk

2. Richard Russell: The Smart Money Is Dumping Stocks

3. Quality Companies “thrown out with the bathwater.”

Marc Faber to EU: ‘Kick Greece out and never take them in’

“What I think should happen is to kick them out and never take them in. As we understand it, we are not talking about economic, but rather political issues. Greece is part of NATO. and the Americans have a naval base in Crete. Greece is part of the EU…Given the tension with Russia, American Neocons are afraid that if Greece turns its back to Europe, maybe Chinese or Russian influence will prevail in the country.”” Greece is an irrelevant country in global economy. It’s less than 2 percent of global GDP. Economically it has no impact. However the impact, this is the problem for whole world, is that the global financial system is far too big for the real economy, and so when Greece defaults, it may threaten some institutions like the International Monetary Fund, the European Central Bank, and the banking system. This is the issue.

If such a small country can have such a huge impact on the financial system, it means the financial system is very fragile. That’s the problem in my view,” Dr. Doom commented.”Greece was bailed out repeatedly. It was not the bailout of Greece; it was the bailout of the banks and the institutions of Europe. Now we clearly see that with this economy and GDP in Greece, they think they cannot pay the interest rate on their debt and repayment is out of the question. I think what Aleksis Tsipras is doing, he is basically doing the right thing, telling the truth; ‘we don’t have the money, we have to make a significant haircut on our debt.'” – in Turkish Anadolu Agency on Friday

…more from Marc:

Marc Faber : The world is addicted to Debt

Marc Faber: Greece Is Basically Bankrupt