Charles Dow's Original Editorials and Their Relevance Today

The Dow, Transports Break Out

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The Industrials and Transports broke out of a two-month trading range on Friday, so the market has something positive to build on here. That said, we’d note a couple of reasons for caution.

First, the indexes broke down out of these ranges two weeks ago and immediately reversed, so be on guard for a similar reversal. And second, a “line” isn’t necessarily the strongest of Dow Theory patterns; to quote Robert Rhea, a breakout of a “line” indicates “a change of the general market direction of at least secondary, and occasionally even of primary, character.” In other words, it’s not viewed as strong a buy signal as persistent new trends in the indexes.

So what to look for: A good Dow Theory buy signal will be followed by at worst a modest pullback, so a sharp drop back into the trading range would be a negative sign for the market. To the upside, the Dow Theory sell signal area of 11,865 will be the first test.

Paul Shread is a Chartered Market Technician (CMT) and co-author of the book “Dow Theory Unplugged: Charles Dow’s Original Editorials and Their Relevance Today” from W&A Publishing.

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