Dow Theory Flashes a Buy Signal
Last week, the Dow Jones Industrial and Transportation averages closed above their October highs, issuing a buy signal under Dow Theory and negating the sell signal from early August.
The buy signal looks pretty solid, meeting my ideal conditions – a rally in both indexes of at least 18 trading days from trough to peak, a decline of the same duration from peak to trough, followed by new highs in both the Dow and Transports.
The buy signal also comes some 400 points above the August sell signal. That the August sell signal proved to be a relatively weak one should come as no surprise to students of market breadth, as the lack of deterioration in the NYSE advance-decline line suggested that there might be enough liquidity to limit the bear market’s damage.
Dow Theory offers no prediction on how long or far any rally will carry from here; the date of the next sell signal will tell us that. But for now, conditions appear favorable for stocks.
There is one negative to note here, however; that same advance-decline line that earlier suggested strength is now lagging the market, still below its November highs. Traders will want to see that negative divergence wiped out soon with a new high in the A-D line.
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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