Dow Theory Revisited

 |  Includes: DIA, QQQ, SPY
by: Paul Castro

"The bend in the road is not the end of the road unless you refuse to take the turn." ~ Anonymous

Dow Theory Buy Signal: Check! Now what? I posted a few weeks ago on the subject of Dow Theory. Given Friday's Dow gone wild, it seems an appropriate time to revisit the subject.

Friday's Dow Industrial's price high exceeded the prior intermediate price high which was recorded on February 1, 2008 when the Dow closed at 12,743. We now have our first higher intermediate price high in the Industrial Average since October 2007. The Dow Transportation Average first exceeded its February 1st price high on March 24, 2008 when it closed at 4,861, thus exceeding the February 1st price high of 4,807. The Transportation Average actually put in a lower high in October requiring one to track back to July 2007 to see the last time prior to March 24th that the Transportation Average made a higher intermediate price high. So with the Transportation Average already having achieved a higher intermediate price high, Friday's higher intermediate price high on the Industrial Average generated a Dow Theory Buy Signal.

In accordance with Dow Theory, the bear market which began in July 2007 (the last time both the Industrials and the Transports made a concurrent higher intermediate price high) has now ended. We now have a new bull market, the origins of which can be traced back to January 2008 (the last time both the Industrials and the Transports made a lower intermediate price low).

In order to confirm this new bull market, Dow Theory compels us to look for a higher intermediate low sometime into the future, i.e, a low on the Industrials and the Transports that bottoms out above the lows reached on March 10, 2008. As long as the March 10th lows are not violated, we can feel confident that a new uptrend of higher price highs and higher price lows has indeed begun.