Dow Theory Tells Us Not to Trust the Market’s Recent Run
At the close of trading last week, the Dow Jones Industrial Average registered its best first half in two decades.
Not only that, but the 6.9% gain on the S&P 500 marked its best June since 1955.
And to begin this week, the major market averages moved higher thanks to the weekend news that a U.S.-China trade truce has been reached. Well, perhaps that’s the wrong way to describe it. In reality, the agreement was to “pause” the tariff war – with the U.S. maintaining current tariffs but holding off on new ones.
In The War Room, I’ve argued that the trade war news has already been priced into the market. That’s why I asked an important question about the latest market rally…
Will the upside gap hold, or will it fade?
For the answer, let’s see what Dow Theory has to tell us. It’s credited as the first form of modern technical analysis.
Dow Theory was developed by Charles Dow, who, with Edward Jones, founded Dow Jones & Company and developed the Dow Jones Industrial Average.
The two published their market theories in a series of editorials in The Wall Street Journal, which was co-founded by Dow.
Dow Theory says that the market is in an upward trend if one of its averages (industrials or transports) advances above a previous important high and is followed by a similar advance in the other average.
For example, if the Dow Jones Industrial Average climbs to an intermediate high, the Dow Jones Transportation Average is expected to follow suit within a reasonable period of time. The combination of these two major indices each confirming new highs signifies that a bull market is alive and well.
That’s simple enough, right? So let’s take a look at both charts right now and see whether they’re each confirming new highs…
Nope, both are NOT hitting new highs.
The latest high on the industrials was just below $27,000, set in June.
However, the latest high on the transports was around the $11,130 level, which was back in April. Right now, there is no confirming new high.
So, according to the earliest known form of modern technical analysis, the major market averages are still not in a confirmed upside trend!
Action Plan: Until the Dow Jones Transportation Average confirms the bull trend by establishing a new high of its own – the market’s bull run is in doubt. In many respects, that’s why I’ve been skeptical of this latest upside move. In The War Room, we’re getting positioned in overbought names that could fall victim to a pullback in the days and weeks ahead. One recent example was Costco, which we sold for a winning trade on a pullback yesterday!