What the Dow Theory Says About This Rally

After November’s furious upside rally, many traders and investors are all wondering the same thing…

Can the rally continue?

To help answer that question, let’s examine where the major market indexes stand in terms of one of the most time-tested and important predictive models ever created…

The Dow Theory.

As a quick reminder, the Dow Theory is a financial concept that says the market is in an upward trend if one of its averages advances above a previous important high… and then that move is accompanied by a similar advance in another average.

So, for example…

If the Dow Jones Industrial Average were to climb to an intermediate high and then the Dow Jones Transportation Average ALSO climbed to an intermediate high, the upside trend would be confirmed, according to the Dow Theory.

This approach was created by Charles H. Dow, who, along with Edward Jones and Charles Bergstresser, founded Dow Jones & Company in 1882 and developed the Dow Jones Industrial Average in 1896.

Dow famously fleshed out his theory in a series of Wall Street Journal editorials.

He would die in 1902, but one of the hallmarks of his work still holds true today: the idea that in order to confirm an upside or downside trend, one critical box must be checked.

Indexes Must Confirm Each Other

Dow insisted that for a trend to be established, the signals that occur on one index must match or correspond with the signals on another.

Dow’s assumption was…

If business conditions were truly healthy, then industrial stocks and, say, railroad stocks should be rising simultaneously.

Therefore, a confirmation of highs in both sectors would’ve made him confident enough to call a bull market.

So, with that in mind…

Where do the major market averages stand right now?

Take a look below…

Last week, the Dow pushed to new highs:

Chart: Dow Industrial Average


It’s important to note that the Dow Transports (which includes names like FedEx, Union Pacific, United Parcel Service, J.B. Hunt Transport Services, United Airlines Holdings, Ryder System and Norfolk Southern) still has around 10% of upside left before it hits a new high of its own.

Chart: Dow Transportation Average



This tells you one of two things is about to happen…

Scenario #1: If we are, in fact, in a bull market, the Transports will rise 10% to hit a new high and confirm the upside trend.

Scenario #2: If we are not in a bull market, the Transports will fail to hit a new high, and we’ll know that the November gains were a smoke screen.

So the fate of the markets now lies in the hands of the Dow Transports. If you want to know whether we’re truly in a bull market, this is the sector that will give you the answer.

To see exactly how I’m playing these two potential scenarios, I invite you to join me in The War Room. Last week I closed nine winning trades (that’s almost two wins per day!), including a 75.52% return on Pure Storage (PSTG) in one trading day.

Click here to join me in The War Room.



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