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In Uncategorized on February 9, 2010 at 2:39 am

Dow Theory is like a light switch.  Once it is turned on, it stays on until it is turned off.  Likewise, a BUY signal stays in force until such time that a SELL signal is given thus reversing the previous BUY signal.  It is binary.  It is 1 or 0 — there is no gray area — except in interpretation.  The most difficult time a Dow Theorist has is during a secondary reaction (rally in a bear market or reaction in a bull market) when the change in primary trend is not yet clear.

Since the confirmed dual January highs in the Transportation Average and the Industrial Average, we have seen a pullback or reaction of less than 10%.  During the previous bull market from 20003-2008 we experienced several pullbacks of less than 10%.  Until such time as we get a SELL signal, I have no choice but to take the most recent pullback as just that: a secondary reaction in a primary BULL market.  Let’s take a look at the Transportation average below (I have included the Industrial ETF called DIA in grey).

Chart 1

When you look at the weekly chart above, the correction looks like a normal reaction in a long-term uptrend.  If you have not established your bullish positions yet, I recommend you use this “sale” to do so.  Check our AlphaDow or ETF Advisor page for recommendations.