Dow leads the way?

Yesterday, Dow had a strong rally where it gained 391 points to close at 12654. It is now 200-400 points away from a cluster of resistance, which will truly test the strength of this recovery. The first hurdle will be the strong horizontal resistance of 12850. Following that, it will have to overcome the psychological 13000 resistance. Finally, DOW will face the downtrend line resistance at 13100-150. See the Chart 1 below.


Chart 1: Dow's daily chart as at April 1, 2008 (source: Yahoo Finance)

In a recent article entitled 'Those curiously strong Transports', Mark Hilbert has noted that one of the market averages (or, index) had actually gained ground during the bad first quarter. That average is the Dow Jones Transportation Average (DJT) [see Chart 2 below]. Why should we bother about DJT?

The followers of Dow Theory would recall that one of its guidelines is that a buy signal is generated when both the Dow (or, DJIA) & the DJT reach significant new highs, while a sell signal is triggered when both averages reach significant new lows. When the two averages trend in opposite directions- a 'non-confirmation' in Dow Theory parlance- a market turning point may occur.

Mark noted this:

What does all this mean? For answers, I turned to the three Dow Theory newsletters I track: Dow Theory Letters, edited by Richard Russell; Dow Theory Forecasts, edited by Richard Moroney; and TheDowTheory.com, edited by Jack Schannep.

Interestingly, though these three newsletters disagree on lots of other things, they are all more or less in agreement that this non-confirmation sets up the preconditions for a buy signal. In particular, they argue that it would be bullish if the Dow Industrials were to join the Dow Transports in breaking above their February highs.

The level to watch in this regard is 12,743.19. To get there; the Dow Industrials would need to rise by just 3.9% from its March 31 closing level.

So such a signal is not all that far away.

Chart 2: DJT's daily chart as at April 1, 2008 (source: Yahoo Finance)

The next few days could be very interesting indeed as we await a buy signal from the venerable Dow Theory.