I am looking at the Dow Jones industrial and the Dow Jones transportation average right now. And I am thinking to myself that the market just did something that looks very much like a buy signal, according to Dow Theory.
When both the Dow Jones Industrial and the Dow Jones transportation averages makes new highs, after they’ve both made higher lows, during their prior swing lows, it means that they are sending out bullish signals that the market is heading higher, in accordance with Dow Theory. So let’s delve into where we stand in early november of 2019:
The market has been building a base on the Dow Jones Industrial average for quite some time now. It broke out of this base on november fourth. It actually broke above an earlier high, after making an earlier swing low even as early as june 20, as the picture show:
But the transports did not confirm this move right away. According to Dow theory both averages need to confirm the move and hit new highs to make it a bullish signal. Although this do not have to happen at the exact same time. Now, it looks like that confirmation came this thursday:
What is a buy signal according to Dow theory?
Dow theory is a methodology first invented by Charles Dow, in the late 1800s. Although he himself never called it Dow Theory or thought of it as a buy and sell system. The buy signal happens when the transports and industrials are both cutting into higher ground, after a consolidation of higher lows. The theory is that when economic activity is picking up, Industrial companies need to ship their goods by transport, therefore leading to higher profits for both of these groups.
Is this market a screaming buy?
I don’t know. And I don’t make recommendations. I am just telling you what the economic barometer of Dow theory is saying. The barometer just sent out a signal. Now, this is just one tool in the toolbox and you should not base your investing decisions on what I or anyone else is observing. But one tool just turned bullish. That’s it.
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