Last week the Dow Jones Industrial Average (DJIA) made a new all time closing high, breaking above its recent range (Dow Theory line). At the same time the Dow Jones Transportation Average (DJTA) broke decisively below the bottom of its line. When this occurred it invalidated the line patterns in both indexes. Remember, a major tenet of Dow Theory states that both indexes must confirm a move to provide any useful information…so the fact that the indexes broke different directions invalidates the lines…period.
So what do we do now? We go back to waiting for the current secondary low to be broken (which would signal a new bear trend) or the formation of new secondary lows. To break below the current secondary low (without creating a new secondary low) it will take a decline of over 30% in DJIA and 45% in DJTA. A highly unlikely scenario.
So what we should be watching for is a new secondary low to be created. There are several criteria that should be met to create the low. Two important criteria are 1) a decline that lasts more than three weeks and 2) a decline that retraces roughly 33% from the last secondary low. DJTA has met the three week criteria, but would need to fall to 7775 (almost a 16% decline) to create its low. DJIA would have to fall over 10% to 16390. Basically a retest of the October 2014 lows. If that occurs it will be a dip that should be bought according to Dow Theory because the long term trend is up until the current secondary lows are broken. Then we will watch the subsequent rally closely for clues that the long term trend is changing.
Bottom line, the major trend is still up and we’ll need something significant to happen before Dow Theory will signal a change. If I see anything interesting I’ll be sure to do an update.