The moment of truth has arrived. We will now get the indication of where the market is truly headed in the next 3-6 months. According to Dow's Theory, the Industrials and Tranports need to hit a new low and reverse that trend together in order to indicate that the market is tentatively headed in a new direction. That is exactly what happened on October 27th when the Industrials closed at 8175.77 and the Transports closed at 3364.98. From that level both indices moved higher and close above the previous high level set on October 13th. The close above the October 13th level occurred on November 3rd.
The most important point here is that Dow's Theory states that there must be a confirmation of some sort before committing money to or pulling money from the stock market. Confirmation would occur if both the Industrials and Tranports fell back to the prior low (October 27th) with one or both indices moving higher once again (point A in the chart below.) If this scenario were to play out I would commit all of my investment money to the market. The alternative would be if both indices fell below the previous low of October 27th. If that were to happen then the Dow would be on track to head much lower. If the market were to decline 3%-5% below the previous low then I would consider closing out any open positions that I have.
Again, if both indices fall to the prior low and one heads up from there then we would have confirmation that the bottom is in for the stock market, especially big blue chip stocks. However, if both indices fall through the prior low then we would have a firm confirmation that the bear market is still in effect. Let's watch what happens because the next few days may reveal the ultimate direction of the overall market. Touc.
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