When both averages are moving up, the market is a buy, and sells are signaled when both averages are moving lower. Unfortunately, there are also times, like now, when no clear signal is being offered.
Up moves under Dow Theory are defined as new highs, and when an average reaches a new high, it is a buy. The chart below shows the DJIA signaled a new buy as it reached new highs in August. The DJTA failed to confirm that signal, and pure Dow Theory practitioners remain bearish based on a sell signal given in May when both averages fell to new lows. More recent market action has failed to deliver a strong buy signal and a divergence has formed where one indicator is bullish and the other is bearish.
The chart below looks at the two indexes with a stochastics indicator. Here the trade signals are less ambiguous and, for now, a long trade in the transport sector seems like the best potential trading option.
The weekly chart shows that the DJTA signaled a buy in the stochastics indicator at the close of trading last week, while the industrials remain on a buy signaled a week earlier.
GWR is among the biggest winners in the stock market during the past six months with a gain of more than 50% in that time. This has pushed the stock toward the initial price target projected from a cup-and-handle pattern. The next target from that pattern, a Fibonacci extension of the depth of the pattern, is at $86, offering a potential gain of 17% from current levels.
This trading strategy uses the idea behind the Dow Theory that the industrials and transports should confirm each other. But it adds indicators to offer timelier trade signals, which could improve on the profitability of the basic strategy.
Recommended Trade Setup:
-- Buy GWR at the market price.
-- Set initial stop-loss at $67.50
-- Set initial price target at $77 for a potential 5% gain
-- If target is hit, then raise stop-loss to the 26-week MA to participate in the uptrend as long as possible