The Stage Is Set. Will The Averages Shine?

8/25/2014


The Dow Industrials and Dow Transports rebounded within 1% of all-time highs, meaning both averages have staged meaningful retests after significant corrections. So, the state of the Dow Theory is clear.

With closes above the July highs of 17,138.20 in the Industrials and 8,468.54 in the Transports, the bullish primary trend will be reconfirmed — and the August lows will no longer represent significant points.

Without new highs in both averages, a breakdown below the Aug. 7 closing lows of 16,368.27 in the Industrials and 7,992.08 in the Transports would represent a bear-market signal.

Both averages are much closer to the July highs than the August lows, as are the S&P 500 Index and broad measures like the S&P 1500 advance-decline line. Still, while the odds favor a bull-market confirmation, the averages may hit some resistance near the July highs.

If both averages can penetrate those highs, which were reached amid a wave of investor optimism, it would suggest that the underlying trend of rising equity values remains intact. A failure to reach new highs would imply uncertainty regarding the business outlook, especially if followed by a breakdown below the August lows.

For now, subscribers should watch the averages, look for buying and selling opportunities one stock at a time, and maintain nearly fully invested portfolios. Reflecting several rank changes this week, our buy lists have 92% to 98% in stocks.


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