Friday, April 20, 2007

Dow Theory Confirms Rally

According to Dow Theory, Friday's close confirms the current rally, and suggests that there's more upside to come.

The Dow, Transports and Utilities each closed at new, all-time highs on Friday. This convergence is a rare event, and the last time it happened was in 1998. Though I'm not a huge Dow Theory fan, the work of Charles Dow, William Hamilton and Robert Rhea forms the basis of modern technical analysis, so it's worth noting when DT signals occur.

Richard Russell is currently one of Dow Theory's most visible experts. For the record, he's been very UN-enthusiastic about the current rally, and according to Peter Brimelow, Russell is only now at the point of conceding that, yes, this is a bull market. Of course, this could also be very contrarian bullish. Remember what happened after 1998?

Dow and Hamilton went to great lengths to say that Dow Theory is very fallible. That said, today's action is something we haven't seen in 9 years. It's particularly provocative that it's occurring at a US earnings trough while investor sentiment is generally poor. I'm also reminded of earlier this week, when so many of the world markets hit record highs.

Is today's confirmation the prelude to a fall, or the beginning of a new uptrend? It's a great question, which is why I'm parking the charts below right here for posterity.



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