Stock Market Buy Signals: The Bear Is Dead! Dow Theory

Is it time for the Stock Market to turn around? Are we seeing a buy signal? According to Robert Knight, MBA, Head Trader at Turbo Trading, "The Bear Is Dead!" He justifies this opinion using Dow Theory. Find out: What is Dow Theory? How does it apply to current market conditions (February 2023).

$DJIA over 34300 will be a major Dow Theory buy signal. $DJIA, $DJTA and $SPX have all put in a "Golden Cross". A breakout on the Dow will confirm the breakout on the other two markets. Robert Knight thinks it is safe to say, "The bear is dead". Video with transcript:

This is a video on the Dow theory and a buy signal that we're very close to seeing here. Now Dow Theory was invented back in (the late 1800s and 1900s). There were (three) guys -- (Charles Dow and Edward Jones, and Charles Bergstresser) (who created the Dow Jones Industrial Average in 1896). They put together the indices. The original one was . . . a trend between the Dow Jones Industrial Average and the Dow Jones Transportation average.

But of late, most people now throw in the Standard and Poors 500. It's a confirmation of the indices breaking out through key levels and setting a trend, either breaking up or down … Let's just talk a bit about the . . . Dow theory itself.

First of all, you have to recognize that the chart patterns, especially these big indices, are the sum total of all the knowledge of all the traders, of all the events that are happening in the world, discounted at an appropriate risk factor. It includes the world economies, interest rates, what Chairman Powell just said (in the announcement about raising interest rates 1/4 percent). These things all come in and they make a point on the chart and the charts as they go over time form a pattern. So this is the world knowledge of the stock markets. Not everybody knows, but it's all the knowledge of all the people in the markets . . . to form these charts.

There's a theory and it's called Efficient Market Hypothesis, EMH. And EMH says that you can't do any better than the indices. Now, Warren Buffet would argue against that, but you can't do any better than the indices unless you adjust your risk to greater risk, and then you have more volatility.

The Efficient Market Hypothesis says that all earning potentials, competitive advantage, and management's competence, all these factors are all priced into the market. Not everyone knows all these details, but the sum total of it all gives you these points on the chart. So that's the basis for the Dow Theory.

Now, this is all the information that's available to the world and the chart reflects what's happening in the world there. You can't buy EMH . . . markup hypothesis. There aren't stocks that are undervalued. There aren't stocks that are overvalued in the long term. Of course, unless you're adjusted for risk, then of course you'll find those.

But unless you're Warren Buffett or . . . one of these very successful fund managers, you can't beat the indices. So what is Dow Theory? Well, what it says is that anytime that the Dow Industrial (or the tranies, but normally you're looking at the Dow Industrials) breaks out or trades above key levels.

So in this case here, we saw at the end of November, we've got the Golden Cross. It traded up to this key resistance backed off, but it's forming a cup and handle pattern here. This can get up through 34,300. That's a breakout for the Dow, but the Dow Theory needs to be confirmed by a move by the Dow Transportation (Index). And in this case, actually the Dow Transportation may be ahead of the Dow. So they both have to confirm each other. When we see here again, here's . . . your 50, crossing up through the 200, breaking out through a key level, this declining channel line and this resistance level here.

So this is a breakout on transportation. We need the Dow now to break out over this level to confirm it. This 34,300, maybe 34,600 in that area, if it breaks up through that, that confirms the move on the transportation. But that's 30 stocks in the industrials and 20 stocks in the transportation.

So a lot of people now have added in the SPX in the range of 500 stocks. And so, if those three charts all break out through key areas, then that's a very, very strong buy signal that the direction has changed. That we've come out of this bear market. We've got this big Reverse Head and Shoulders Pattern.

Here's your key resistance at 4,100. The 50 it is just about to cross up through the 200. That's your Golden Cross. So we're very, very close here. And if these all break out, that's a huge confirmation. It doesn't happen very often . . . near the bottom of the, well, this is the bottom of the bear market.

So this could be the start of a big bull phase if we get the confirmation of these three indices all breaking out at the same time. That's Dow Theory.

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