Our comments last week about the Dow Theory (and its currently-bullish mode) prompted some feedback from our readers. Some of you agreed, and some disagreed. We’ll try and work through all of it, starting with this e-mail.

Dow Theory indicated our entry into a bear market at the end of last year when we slipped below the 200 MA for more than a few weeks - we recently retested it and failed miserably.   Look at recent volumes, the bear market rally is fading fast.

Thanks for the note. We’re not sure what you’re calling the Dow Theory here. For our purposes, the ‘theory’ only involves the leadership of the transportation stocks or the industrial stocks. Where one goes, the other will eventually follow. We used the 200 day moving average line not because it’s a component of the theory, but simply because we needed some sort of baseline to compare apples to apples. (We could have used a 100 day average, or a 250 day average, or a 184 day average….it was arbitrary. We just chose 200 because it’s fairly common.)

Yes, the pullback from late last year was ‘predicted’ by the Dow Theory because the transportation stock sold off first. The 200 day average indicated the same thing.

Yes, the 200 day line acted as a resistance line for the Dow Industrials a few days ago, which also is bearish.

However, with the transportation stocks well above their 200 day line, that’s actually bullish for the overall market even though the Industrials are struggling with the 200 day moving average line.

In other words, we’re seeing mixed signals.

Which is right? That’s the question we’re asking. We can’t say yet either. We’re just saying according to the Dow Theory, the current scenario is bullish. Certainly other analysis could suggest otherwise.

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