A few weeks ago I mentioned that Dow Theory was still confirming the long term bull market even though many others were calling a bearish long term trend change. On Friday, both the Dow Jones Industrial Average (DJI) and Dow Jones Transportation Average (DJT) closed above their last secondary high points. This confirms again that we’re still in a long term bull market.

Those that called for a sell signal made the most common mistake in interpreting Dow Theory. These technicians misidentified the last secondary low point as a result of not paying attention to the size of the price decline. Secondary reactions should retrace between 33% and 66% of the rally from the previous secondary low. As a result, the last secondary reaction was in 2012. This means that price will have to fall below those points (about 12542 for DJIA and 4847 for DJTA) without any rallies to change the trend from bullish to bearish. As I’ve mentioned before, that’s not a likely scenario. You can read this post for details of what is likely to be the market action leading up to a Dow Theory trend change.

For now the market is in a bullish long term trend so dips should be bought. When the Dow Theory picture starts to get murky I’ll be sure to post about how a bullish or bearish scenario would play out.