The classic Buy signal is developed as follows: After the low point of a primary downtrend in a Bear market is established, a secondary uptrend (this is the most often debated part of the Theory) bounce will occur. After that, a pullback on one of the averages must exceed 3%, according to Robert Rhea in his 1930's The Dow Theory, must then, ideally, hold above the prior lows on both the Industrial and the Transportation Averages. Finally, a breakout above the previous rally high by both, constitutes a BUY Signal for the developing Bull market.The chart represents how the Dow Jones Industrial Average and the Transportation Average might look under the most usual BUY signal (B-1):
Both the Dow and the Transports made all-time highs last week, aided by a surge in the shares of Avis. The technical pattern is consistent with the description of a Dow Theory buy signal.
While the Dow Theory buy signal is bullish for stock prices, a number of key risks are lurking as I look forward to 2022.
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