The Dow Theory Buy Signal (by Springheel Jack)

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Something very interesting happened yesterday, though few people seem to
have noticed. The Dow closed above the highest close made in June, and
the Transports index did the same. We therefore have a new Dow Theory
Buy Signal, one of the most venerable, and reliable, of trend change
confirmations in the indicator universe.

Richard Russell, writing before the close yesterday said:

'If they both close above their June highs, it will be particularly noteworthy, because simultaneous confirmations imply a special power.'

As far as I am concerned, that has all but killed what remained of the
summer bear case, we are just waiting now for long treasuries to break
support and for the 13/34 EMAs to cross back on the weekly chart. 30
year treasuries look as though they may well break support today:

100727_T30Yr_Daily_Rising_Suppport_Trendline

I was researching a weekend post on the 13/34 EMA weekly cross the other
day, and while the post is still on the drawing board, I was very
struck by the points of comparison between the look of recent market
action and the pullback in 1998 during the dotcom bubble. Here's the
chart of 1991 to 2000 with the dotcom bubble highlighted in yellow and
the comparable period in 1998 circled:

100727 SPX Weekly 1991-2000

In 1998, as now, there was a sharp correction on SPX, from 1190 to 923,
and there was a 13/34 EMA weekly cross that then recrossed within a few
weeks for a strong buy signal. The SPX then rose more than 50% within
two years to top out in early 2000.

What relevance does that comparison have now? Plenty. We are in another
bubble now, the dotgov bubble if you will, and there is only one way
that a bubble based on an orgy of government spending is likely to end,
and that is with a bond crisis. That bond crisis is not going to be
about bonds on economic also-rans like Greece, it will be centered on
the US and the likelihood that the US will be able to repay the
ever-escalating tidal wave of debt being generated now.

Until we get that crisis we are in an expanding bubble, and valuations could increase a lot from here.

In the very short term I'm expecting to see a peak and a
pullback within a couple of days and I have a possible rising wedge on
ES indicating back to a retest of 1084.5 ES:

100727_ES_60min_Rising_Wedge

If we should make it back to 1084.5 ES, I will be regarding that as a very good buying opportunity.

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