DOW THEORY UPDATE -- DOW TRANSPORTS ARE TESTING SEPTEMBER HIGHS -- UPSIDE LEADERS ARE RYDER AND OVERSEAS SHIPBUILDING -- UTILITIES ARE ALSO CLOSE TO BREAKING OUT -- UTILITY LEADERS ARE PG&E AND SOUTHERN COMPANY -- ELY LILLY BREAKS RESISTANCE LINE

DOW THEORY UPDATE ... One of our readers asked for an update on Dow Theory. Just to refresh your memory, Dow Theory holds that the Dow Industrials and Transports must both hit new highs to confirm an ongoing uptrend. Chart 1 shows the Dow Industrials having already done so. Chart 2 shows the Dow Transports testing its September high. Obviously, a close about that high would put both Dow averages back in sync. Most of this week's transportation buying is coming in rails and truckers. Norfolk Southern and Union Pacific are testing their September high.

Chart 1

Chart 2

TRANSPORTATION BREAKOUTS ... Two transportion stocks that have already broken out to the upside, and show superior relative strength, are shown below. Chart 3 shows Ryder Systems hitting a new 52-week high. Its relative strength line has broken out as well. Chart 4 shows a bullish picture of Overseas Shipbuilding Group. The chart shows the stock breaking through a "neckline" in an apparent "head and shoulders" bottoming pattern. Its relative strength line is rising as well.

Chart 3

Chart 4

DOW UTILITIES MAY BE BREAKING OUT AS WELL ... While we're looking at the Dow family, it's worth noting that the Dow Utilities are also on the verge of breaking through their September highs. Utilities are considered to be defensive in nature. As you know, Arthur Hill and myself have been pointing out the new flow of funds into defensive categories like consumer staples and healthcare. Let's add utilities to the list. The falling relative strength line for the UTIL shows how out of favor it has been since July. Some individual utilities have already achieved bullish breakouts.

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UTILITY LEADERS ... Here are two utility leaders that have promising chart patterns. Chart 6 shows Southern Co. breaking out to an eight-month high today. Its falling relative strength (solid) line shows that the stock has been an underachiever since March when the market bottomed (which has been the case with most defensive stocks). An even stronger chart picture belongs to PG&E. Chart 6 shows that stock exceeding the highs formed during the second half of last year. Its relative strength (solid) is starting to turn up after falling from its March peak. In recent articles, I showed the same upturn in relative strength lines taking place in several consumer staple and healthcare stocks. As I wrote on Friday, that suggests that investors are either turning more defensive or are looking for neglected stocks that still provide value in the current uptrend.

Chart 6

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ELI LILLY BREAKING OUT ... Here's a good example of new buying in the healthcare sector. Last Thursday, Arthur Hill listed Eli Lilly as one of his stocks to watch, and showed it testing the upper line in a bullish "symmetrical triangle" (which is defined by two converging trendline). Chart 8 shows LLY breaking through the upper resistance line today in decisive fashion. Its relative strength line (below chart) is also turning up for the first time in months. These three defensive categories (staples, healthcare, and utilities) might be worth a look for those of you looking to commit some funds in the current market. Not only are they just starting to turn up (providing more value), but they should hold up better than most other stocks during any market correction.

Chart 8