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Investing.com -- The Sevens Report said on Friday that, by the standards of Dow Theory, the U.S. stock market’s current rally would be considered a “bull trap.”
“In a short phrase, the founder of the Wall Street Journal and widely viewed ‘father of technical analysis’ would call this breakout a Bull Trap,” the report noted.
The report explained that despite the Dow Industrials hitting new highs, the Dow Transports remain negative year-to-date, flashing a divergence that Dow Theory views as a warning.
The Sevens Report highlighted two principles as critical: “Tenet 4: Confirmation, and Tenet 6: Trend Reversals.”
According to Dow Theory, both the Industrials and Transports must rise together to confirm economic expansion.
“When one would diverge from the primary trend, it was a warning that the economy was likely losing momentum and at risk of a recession,” the analysts explained.
In the first quarter of 2025, both averages posted lower lows and lower highs, triggering a bearish reversal.
“The bearish confirmation of the averages in March brings us to the next critical tenet,” the note said, adding that without both indices moving higher together, a recovery cannot be assumed.
The Sevens Report said transports’ continued weakness suggests pressure in transportation, travel, and logistics, which poses risks to the broader economy.
While acknowledging that four of five major equity benchmarks recently hit all-time highs, the report warned: “The advance would still meet the technical definition of a Bull Trap as far as Dow would be concerned.”