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Key Sector Charts Signaling Buy?

In an environment as complex as today’s market, investors need more than Dow Theory to gauge the health, or lack thereof, of stocks.

Dow Theory, of course, is the idea that a bull market is genuine only if both the Dow Jones Industrial Average and the Dow Jones Transportation Average simultaneously are rallying to new highs. This might have made sense over a hundred years ago when the idea was first proposed, and when the US was a growing industrial power, but it’s too narrow an outlook for 2010.

That’s why one of Cramer’s favorite technicians, Dan Fitzpatrick, thinks the theory needs some expanding. Rather than looking at only the industrials and transports, he says the techs, banks and retail must be considered, too. So even though the Dow Industrial and Transportation indexes are at new highs, a full picture of the market isn’t complete without these other sectors.

Just how are tech, the banks and retail doing? Well, the Nasdaq 100 hit a new high last month, putting tech in the bull column. And retail, as measured by the SPDR S&P Retail exchange-trade fund , is less than half a point a from a new high for the year as we head into the typically strong holiday season. The financial sector is a bit more complicated, though.

Fitzpatrick uses the Financial Select Sector SPDR ETF to track the banks, a group that has weighed on the market for some time now. The XLF had run headlong into its 200-day moving average until just last week when a post-midterms breakout helped it cross that level. Fitzpatrick thinks the ETF could pullback to $15 to test the move, but the key will be whether or not this SPDR regains its momentum.

If it fails to stay above that 200-day moving average, then there’s a gaping hole in any argument that this bull market is real. The banks are just too important for them to not take part in the rally. However, if the XLF bounces back from any dip, or even fails to dip at all, then Fitzpatrick’s Dow Theory would say this bull market still has legs.

One thing all these charts have in common, too, is that they are either at or slightly above what’s known as prior resistance, the previous ceiling that kept them down. This is important, Cramer said, because ceilings become floors, or support, for these averages and ETFs, and that makes rallies more likely than serious pullbacks.

So what’s the takeaway from all this?

The only real worry, Cramer said, is the financials. But given the strength exhibited in these charts, today’s declines looked more like a buying opportunity than a cause for concern. As far as he’s concerned, this bull market looks like it could still have legs.

“The charts are on your side,” Cramer said. “Even if you're not a chartist—and I'm not one—it's always good to know that the charts are running with the bulls.”

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