Dow Theory Forecasts, the purveyor of the most widely respected technical formula on Wall Street, reports that "under the Dow Theory, the stock market has been in a bullish uptrend since the spring of 1988. The market has provided all the key Dow Theory signals, including confirmations of new highs. As long as the trend of the market remains bullish under the Dow Theory, buying during secondary reactions is in order."

And Dow Theory Forecasts makes no bones about considering the recent market stallout a secondary reaction. In fact, it believes the economy is about to respond to the current high level of interest rates by slowing; once the Fed detects slower growth, it will raise rates, leading to a spectacular rally."The big problem for investors is that rallies in markets that have been held in check by higher interest rates tend to be rather quick, allowing very little chance to buy stocks once it starts. Such past rallies have often moved up 10 percent or more in just a few trading days. Investors who wait for clear-cut signs that rates have peaked will probably miss a market that's moved up several hundred points in less than a week. Those who wish to participate in the kind of declining-interest-rate rally we anticipate will have to have their chips in place beforehand."

In a recent issue, Dow Theory Forecasts detailed the particular chips it favors for such a rally. Here are some of its more interesting "capital gains favorites" for the balance of 1989:

Citicorp, with its 5-to-1 price-earnings ratio and 5 percent yield, seems poised to test its 1987 high of $34, says D.T.F. "Earnings have been strong in recent quarters and tighter cost control is helping the bottom line."

Echlin, the provider of automative and heavy equipment parts, has begun improving its margins by assimilating recent acquisitions. D.T.F. expects record earnings in 1989.

Hanson PLC, the British conglomerate, has been streamlining its operations to help boost profits and move its stock price higher.

IBM should soon combine new products with lower costs to buck the skepticism about technology stocks, predicts D.T.F.

Schering-Plough, whose strong research and development program is paying off with a raft of "potential new blockbuster drugs," should continue recording double-digit growth.

Southwest Airlines, selling at a steep discount to its 1983 highs, is one of the lowest-cost airlines in a time of rising fares and overhead.

Walgreen, one of the nation's leading drugstore chains, has dropped its Wag's family restaurant chain to concentrate on its growing prescription drug business.

Zurn Industries, the provider of waste-to-energy and water control systems, has boosted its backlog 44 percent in recent quarters and seems to D.T.F. to be ready to register strong breakouts in earnings and stock price in 1989.

(Dow Theory Forecasts, 7412 Calumet Ave., Hammond, IN 46324; weekly, $198 annually.)

Investor's Notebook reflects the opinions of professionals. It does not endorse specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited. (C) 1989 Universal Press Syndicate 4900 Main St., Kansas City, MO 64112