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Dow Theory: Transports Not Confirming Industrials

  • Written by Syndicated Publisher No Comments Comments
    September 22, 2012

    One of the elements of Dow Theory is that the Dow Jones 20 Transportation Average (DJTA) should confirm new highs in the Dow Jones 30 Industrial Average (DJIA). When this fails to happen, it is a bad sign for the market. The logic behind this is that, if industrial company stocks are doing well, the companies will be ordering raw materials in anticipation for future sales, which will be transported by the transportation companies, in turn causing the transportation stocks to benefit.

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    (This is an excerpt from recent blogs for Decision Point subscribers.)

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    The two charts below show that the DJTA has not confirmed the new highs in the DJIA all this year. Whereas the DJIA has continued to push to new highs, the DJTA has stalled and moved sideways.

    Screen shot 2012-09-21 at 11.35.37 AM

    Screen shot 2012-09-21 at 11.35.05 AM

    The internals behind this divergence are even worse than revealed by price. Each chart has a panel showing the percentage of stocks in each price index that are above their 200-EMA. Note that the percentage for the DJIA is near 90%, while it is only 20% for the DJTA.

    When a stock’s price is below its 200-EMA, by our technical definition it is in a long-term bear market. With 80% of DJTA stocks in bear markets, the outlook for the DJTA is not good. And in accordance with Dow Theory, the prospects for the broader market are much worse than the new highs in the DJIA would imply.

    Images: Flickr (licence attribution)

    About The Author

    Carl SwenlinCarl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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