Dow non-confirmation

February 27, 20173 Comments

The chart below illustrates a few incidences where the Dow Industrials and Dow Transports diverged over a few months. As you can see, when the industrials (green line) were moving up while the Transports (red/black line) moved down, you eventually saw a correction in the industrials. Conversely, we saw the transportation stocks rise while the Industrials trended down over the late summer and fall in 2016. This divergence lead to a rally in the industrials after the election.

dow theory

Right now, the transports (TRAN) are failing to rise in the face of the new highs on the industrial index (INDU). While it’s not been a trend—as had been the past patterns of divergence I’ve drawn on the chart – it’s something we want to keep an eye on. A prolonged lack of confirmation by the transports will likely be bearish for the big industrial index. It’s too early to draw a conclusion, and the end of February / early March can often be a bit choppy, so this might just be a moment of volatility. But we should remain aware of the recent non-confirmation and look for potential follow-up in the future. If the transports illustrate a pattern of trending down for a number of weeks or a few months, it may indeed be a sign of nasty times to come.

 

3 Comments

  • Hi Keith,

    Transforce and CN Rail did pullback lately. Not a whole lot, but they have. Can you tell us why you think that is… that when transports lags industrials, typically, the market has a correction? Is it that transports are a risk-on area of the market? So when money leaves it, it means bullish sentiment is about to drop? Or, does it simply not matter for us technicians… it’s just the way it is and a great indicator that should be factored-in?

    Thank you,
    Matt

    Reply
    • Matt– when you see non-confirmation and or divergence between TRAN and INDU it basically means that the market is not moving evenly with healthy breadth. The theory is that industrial companies make stuff, transports move that stuff. True, some of the components like MSFT don’t ship as much of their products these days as they get downloaded or are service orientated (cloud, etc), but there are still enough “makers” and “movers” out there to represent a big chunk of the economy– this tells us to keep an eye on the two sectors to see that they are more or less confirming each other.

      Reply

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