Back in May of this year, I noted that the Dow transports were failing to confirm the new highs seen on the Dow Industrials click here to read the blog.
This tenant of Dow theory states that the INDU and TRAN averages must confirm. The tenant is probably the – or one of the- first breadth indicators created. To this day, it’s a still a good leading indicator, so long as it’s used in conjunction with other methodologies. You’ll note on the chart below that we got a follow-up divergence signal from the TRAN/INDU lines in June. It was becoming quite clear that something was amiss for the markets.
So what are the averages telling us now? Well, from a Dow confirmation point of view, the outlook is bullish. Note how both indices have been following each other’s movements closely through the entire double-bottom formation. This gives us one more bit of evidence to suggest that the markets are likely going to remain bullish (interim corrections along the way to be expected) for the coming months.
Keith speaking at the MoneyShow Saturday October 31, 2015 at 3:30pm
Please come out and join me – I really enjoy meeting readers of this blog at my speaking engagements. Here is the link for the details.
New video: Have your cake and eat it too – Better returns with lower risk
[su_youtube_advanced url=”https://youtu.be/R9mJvbHApmk” rel=”no”]On April 21, 2011, I sent the following commentary to our clients at ValueTrend regarding the state of the markets:[/su_youtube_advanced]
Another bullish indicator is fun managers hold high percentage of cash at this time.
Keith, do you think gold sector has further upside to run? It looks like GDX breaks its resistant level.
the gold stocks and other resource sector stocks do appear to be breaking out!
In a broad based short covering rally isn’t this kind of correlation to be expected?
Guenter – what evidence has brought you to believe that the current market upside is based largely on short covering?
True–short covering usually does at least add to upside when markets turn, but this doesn’t imply that it is the only driving factor, nor that the movement will be short lived.
As my original teacher Ralph Acampora noted: Always watch what “they” are doing–ie shorts, insiders, institutions, hedgers. “They” lead movements. Short covering can be a sign of a bottom – at least it is one bit of evidence.
Also–Transports moving in tandem with the industrials is simply a confirmation of the existing trend. What I am pointing out is that the prior divergence is no longer signalling a bear – thus, we must defer to the market movement, which is decidedly up at this time.
Keith, your thoughts on Transforce? The recent chart seems to be in line with the uptrend in transports and industrials as you have mentioned and the company has good fundamentals with growing free cash and revenue pretty steadily while evaluation seems on the lower end.
Carmine–best to ask me that type of question on BNN–I try not to get to specific stocks on this blog, lest it turn into a personal research service – which I cant do on a regular basis. Next show is November 5th 6:00pm
The treasury added liquidity late in the week. When the debt ceiling is lifted the opposite should happen. Seem to me that fundamentals are declining.