What Dow Theory may be telling us about the market

Dow Theory states that Dow Industrials and Transports averages must confirm each other (amongst other components of that theory). If these two indices diverge, it’s potentially bearish. The DJIA and S&P 500 have broken out to new all-time highs recently. When the Transports (TRAN) and Utilities (UTIL) indices didn’t confirm the highs on the Industrials, it should raise a red flag in your market prognosis.

djia

If you take a look at the charts on this page, you will see that all three major indices moved up together from October to the end of 2014. however, the utilities sector has been sideways since February, and transports have moved lower in that period. Meanwhile, the industrials moved on to make new highs recently – as did the SPX.

UTIL

The amount of time that transports and utilities have been diverging from the new highs on the DJIA is becoming a bit concerning.  Even the small caps and tech stocks (not shown) are failing to make new highs. I noted back in mid-April that breath, via the New High/Low indicator, has declined in the face of the uptrend in the market indices (https://www.valuetrend.ca/storms-a-comin/).

TRAN

The market may be in danger of a correction sooner rather than later if breadth, as illustrated by this Dow Theory divergence and other indicators, does not right itself. Please review my video below to further explore this observation.

[su_youtube_advanced url=”https://youtu.be/xIgEmEMGQio” rel=”no”]

12 Comments

  • Thanks, Keith! Very insightful and timely analysis. I have been watching you at BNN Market Call shows for many years, and recently discovered this blog. Your video is also great! Looking forward to your new posts and video. Best regards, Eugene.

    Reply
  • The VIX is also coiling for what could be a move upwards. It’s in a wedge formation now. And for those that follow fibonnaci, the S&P is nearing it’s 161.8% extension from it’s 2007 to 2009 decline. That level is often where advances fail and pull back.

    Reply
  • I have heard the transports failure to confirm described as this. Perhaps companies are producing goods but they are not being shipped in the quantities they would like, which means consumers don’t necessarily have the money to buy all those goods produced. They fact it’s has been going on for some time will now result in weaker numbers reported by companies which could mean lower prices for stocks.

    Reply
    • Yes, I believe that is the reasoning behind the theory. I look at it as a factor of market breadth too–too much focus on one sector over the other.
      Either way, this divergence, as you say, is certainly longer than most. Something’s amiss, me thinks.

      Reply
  • Love the videos. Nice add to your blog. Make thing more easy to understand your point.

    Thank You

    Reply
  • DO YOU TAKE TO ACCOUNT THE NEGATIVE CROSSOVER (MONTHLY CHART) ON PMO IN YOUR ASSESSMENT OF THE MARKET. I UNDERSTAND THAT A MONTHLY NEGATIVE CROSSOVER (ON THE 30 TH OF APRIL 2015) TAKES TIME TO BE REFLECTED IN THE MARKET BEHAVIOUR?

    J.P.

    Reply
    • JP
      Death cross and golden crosses of MA’s are more about trader psychology than anything. When traders see them occur, it can stimulate them to trade in the direction of the cross over–so you often se follow-through of the movement by the stock in question. I have found through practical experience that cross overs are not reliable to make longer termed trades off of.

      Reply
  • THAT NEGATIVE CROSSOVER WAS EFFECTIVELY FOR THE SPX INDICE

    J.P.

    Reply
  • look like greece and uk referendum might be cause of this bear market

    Reply
    • We’ll see–markets set up for a decline, then look for the excuse to fall.

      Reply

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