Confounded by DJ30′s v-shaped rebound on Friday? Divergence between Dow Jones Industrial Average, Transportation index grows wider. Investors should keep an eye on this big picture, proven-time-and-again signal.
Red flag up, waving
While the Dow Jones Industrial Average was booming, Dow Jones Transport was quietly correcting. According to Dow Theory, that’s a bearish signal. From Wikipedia,
Stock market averages must confirm each other
In Dow’s time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow’s first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers’ profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning that change is in the air.
This is what an overlay of DJIA and DJT charts look like at the moment. That’s a big divergence between the two indices and it looks like it is growing.
Chart of Dow Jones Transportation overlaid with Dow Jones Industrial Average | Source: Investing.com
Market dumped 2 months after the red flag was noticed
The last time market took note of this divergence, red flag was raised late May – July 2015.
The last time red flag about DJIA, DJT divergence was raised
We know what happened after in August when the US stock market flash crashed on 24 August 2015 aka “Black Monday“. It was not just any flash crash – Dow Futures round tripped 4500 points intraday!
DJ30 5-minute chart of ‘Black Monday’
Is the Dow bullish after that 400 point rally on Friday 04 Dec? I don’t know but I do know that nothing changed since 5 weeks going on to 6th and the Dow is still resisted.
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."