Dow Theory Sell Signal
Dow Theory states that both the Dow Jones Industrial Average and Dow Jones Transportation Index have to make higher highs together in order for a bull market to stay intact. The same goes for a bear market - both indexes have to make lower lows around the same time in order for a bear market to continue. When one index does not confirm the other, within a reasonable amount of time, there is a good chance for a reversal in both indexes.
If you look at the above chart you will see a weekly chart of the Transports and in the lower panel the dow jones industrials. Notice how all the points on both charts lined up with eachother confirming every swing high and low until now. The dow made a much higher high at point 7 vs point 5 but the transports made a lower high. This is condsidered bearish if you follow the dow theory which has been around well over 100 years!
The lower chart is a daily chart of the Transportation index. You can see the head and shoulders pattern and the move that followed. The transports are clearly through their 200 day moving average which confirms that the trend is now down..
Posts
![[Most Recent Charts from www.kitco.com]](http://www.kitconet.com/charts/metals/gold/t24_au_en_usoz_4.gif)
![[Most Recent Charts from www.kitco.com]](http://www.kitconet.com/charts/metals/silver/t24_ag_en_usoz_4.gif)
![[Most Recent Exchange Rate from www.kitco.com]](http://www.weblinks247.com/exrate/24hr-euro-small.gif)
5 comments:
Does it make sense - since so much "transportation" is done digitally these days to give any credence to a theory that was originally based on rail?
Just asking - always curious
I'm well aware of that however divergences between the dow and the transports still signal a change in trend. Obviously the theory as to why it works has changed, but it still works...Scan your charts for the past 10 years and you will see that divergences usually warns of a turning point in the market. A good example is the low that was made in march of 2003. The transports made a new low but the dow didn't. That dvergence kicked off the current 3 1/2 year rally we've had.. I think it's a good tool to use especially when COMBINED with other tools..
Look I know you're smarter than I am - but even a simple minded individual such as myself knows that one doesn't make a trend.
I'll go away now and leave you alone.
I think you misunderstood me..I was just trying to explain to you that I feel dow theory is still useful especially when combined with other tools.. This is just what works for me. If your methods work for you..more power to you...I appreciate your comments...really I do..
As far as the trend, the trend is still up in the dow and S&P.. I could be totally wrong about my views and if I am it's not a big deal..I do hundreds of trades a year..This is one of many my friend..
Keep the comments coming..it's always nice to know someone actually reads what I write and takes the time out to comment on my blog. :-)
Hey Kevin:
I appreciate your comments.
I never knew that about the divergences between the transportation index and the Dow.
We'll see what happens soon.
Frankly, I'm surprised the Dow is still going up. I suspect we may hit a double top on the S&P @ 1460, and then go down.
Just guessing ...
We'll see ...
:>)
Post a Comment