Transports Make A 7 month High

Last month I pointed out that there was a Dow Theory buy signal based on the transportation index showing bullish divergence compared to the Dow Jones Industrials. I also pointed out the head and shoulders bottom that was created in the transportation index.

Above is a daily chart of the transportation index (TRAN). The most likely upside target for this index would be the high from last summer. That's where I think we are headed.

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..