The trend is your friend until, well, it’s not. Simple as that. So, how do we protect ourselves against a market turn? This is an important question, considering the markets are up roughly 100 percent from the March 2009 lows. Although there are many ways to slice and dice the markets, a simple confirmation check with technical overlay can provide a good macro check-up, as well as hints to underlying sector strength and weakness. Further, this check-up requires that we compare the health of two or more market indices/sectors to see if they are in or out of sync with one another. In the spirit of Dow Theory, today’s annotated chart column will compare two major Dow indices, the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJT), looking for current and prospective price confirmation/non-confirmation signals. Traditional technical analysis will also be used to assist in identifying any current or coming market weakness. With that said, it is time to let the charts do the talking.
The Dow Transports have the strongest long term chart, so we will start there. The first thing that stands out in the chart below is that the index briefly made new all-time highs last week. Although this is definitely a reason to celebrate, market watchers would be wise to note that it also indicates that the Transports are up against pretty stiff resistance here. Only a sustained break of the 5,500 level will confirm a break out and underlying strength. If this is going to happen near term, then volume must pick up. Either way, I expect this to happen in the coming weeks or months. Transports had the benefit of streamlining business, while adjusting to higher commodity prices in ’08.
Similar to the Transports, and duly confirming their strength, the Dow Jones Industrial Average is nearing three year highs. However, in contrast, it is still quite a ways off the 2007 all-time highs. This begs the question: Will this turn into a larger picture non-confirmation if the Transports continue printing new all time highs, and the Industrials do not? Currently, this is only a minor non-confirmation. But rest assured, if the Industrials get closer to all-time highs, technical analysts will zoom in on this. Near term, watch the Industrials relative strength and volume for clues.
Investors would also be wise to watch the performance of the dollar for clues on both indices. Continued dollar weakness may benefit the Industrials more than the Transports, while a stronger dollar may work vice versa (due to its effect on commodity prices).
With the markets running hot of late, some consolidation and/or correction may be warranted. Even so, it seems the Industrials and Transports are poised for one final push. And if the Industrials fail to hit new all-time highs, the index may be in for a more significant slide.
Previously published as a blog by Minyanville.
No positions in any of the securities mentioned at time of publication.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.