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DJ Transport and Industrials Ratio: Another Warning from the Dow Theory ?
May 14 ( From TradingView )
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The US equity market was showing some strenght since mid-October 2014. Transports are performing very strongly since then and was a sign for that; it did confirm the last upleg of the stock market. But the Transport are weakening tremendously vs the DJ Industrials since January 29 2015.
ONE chart below is worth a look where we will show the ratio of the Dow Jones Transportation and the Dow Jones Industrials compare to the Mighty SP500
( Bottom Chart )...
Observe on the chart below that we reached on November 25 2014
on a ratio basis, the highest level since 1989!
Since January 6, the 50 Day Moving Average on that ratio started a
brand new downtrend ( DJ Transport started to underperform the Industrials ), indicating a weaker stock market ahead as shown by the charts below... It reached a level last seen in October 2014...
Also observe the Major Divergence since Mid-November as the ratio is making lower highs but not the Mighty SP500. Quite surprising that DJ Transport underperform within Oil price historically low...
Dow Jones Transport
Dow Jones Industrials ( Top Panel - Blue Line )
50 DMA ( Red Line )
and SP500 Index ( Bottom Panel )
Let s start with the Dow theory :
..."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. To Dow, a bull market in industrials (INDU) could not occur unless
the railway average rallied as well (TRAN), 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."..
Over the past 2 years, it happened 5 times that when we had the 50 DMA on that ratio shifting downward, we had from that signal on that day ( white vertical lines on the top chart above ) to the next low an average decline of 3.9%.
The Dow Theory considers such behavior , as a divergence signal of a potential change in the bullish market’s trend.
DJ Transport and Industrials Ratio: Another Warning from the Dow Theory ? $DJIA, $DJT, $SPY, $SPX Trading #investing #dowtheory #SP500 #dowjonestransport
But the real worry is that we are near breaking the multiple lows in the DJ Transport: First on December 17 2014 at 8580.81, the second on January 14 2015 at 8584.99 and the third on February 2 at 8583.54, the fourth on April 30 at 8559,99 and the fitht on May 6 at 8567.20... Near the Precipice we are IF we break that Support...
( See Red Trendline - Ellipse - Chart Below )
Dow Jones Transport ( Daily Candles )
20 DMA ( Yellow Line )
50 DMA ( Red Line )
200 DMA ( Green Line )