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DOW THEORY


Industrials Fail To Confirm Transports

11/03/05 02:04:42 PM
by Arthur Hill

The Dow transports raced to a new all-time high this month, but the Dow industrials is lagging badly with a bearish pattern in the works.

Security:   $TRAN, $INDU
Position:   N/A

With a new all-time high this month, the Dow Jones Transportation Average is one of the strongest indexes in the market. The Dow transports represents airlines, air freight, truckers, and railroads. These groups move people and goods to form the backbone of the economy. When the Dow transports is performing well, it usually means the economy is growing. (See Figure 1.)

FIGURE 1: TRANSPORTS. When the Dow transports are performing well, it usually means that the economy is growing.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
The Dow transports is doing its part to signal a bull market, but the Dow industrials is lagging badly, which should be cause for concern among the bulls and the Dow theorists. The industrials has not even cleared its October high and remains well below its July-August highs (Figure 2). This is a blatant nonconfirmation and the Dow industrials would have to break above 10720 to provide a Dow theory buy signal.

The industrials are lagging badly, and this should be a cause for concern among the bulls and the transports.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
 
The Dow industrials is meeting resistance from the April trendline and also formed a potentially bearish rising flag. The April trendline provided support from May to September and the average broke this trendline with a sharp decline in October. The trendline extension now becomes resistance around 10500 (gray oval). The advance over the last four weeks looks like a rising flag, which is a bearish consolidation. A move below the lower trendline and late October low (10230) would signal a continuation lower.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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