Dow Theory Nonconfirmation in Transports and Industrials

Jun 12, 2009: 4:07 PM CST

There’s interesting chatter in the “Dow Theory” community as to whether we’re experiencing a non-confirmation in the Industrials and Transports currently – namely, the Industrials are at a new high for 2009 and are above the 200 day SMA while the Transports are not.  Let’s take a look at both.

Dow Jones Industrial Index:

One may also ask the question “Is there a ‘Three Push’ Reversal pattern forming in the Dow Jones?”  It would appear so, with three consolidating ‘pushes’ or impulses up that have formed on three lower highs in the 3/10 Momentum Oscillator.  That alone is a serious non-confirmation of higher prices.

We also see a volume divergence setting in underneath price, with volume in the Dow Jones Index (1.1 Billion today) reaching a level that is clearly below the recent average – more importantly is the “trailing off.”

One can also see the multitude of ‘dojis’ (often known for their ‘reversal’ signal) that have formed over the last two weeks – that is showing signs of serious indecision.

In terms of Dow Theory, the Industrials have made a new high and have risen above their 200 day Simple Moving Average which is classically bullish… but the Transports Index has not.

Dow Jones Transportation Index:

Again, while the Dow recently formed new highs for 2009, the Transports could neither break above their May highs nor its 200 day simple moving average.

A negative momentum divergence has also formed as well as a negative volume divergence.

I could have easily titled this post “Major Sell Signal in the Dow Jones Index” but I dare not be so bold, given the ability of the market to rise against a negative fundamental and technical backdrop.

From a chart (technical) standpoint, the chart is literally screaming “sell signal,” but still we operate in a world of probabilities and stranger things have happened, so do continue to guard your risk and do your own analysis for additional insights.

Corey Rosenbloom, CMT
Afraid to Trade.com

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15 Comments

15 Responses to “Dow Theory Nonconfirmation in Transports and Industrials”

  1. Vasan Says:

    Nice post.

  2. Spudley Says:

    I agree with your analysis Cory. I noticed the volume falloff and the momentum divergence as well. The markets are a screaming sell signal. I bot some SPY puts on Friday. Fundamentally speaking – the consumer is cooked. Zero Hedge suggests that JPM's purchases of SPY are one of the few things holding this market up. I think you're right on. Nice work.

  3. Spudley Says:

    Check out my volume post. ; http://displacedema.blogspot.com/2009/06/holy-h

  4. Bob Says:

    I too agree and find the divergence a compelling bearish indicator growling in the background… but the trend is still intact. Until the trend is broken, Dow Theory implies “it is still in place”.

    I'd like to see an exhaustion rally. At these levels, a price break to the upside would create a monster short squeeze. The ensuing short covering might just create the perfect environment for an exhaustion rally and top, finalizing this bull run.

  5. The Pullback Flag Retracement in Google GOOG | Afraid to Trade.com Blog Says:

    […] at the caveats.  The overall stock market is overextended and I just recently highlighted a “Dow Theory” Sell Signal (or non-confirmation) so now might not be the time to get aggressively […]

  6. JeffreyLin Says:

    from a chart standpoint this is obviously a non-confirmation. but many “new” Dow-Theorists say tech $QQQQ's should be used isntead of transports nowadays. also, this market has faked a lot of basic TA analysis (http://finz.tv/2009/06/06/qman-alamo-trader-cha…) and gone the other way, with psychology seeming a much bigger part. What says you Mr. Psych Major?!?!!!

  7. Corey Rosenbloom, CMT Says:

    Haha – that's why I wasn't going to type in bold letters “BIG SELL SIGNAL” because this market has confounded both the technicinans and fundamental analysts all the way up.

    Sentiment is strange – the newer, inexperienced people seem to be excited and bullish but most every pro I talk to is doubtful/bearish. Not so much looking for a collapse, but at least a meaningful retracement of this large move up.

  8. Corey Rosenbloom, CMT Says:

    Right – for now, the higher timeframe Trend is down (see weekly charts). We've not broken to an uptrend there. We'd need to see a meaningful close above 9,000 to get excited.

    We might get the exhaustion rally as you mentioned which would confound even more traders by thinking “well, it's certain now we're in a new bull market” just as this swing peaks out.

    Will this swing ever peak out?

  9. Corey Rosenbloom, CMT Says:

    Well, you're right and I read Zero Hedge's article and if that is the case indeed, what are we to do? I mean, the obvious answer is to get aggressively long as the market is cooked up but that goes against everything we believe in as traders and technicians and more.

    Reality is that supply & demand move markets, not fancy charts or fundamentals. If the government is indeed doing something, it would push on the demand side thus driving prices higher no matter what the charts are showing in terms of volume, momentum, or breadth divergences.

    Price is king – just that we trust the price we see is a fair price.

  10. Bob Says:

    Gravity is a powerful force… I think we are close, but it's hard to time it. Patience… Wait for it!

  11. Abe Froman Says:

    Corey, first time poster here. I have really enjoyed reading your posts since I found your site about a month ago. Thanks for helping us understand some of what we see in the markets as we strive to make infomed trading/investing decisions.

  12. Bob Says:

    Excellent point about the long term down trend. Price would have to break above 9000+, and since it hasn't, we are technically, still a bear market.

    The current price is quickly approaching the intersection of the downward sloping longer term trend line and the upward sloping shorter term trend line of this rally. Both appear to be holding and valid. Also, price has yet to pierce the SMA's.

  13. The Pullback Flag Retracement in Google GOOG | Penny Stock Trading System Blog Says:

    […] at the caveats.  The overall stock market is overextended and I just recently highlighted a “Dow Theory” Sell Signal (or non-confirmation) so now might not be the time to get aggressively […]

  14. trading Says:

    But didn't it happen just before the recession that dow theory was yelling to buy and everybody was buying and not just buying but buying stocks madly. In the end recession came and many people got burnt. It's good to follow theories but at the same time you need to concentrate on other issues.

  15. trading Says:

    But didn't it happen just before the recession that dow theory was yelling to buy and everybody was buying and not just buying but buying stocks madly. In the end recession came and many people got burnt. It's good to follow theories but at the same time you need to concentrate on other issues.