The Dow Theory Sell Signal Given Today

Feb 19, 2009: 9:11 PM CST

In another ominous sign to investors, the market gave an old-fashioned renewed “Dow Theory Sell Signal” Today.  What does that mean going forward?  Let’s take a look at the Dow Jones Industrial and Dow Jones Transportation Index for additional insights.

A modern Dow Theory Sell Signal is given when BOTH the Dow Industrials and Transports (formerly the “Rails” in Charles Dow’s day) confirm with a new swing (closing) low.  That happened today.

Dow Jones Industrials:

Dow Industrials

The Dow pierced the November 7,449 low intraday today (today’s low was 7,447), which doesn’t sound like much, but technically (chart-wise) it is significant.  Also – as was splashed all over the headlines and TV News today (they still managed to ask the question “Is THIS the Bottom?”), the Dow Jones Index closed today at its lowest level since late 2002, making a six-year low today (again, albeit by a small fraction).

To break the October 2002 low (and really give the bulls a headache), the Dow would need to breach or close beneath 7,197, a prospect that really doesn’t seem out of the picture now.

Keep in mind that Elliott Wave projections have us in terminal Wave 5, so we appear to be needing to complete a bit further to the downside to complete the Elliott Count.

For a monthly view of the Dow, see my earlier post today entitled “Trend Trading the Dow Jones.”

The Dow’s lower close today officially gives us a confirming signal from the Transports, which have already closed beneath their Novmeber 2008 lows.

Dow Jones Transports:

Dow Transports

Not much detail to say here, other than we clearly and unmistakeably have broken the November 2,909 close and support that was generated off this level in January/February 2009.  These new lows – also in the Dow Jones – are coming off multi-swing positive momentum divergences, but in a strong trend, momentum oscillators can give off false signals.  Still, if I were a seller, I’d want to see new momentum lows confirming new price lows – this divergence might give pause to aggressive sellers.

Unrelated to Dow Theory, but very related to the broader market, the XLF (Financial Sector ETF) registered a new low today.  In this environment, most people believe that the price movement of the Financial Sector has more weight on the market (or influence) than the Transports, though today’s action and headlines (I heard it first on CNBC) regarding the “Dow Theory Sell Signal” might draw in a fresh round of sellers either panicking out, or shorts jumping in fresh positions, expecting more downside potential.

Continue watching the key sectors within the market for additional clues, and don’t be surprised if the other US Equity Indexes quickly test… or perhaps exceed… their respective November lows.

Corey Rosenbloom
Afraid to Trade.com

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