Caution Sign From Dow Theory

At the end of February I noted that Dow Theory had created a non confirmation. In that post I mentioned that I wouldn’t care about it unless the transports (DJTA) fell below their January lows. On Thursday of last week the January lows were broken. This is our first caution sign from Dow (DIA) Theory. What makes the warning more significant is that the transportation average has been trading in a tight range since the first of the year. This tight range is called a Dow Theory line.

 

The break below the bottom of the range creates a warning, but a major tenet of Dow Theory states that both averages must move together. The industrial average (DJIA) still hasn’t created a low that is three weeks away from its early March high. In addition, it isn’t painting a line. When both averages paint a line then break out (either higher or lower) the event is considered significant in Dow Theory. Since that hasn’t happened it leaves us with a small warning to pay closer attention to your portfolio holdings and the movement of the industrials.

There are two things I’m watching closely on DJIA. First would be a break below the March lows. This would be another warning sign that a longer term top may be forming. The second thing to watch would be a rally in DJIA that gets back near recent highs but doesn’t make a new closing high. This would paint a Dow Theory line in the industrials as well as the transport. The resolution of those two lines will likely point the direction of the next intermediate term trend.