Dow Sell Signal May Be On The Way

Gregory A. Clay • by Gregory Clay

Option Trading Strategist & Financial Writer • Aug 7, 2017 at 10:54 AM EDT

Expect the Dow Jones Industrial Average to retrench if the Dow Transports don’t catch up soon. When transports goods across the nation do not perform well it is an indication that there is underlying economic woe.

In the chart below the DOW Transportation index (DJT) is has diverged lower from the Dow Jones Industrial Average (DJI). We look for DOW Transports and Industrials to move in synch for confirmation of the current trend. Technically, whenever these indexes pull away from each other, it is considered a weakening trend. You can see in the updated chart below how the transportation index has diverged lower away from the Dow Industrials.

Expect the Industrial index to retrench if the Transports don’t catch up soon. Lack of confirmation or synergy between the two oldest U.S. market benchmarks triggered a Dow Theory Sell Signal July 26.

At the backbone of our economy, where transports goods across the nation do not perform well it is an indication that there is underlying economic woe. It is not always right and like everything else it is subject to interpretation, but it does have a reasonably solid track record and is worth keeping an eye on as our other indicators are pointing to a summer selloff around the corner. In the 8 trading days since the July 26 Dow Theory Sell Signal when DJIA hit another new high and the Dow Transports failed to stay in sync and began its recent decline DJIA is up 1.5%, while DJTA is down 3.6%.

That’s not a big move up for DJIA, but it is still up. Since this Dow Theory Sell Signal, DJTA has fallen rather sharply, down 6.1% from July 14 to August 1. All this weakness in the Transports has occurred while the Dow Industrials continues to log multiple new highs. These Dow Theory Sell signals take some time to pan out, but the recent history suggests that usual selloff and low following a Dow Theory sell signal may be on its way shortly.

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