All Eyes on The Dow Transports
Charles Dow is known as the grandfather of technical analysis for his ideas that lead to the formation of Dow Theory. One of the main concepts within Dow Theory is confirmation. Confirmation happens when The Dow Transportation Average confirms the trend of the Dow Industrial Average. In other words, the companies that transport the goods should be telling the same story as the companies that make the goods. A bearish signal occurs when the two indices diverge from one another. This signal has historically preceded bear markets and even recessions. The top technicians are closely watching the relationship between the Transports and Industrials for clues as to where the market is headed.
Chris Kimble is a well-respected technician and founder of Kimble Charting Solutions. He wrote a post today about the importance of Transports as a leading economic indicator and points out that the index is at a key inflection point.
Kimble included the chart above to demonstrate that Transports are running into a falling channel and refer to the recent leg up a counter-trend rally. He explains that if Transports fail here it would suggest the economy is slowing. Kimble also acknowledges that any debate of a recession will be cleared up if Transports are able to break out above resistance and confirm the price action of the Industrials.
J.C. Parets, is another well-known technician and founder of All Star Charts. Parets is a vocal proponent of Dow Theory and often writes about it. He wrote a note today examining the Transports.
Above is one of the line charts Parets uses to explain that the two indices often behave the same. He highlights the fact that Industrials have cleared their overhead resistance but that the Transports have yet to test their resistance level.
Parets also includes this candlestick chart of the Transports on their own. He explains that 9800 is the level to watch:
“ If we’re above 9800 I think we need to err from the long side with a target near 10500.”
“If we’re below 9800 then I think there are probably some bigger issues out there from any kind of intermediate-term perspective.”
The two experts agree that were at a really important level right now in the Transports. According to Dow Theory, If the index fails to confirm the primary trend of the Industrials it could have major implications for the overall market. We’ll keep an eye on this relationship and report back on any major developments.