Watch the Dow Transports
03/19/2008 12:00 am EST
Pamela and Mary Anne Aden, editors of the Aden Forecast, say that the Dow Jones Transportation Average is a key barometer of the market's future direction.
Stocks were essentially holding up fine until the subprime problems emerged last summer. That's when the different stock market indices hit their peaks and they've been declining since that time.
The Dow Jones Transportation Average actually led the way down by several months.
As the news worsened this year, most of the US and world stock markets turned technically bearish, declining below their long-term moving averages.
Interestingly, however, some of the strongest international stock markets are still holding up. That's especially true of Brazil, which has been a real powerhouse, and some of the other countries that have benefited from rising commodity prices. That's a positive sign and it could continue, at least temporarily.
Note that the Standard & Poor's 500 is currently oversold, and this provides a good example of the technical standing for all of the world markets. So, even though the up trend since 2002 has clearly been broken, the markets are all due for a rebound rise in the weeks ahead.
Once the rebound is over, the world markets will then likely move together as they always have in the past. At that point, if the major trend proves to be down, all of the world stock markets will get swept out with the tide. That in turn would have a profound effect on the final outcome for the economy.
For now, a lot of technical damage has been done. There's no denying that, and we'll just have to wait to see what happens next. Based on Dow Theory, which has a reliable track record of identifying the major stock market trends going back about 100 years, the key now is the Dow Transports.
A primary bear market Dow Theory signal was triggered on November 21, 2007. Since then, the Transports have held above their January low at 4140. For the bear trend to continue, both the Industrials and the Transports would have to break below their January lows.
So far, the Transports have not. So, that is the key number to be watching this month: 4140 on the Dow Jones Transportation Average. Whether it holds above it or breaks below this level, it'll tell the ultimate story.
With oil now soaring to new record highs, however, it's quite possible that the Transports won't be able to withstand the pressure. Will they break down or will they hold? That's the big question and we'll soon find out the answer.Subscribe to The Aden Forecast here.