Dow Theory: European Edition

04/29/2014 7:00 am EST

Focus: STOCKS

Gregory Harmon, CMT

Founder and President, Dragonfly Capital Management

Greg Harmon of Dragonfly Capital makes the case for why the French CAC could stand in for the role that Transports play in the US market.

This may sound like a silly premise but stick with me for a few minutes. Many of you spend a lot of time looking at the US market structure, and from a technical perspective that means Dow Theory. You may not invest by Dow Theory and you may only follow it when the signals are close to confirmation, but you know what it is. When the Transports (IYT) or Industrials (DIA) make a new high, an uptrend is confirmed when the other one also makes a new high.

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The Transports have made four new highs since the beginning of the year but the Industrials are yet to confirm with a new high as shown in the candlestick chart of the Industrials with the area chart of the transports added above. So Dow Theory does not confirm the new continuation of the uptrend.

That is nice, but I started this by talking about France and Europe. How does this tie in? The relationship is almost good enough for an SAT question: Industrials are to Transports as the German market is to ____________. The answer is the French market.

Check out the candlestick chart of the German DAX (DAX, EWG) with the area chart for the French CAC (PARI, EWQ) below. Notice any similarities? The big daddy in Europe is the German market and it has not made a new high since January, while the little brother, the French market has made four new highs.

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Perhaps it is time to start looking at the French market a bit more closely as the Transports keep making new highs, and watch the German market instead of trading in it.

By Greg Harmon of Dragonfly Capital

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