Dow Theory: Transport Confirmation?

05/03/2017 2:45 am EST

Focus: STRATEGIES

Charles Carlson

Editor, DRIP Investor

An important tenet of the Dow Theory is that the Dow Industrials and Dow Transports must confirm one another in direction, explains Chuck Carlson, editor of DRIP Investor.

The Dow Industrials and Transports represent two very important segments of the economy. For an economy to be in sync, you need both Averages confirming one another. When the Averages are diverging, it can be a yellow or even red flag for the stock market.

The recent rally in the Dow Industrials has obfuscated continued sluggish action in the Dow Transports. Indeed, while the Dow Industrials are trading just off their all-time high, the Dow Transports are down 5% from their all-time high and have not enjoyed nearly the bounce that the Industrials have off their recent lows.

To be sure, it is too early to panic and sell stocks; and the Dow Transports have a history of putting points on in a hurry.

Still, without help from the Transports, it is unlikely the overall market will be able to sustain a meaningful upward move.

Thus, for investors wanting to know where this market is headed in the near term, the Dow Transports offer perhaps the best barometer.

A negative would be a close in the Dow Transports below the recent low of 8874.56. And a close above the March 1 high of 9593.95 would be a bullish development.

Subscribe to Chuck Carlson's DRIP Investor here…

Related Articles on STRATEGIES