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Dow Theory Breakdown

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There’s trouble a brewing according to Dow Theory. The Wall Street Journal’s Paul Vigna reports here.

This time it’s Dow theory adherents, who are troubled that there’s been a breakdown this month that could spell trouble for the bull market, according to research the Wall Street Journal cited Tuesday.

The market looked weak on Monday, saved only by a late spurt of buying that narrowed the losses. It may not be the last time it looks weak.

The much ballyhooed Dow Theory is flashing a warning sign: While the Dow Transports made a new high in March, the Dow Industrials did not. The latter’s failure to hit a new high is currently a red flag.

“This leaves a Dow Theory non-confirmation still in place,” said technical analyst JC Parets, founder of Eagle Bay Capital.

Why? Well followers of the century-old Dow Theory–popularized by Charles Dow–maintain the industrials and transports need to move in lockstep to confirm a market’s trend. A pattern of higher highs and lower lows serves as confirmation of the market’s move.

The theory is based on the thinking that making goods is one leg of the industrial economy and moving those goods around is the second leg, so their trends should be in sync.

Since the Dow Transport hit a year-to-date high of 7627.44 on March 7, both the transports and industrials have sagged. The Dow Transport closed at 7510.38 Monday, while the Dow industrials finished at 16276.69.

To see another buying signal, the Dow industrials would have to

cross above its early March levels, while the transports would need to maintain its momentum.

dow indices

 

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.