Transports Continued Nonconfirmationon November 24, 2012 at 5:55 pm
For several months followers of Dow Theory have voiced concerns that the Transports were not confirming the Summer rally. (One of many examples http://seekingalpha.com/instablog/193926-gary-jakacky/898601-dow-theory-and-the-summer-2012) Examining a longer-term chart reveals deeper concerns.
Note the local peak for both Industrials and Transports in April 2010. Following a healthy correction, both indices powered past that mark before year’s end and marked new highs mid-2011. From that point we have seen two different behaviors. The Transports fell back to test the Summer 2010 low, while the Industrials pulled back to a higher low. During the early 2012 rally, the Industrials reached a new high while the Transports met a lower high (March 2012). The Transports have continued to exhibit lower highs ever since. Meanwhile the Industrials have been marking higher lows. While one would expect the Industrials’ upward trend to continue (given continuous Fed stimulus and a few encouraging signs regarding housing and jobs), Dow Theory suggests that without confirmation from the Transports, the Industrials’ uptrend will fade. On the positive side, the Transports have repeatedly shown support at the March 2010 resistance point near 4800. The Transport’s stubborn price support gives a bull encouragement. Should the US economy continue to recover and oil continue to stay below $90, the individual company story for each of the transportation sector components brighten. Given the duration of the Transport’s basing period and these bright prospects, a pop in Transports may well turn into a sizable one. Sizable enough to confirm the Industrial’s rally. However, should the economic recovery falter and fighting in the Middle East threaten oil supply, the Transports will be particularly hurt and possibly fail their support, bring the Industrials down with them.