Dow Theory in Reverse: Can Bulls Claim Victory At Key Resistance?

To me, Dow Theory is simply another tool or indicator to pull out of my toolbox. Some are ardent followers of Dow Theory while others probably think it’s archaic and outdated. But I will say, I really do like the fundamental tenet around non-confirmation/confirmation between the Dow Jones Industrials and Transports.

This non-confirmation (divergence) came into play this past spring and sent a very cautionary message to investors about stocks.  For those that aren’t familiar, the Dow Jones Industrial Average made new highs in 2015, while the Dow Jones Transportation Average did not. In March, I wrote a post about the non-confirmation and why it was worrisome.  In that post, I also showed how a similar Dow Theory non-confirmation (divergence) played out in 2012.

Here’s an excerpt from that post:

On March 2nd, when the markets were near peak levels, I posted a research note on Dow Theory highlighting the weakness in the Dow Jones Transportation Index (DJT). That wasn’t a call for a market top, but rather a call for some caution as I felt the Dow Theory non confirmation signal was something investors should be aware of.

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[Regarding Spring 2012]  No two market periods are the same, but this is a good example of how a Dow Theory non confirmation (divergence) can take hold (and take the markets lower, or alternatively, higher).

As investors are fully aware, the Dow Jones Industrials (and the Transports) headed lower this summer, before falling apart during the late August stock market decline. See chart below.

But what’s important now is that both are testing important resistance… and a breakout higher could neutralize the selling and give bulls a better feeling.  That resistance is 17,200 for the Dow Jones Industrial Average and 8,200/8,250 for the Dow Jones Transportation Average.

Dow Theory – Dow Transports take Dow Industrials Lower

Keep an eye on what the markets do at this level, as it could change the stance of the Dow Jones Industrial Average and broader stock market.

Thanks for reading.

Twitter: @andrewnyquist

No position in any of the mentioned securities.  Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.