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Wednesday, September 16, 2009

DOW Theory

Shamelessly stole the idea from Cobra

DOW theory holds that reaction highs (or lows) in one index (industrials) needs to be eventually confirmed in the other index (transports) to confirm either a bull or a bear move. If one does not, then that is divergence and signals a trend change may be about to occur.

Well I may have screwed that up somewhat in my explanation but thats the gist of it.

DOW industrials just squeaked above their October reaction rally high. Transports have yet to even take out their November reaction high.

The tranports were a down sector today. The only one. Curious.

Lots of people hold DOW theory in much higher esteem than wave counting. Its simpler. I also follow DOW theory to a good extent. It makes sense that if your in a true bull market and factories are producing goods, then transports will be needed to ship all that economic activity. If one index does not confirm the other as things go along, beware a trend change may be in store.

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