Ladies and gentlemen, we have a Dow Theory nonconfirmation. Higher highs in one index not confirmed by higher highs in the other. Now both indexes threatening new swing lows. $INDU $DJIA $TRAN $DJIT pic.twitter.com/srXrQ443zV
— David Keller, CMT (@DKellerCMT) September 24, 2020
Today’s Chart of the Day was shared on Twitter by David Keller (@DKellerCMT). On top, we have the Dow Jones Industrial Average, and on the bottom, we have the Dow Jones Transportation Average over the past year. David points out that we have a classic Dow Theory non-confirmation signal. One of the tenets of Dow Theory is the idea that you want the companies that produce the goods (Industrials) confirming the trend of the companies that move the goods (Transports). In other words, when one index makes a new high, you want the other index to also make a new high within a reasonable amount of time. As David highlights, Transports printed a new all-time high on Sept. 16th, while Industrials failed to follow suit. Some argue that Dow Theory is irrelevant in today’s modern economy. But take a look at how these two were behaving leading up to the crash in February. It’s important to keep in mind that divergences can persist for a while without any major downside follow-through, and it’s also entirely possible that the Industrials get their act together and print new highs. But until we get that confirmation, be aware that this red flag exists, and proceed with caution.