Industrials vs. Transports

What is Dow Theory Saying?

By Bryan Bottarelli
Monday, June 29, 2009 10:07 AM EDT
Mon, 29 Jun 2009 14:07:00 GMT

Dear Bottarelli Research Member,

Good morning. As we begin this holiday-shortened trading week, I’d like to start by looking at the current formations on two critical indices: The Dow Industrials and the Dow Transports.

Starting with the Dow, you can clearly see that the Blue Chips have drifted into a point where the 50-day moving average is about to intersect with the 200-day moving average. This will create either a major level of support or a major level of resistance. In my view, the resulting move will be a coiled-spring effect that pushes the major market averages aggressively in that direction.

INDU

As you can imagine, the trading strategy for the next four days is to identify the resulting move, and play it accordingly. When looking for clues as to the directional bias, it’s always advantageous to study the chart patterns of other sectors that heavily influence the Dow. Therefore, let’s study the current formation of the Dow Transports.

As you probably know, the relationship between the Dow Industrials and the Dow Transports formulates the opinions of Dow Theory, which is one of the most longstanding market indicators in history. According to Dow Theory, the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high – and is then accompanied by a similar advance in the other. On the flipside, Dow Theory also says that when both averages dip below previous important lows, it’s regarded as an indicator of a new downward trend. Having said that, let’s consider the current technical pattern of the Dow Transports. As you can see below, the Transports have established a double-top formation right at 3,400, and they’re now finding resistance at the 200-day moving average. This move could threaten to dip the Transports below the 50-day moving average.

TRAN

So as it stands, neither the Industrials nor the Transports are advancing above previous highs. And at the same time, there’s a good possibility that both averages could soon dip below a previous important low. As a result, the technical market readings tell me to bias the directional move to the downside. That’s why I’d like to continue holding the SDS August 57 Calls (SDS HE). As you know, we entered these calls on 6/25/2009 for $4.89, and they now trade for $3.90. Maintain this position for a pending drop.

In terms of new positions, I’d like to keep the ledger light until we have an indication of which way the markets will move. As I’ve said before, the market has been prone to some very blatant manipulative efforts, and I’m sure those in charge of pulling the puppet strings are seeing the same exact indicators that we’re seeing today. Therefore, for the near term, let’s play it close to the vest. The moment a new opportunity arises, you’ll be the first to know. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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