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Minyan Mailbag -- Trannies



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue amoung the Minyanship. We share this next discussion with that very intent.


Maybe you could answer this or pass it on to KAT(as I don't have his email address). Wouldn't the action that he described, the Trannies breaking out in June and the divergence with the Industrials, be a NEGATIVE Dow Theory tell, not positive?

From what I understand....if one index breaks to a new high and the other fails to do so that is negative. While the opposite is true near bottoms....Trannies new low in March 03 with Dow holding above Oct 02 lows, created a positive divergence.....I think he has it mixed up......I think!!!

Minyan - g van

G Van:

I understand your point and it's a very valid one. However, I believe you might have taken what I said incorrectly. Let's first recap my post...


Answer to your transportation question.

Fundamental answer...

Watching the Trannies, as you know, mainly comes from The Dow Theorists. The idea being if the economy is doing well - we're moving product. (i.e. Trannies are making money)

Technical answer...

A Positive Divergence between the Trannies and the Dow is another market tell. The Dow Theorists, which there are many of on Wall Street, see the Transportation Breakout in late June, with the associated divergence in the Dow, as an indication the market may be bottoming.

My last post, about the possible break the Transports 50-DMA was intended to be a warning sign for the theorists. If the Trannies head back south it will turn out to be a false breakout and therefore no true divergence.

G Van - first I should let you know that I use the Trannies as a Leading Market "Tell" Indicator AFTER consolidations. Why? Inventory buildup and restocking. My theory is the transports move out of a consolidation first because businesses see demand buildup, which leads to manufacturing, which leads to stocking of shelves. All of this occurs prior to purchases, therefore earnings.

Anyhow, my Positive Divergence comment relates to how the Trannies have broken out of a consolidation and the Dow has yet to do so. {A possible sign the Dow may soon follow suit.} The second part of my comment, "Trannies having a False Breakout" leads to the Dow possibly not following suit. This is why Minyans need to keep a watchful eye.

Below I've given a graphical example of the Trannies and the Dow on the prior consolidation back in June of '03. This is how, I believe, it should work technically.

Notice how the Trannies broke out first and then the Dow followed. However, if the Trannies decide to break here, the likelihood of a Dow Breakout is very slim. That was actually my point.

Thanks for the comment and clarification opportunity.

The question remains -- what comes first; the chicken or the egg? This is why technical analysis is more an art than a science and is subject to individual interpretation.

I hoped this helped.


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