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Stalking the Dow Transports


There are no negative divergences being flashed by the Dow Transports, but any close below February 2010 lows would be cause for concern.


Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

Kirk writes:

Your Buzz about the Dow Transports relative strength reminded me of 2008. If one looked at Dow Transports as a relative strength indicator in September 2008, one would have had their head handed to them.

Not saying it will happen again and not saying the market is in the same "place" as September 2008; simply trying to see all sides.

"Love does not consist of gazing at each other, but in looking together in the same direction."
-- Antoine de Saint-Exupery

As the chart below shows, right after Sept 2008, the wheels came off the wagon, so to speak. Anyone simply relying on Transports could have been in trouble, unless they'd been monitoring Transports for over a year before September 2008. Then, instead of using it as a positive divergence, they would have heard the warning bells loud and clear!

This index was displaying clear divergence after July 2007, even as the Dow Industrials headed to new highs in October 2007. Later on, when the Transports headed higher in 2008, the company of Industrials was sorely missed. So, there had been multiple divergences in place in September 2008. (I shared some of those concerns in an article, How Vicious Will Bear Be on Its Last Legs?)

In addition, in early January 2009, Transports proved their worth when they joined the Bank Index in leading negative divergences in the market; the market just fell apart after that. (Please scroll down to see my Buzz & Banter post from January 14, 2009, The Emperor Has No Clothes, being reproduced below for non-Buzz subscribers.)

I shared a market snapshot yesterday on the Buzz. As of now, there are no negative divergences being flashed by the Transports. However, any close below February 2010 lows by both these indexes would be a sign of concern, especially if accompanied by a host of other negative divergences. As all market participants know, it's not prudent to rely on any one indicator or index or divergence as the "ultimate market tell."

This is especially important in light of numerous distribution days since new 52-week highs in April. (Please see my previous article, Is Market Pain Worth Any Gain?)

So, as I shared yesterday, Dow Transports continue to be on my trading radar.

The Emperor Has No Clothes
(January 14, 2009)

Just scrolling through the charts, here's what I see:

1. Derailing of Dow Transports, which currently stand at -5%. The index is only about 150 points from the November lows.

2. Bank Index, which at the current level of 35.74 is lower than November closing low of 36.72.

Even if the market makes a statement by S&P 500 regaining 850, looking beyond the next few days, I would be paying more attention to the above-mentioned negative divergences and not the S&P statement!

Now if only S&P 500 had come close to violating November lows and the Transports and Bank Index had been positively divergent…

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No positions in stocks mentioned.

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