Dow Theory requires that highs seen in the Dow Industrials, INDU, need to be confirmed by higher highs in the Transportation Index, TRAN, the trannies, and visa versa, high in trannies are confirmed by higher highs in the Dow. In other words, it is one big happy family, with the Dow moving up, and the trannies, the broad markets have nothing but wine and roses ahead.
Taking a look at the July top in the markets. Note how the trannies made a higher high in July, but the Dow did not confirm with a higher high of its own, and look at the result. Sometimes the discrepancy corrects itself and the wine starts to flow again, but when both prices dropped under the June lows, a market collapse was at hand, and occurred. Dow Theory is a not so clear cut market tool, however, and traders often disagree on interpretations, so keep this in mind.
In the here and now, note the Dow Industrials making new higher highs, the bull party lives on. But, the trannies are drifting off each day, fading lower, and in fact now lost the lower rail of the channel (thin black lines) and the rising red wedge. This is obviously bearish behavior. In the days ahead, either the trannies recover and shoot higher to resume a strong uptrend (bullish for markets), or, the Dow starts to drift lower, losing the lower rail of its upward-sloping channel (bearish for markets). Which do you think will happen?
The 5200 level is critical support for TRAN, so watch price behavior closely. The Dow moving under 12600 will show a market that is losing its grip. If the non-confirmation signal stays in place (the trannies are not confirming the Dow), and TRAN loses 5200 and the Dow drops under 12600 down towards 12500, the broad markets will be in serious trouble.
For TRAN and INDU charts use search box above for keystone speculator.