Wednesday, November 21, 2007

Dow Theory Sell Signal...almost there

If you follow market news you will be seeing articles discussing if the Dow Theory has signaled a change from a long term uptrend (bull market) to a long term downtrend (bear market).

So far only the DJTransportation Average Index has developed a sell signal by declining below the August low near 4,450. The DJIndustrial Average has not yet done so and this confirmation is required before the Dow Theory sell signal is confirmed.

The DJIA must break below the August low near 12,500 points. It is not far away from doing so with a low of 12,725 today. Another ~3 % drop will take it below the 12,500 level and confirm the sell signal.

In comparison, the S&P/TSX must decline to below about 12,500 before it has developed the Dow Theory change of long term trend signal.

The S&P 500 and Nasdaq Indexes also have a way to go down before they would give a sell signal.

The fact that the DJTransportation Average Index has developed a sell early warning that a bear market trend may be underway, as opposed to just another small correction, is significant. This is consistent with the overall Dow Theory that expects the industrial slow down to show up first in the transportation industry. For example, before an industry can produce items made of raw products such as steel, these products must first be transported. If a slow down is under way it will then show up first in the transport of raw materials.

The fact that the Dow Theory sell signal seems to be within reach may have influence on some investors and lead to more people try to beat the gun to avoid getting caught in a fast moving down-draft of price decline.

The next few trading days will be interesting to follow.

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