Dow Theory: The Transport Triple Top Threat

One of the most challenging chart patterns is now upon the Dow Jones Transportation Index (IYT). That chart pattern is the triple top formation. Triple tops can be considered challenging because they imply a three strikes rule of baseball. If the batter swings and misses three times then they're out for that at bat.

The triple top usually indicates that investors have, or are about to give up on the particular stock or index. This could be an instance of the market bulls capitulating to whatever forces are at play. One thing is certain, if the downtrend of the Transports continues then we could expect the index to go to the previous low of 3600, which implies a Dow Industrials (DIA) of 9700.

The implications of a triple top is troubling primarily because the Transportation Index has spent the better part of the last two months resisting going over the November 4, 2008 peak. The Transports have not been able to confirm the Industrials in this regard which, to this point, is a Dow Theory non-confirmation.

In addition, the volume on the Transport Index has fallen off a cliff in the most recent rise from the November 2nd low. This indicates a lack of interest in market participants. Lack of interest in the rise generally means that the current levels in the Transports will be difficult to sustain. Additionally, the MACD and the RSI appeared to have topped out and are headed lower.

The threat of a triple top and its implications shall remain in place unless the Tranports can exceed the 4072 level. All of the indications mentioned make me wonder if this means the end of this bull run within the secular bear market.

Comments

[TheFounder]

More and more indicators support this theory with every day that passes.

2009 Nov 20 08:13 AM

[Mad Hedge Fund Trader]

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2009 Nov 20 10:12 AM

[Tony Petroski]

Mr. Dividend Inc.

Good article.

"The threat of a triple top and its implications shall remain in place unless the Tranports can exceed the 4072 level. All of the indications mentioned make me wonder if this means the end of this bull run within the secular bear market."

It's not a "threat of a triple top." It's is a triple top. Like you, I am in the camp that says three strikes and you're out. But the bull run has one more leg.

The Madman weighs in again. His staff must be on vacation (Happy Thanksgiving) because I read his (insightful) comment two weeks ago. Indeed, I ran into the Madman between acts of La Traviata at the San Francisco Opera. He was chatting with Speaker Pelosi and I anticipated his thoughts.

2009 Nov 20 10:22 AM

[Dividend Inc]

Greetings Tony Petroski,

Although I agreed with your assessment that the triple top in the Transportation Average was real, I needed confirmation based on the downside action. As we both know this never came to fruition, so far. The nuances to Dow Theory are hinged to the ability to obtain a confirmation.

Thanks for your contribution and interest in my article.

Jan 19 01:43 PM