Dow Theory Predicts Trouble Ahead for U.S. Economy

by: FP Trading Desk

One of the technical indicators that resonates among a wide swath of investors is the Dow Theory — and these days, it is pointing to a troubled U.S. economy ahead, which could be bad news for the stock market.

According to the theory, the Dow Jones transportation average of 20 U.S. stocks and the 30-stock Dow Jones industrial average signal an ongoing bull market when they rally to new highs together. But when the industrials rally and the transports don’t, it can be a warning signal of an upcoming bear market.

Right now, the Dow Theory is flashing red, even with Tuesday’s robust rally.

“Starting from the mid-August lows, and fuelled by Fed rate cuts, the Industrials rallied up to new all-time highs on October 11, but the Transports did not confirm,” Ray Hanson, an analyst at RBC Dominion Securities, said in a note to clients.

“A break of the mid-August lows would confirm a new downtrend for the Transports, and a confirming break of the mid-August lows by the Industrials would signal an emerging bear trend for the market as a whole.”

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