Dow Theory was developed by Charles Dow, Robert Rhea and others as a way to determine the health of a particular trend. It’s track record of calling tops and bottoms is quite good using only the Dow Jones Industrial Average and the Dow Jones Transportation Average.
Basically, the theory is that if both averages are hitting new highs together, that “confirms” an uptrend. But, when only one average hits a new high, without the other one, that’s a non-confirmation. The longer the non-confirmation lasts, the more likely that a top of some significance is in place. Let’s take a look at the current Dow Industrials and Transports:
As we can see on the charts, while the Industrials were enjoying a Santa Claus Rally and 2015, the Transports failed to follow. The high for the DJTA on 11/28 was confirmed by the DJIA a few days later on 12/3, but there’s only been non-confirmation since.
Keep in mind the components of the Transportation average are airlines, truckers and delivery services, which should have benefited tremendously from the drop in energy prices. The fact that the DJTA couldn’t confirm a new high in the Dow, past 11/28, despite oil falling 50% is quite telling. We think the drop in oil, and the lack of a push higher in the Transportation average, makes the non-confirmation speak that much louder about the health of the stock market and economy.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.