Even through the DJTA was developed in the 1880s, it is still widely followed today as a leading indicator of the broader markets. The theory goes that if the economy is strong (ie. demand for goods is high), then transportation companies will be very busy bringing those goods to market. And since this is on the front end of the consumer cycle, then transportation companies should see the gains of a strong/strengthening economy before most other industries. Hence, the Dow Transports are seen as a leading indicator. Yes, the US was very different in the late 1800s than it is today, but many will argue that we still consume "stuff" and that "stuff" has to get to us somehow - whether it's made in here in the states or China or anywhere else.
As the title of this post suggests, the DJTA may have just broken down as of the close of Monday's trading. Let's look at the charts and see if you agree.
Well, the markets closed about 30 minutes ago and even with the Dow and S&P both up over 0.6%, the Dow Transports closed down 0.45% - that's quite an under-performance! And not only did it close down, it closed below that green support line for the first time since last October. With a closing print of 8566.47, the DJTA is officially breaking down. Here's my assertion in a nutshell: 1) It has now clearly broken below the intermediate term trend line, 2) volume is accelerating, 3) the RSI and MACD are both a mess, and 4) the price action is diverging dramatically from the overall stock indices.
On a short term basis, I expect to see the DJTA fall to its October lows of 7700 as this represents the next natural area of support as well as roughly coinciding with the measured move of it's failed pattern.
If indeed this breakdown leads to a longer-term bear market, then I would forecast the DJTA to drop 40% from current levels to approximately 5000. I'm not making that prediction to be dramatic, that simply represents the next area of long-term support. The DJTA hardly paused on its two year, +86% march from 5000 to 9310. As a result, there really isn't a strong base between here and there.
Of course, the DJTA in no way guarantees that the major equity indices will follow, but I think it's worth noting the vast divergence of late.