Commentary for February 9, 2005

| February 9, 2005

Stocks sold-off meaningfully today after two sessions of hesitation, and it will be important to note where they head next. As we have discussed several times over the past month, we are currently tracking a potential Dow Theory sell signal in progress. Below are the daily charts of the Dow Jones Industrial and Transportation averages:

The first bearish indication occurred when both indices broke below their December consolidation lows, and now that they are rallying after putting in their initial lows for the downtrend from early January, the next sell signal development would be coincident lower highs. The Industrials topped out around 10,850 in December and the Transports topped out at about 3,810. If today’s weakness persists during subsequent sessions, those lower highs will then be in place, and the only remaining development required to form a complete sell signal would be a move below the January lows of 10,370 on the Industrials and 3,460 on the Transports.

It is also interesting to note the divergence that has occurred between these two averages since the beginning of the year. During last Fall’s rally, the Transports were much stronger than the Industrials. However, the Transports have been much weaker during this year’s downtrend. Short-term technicals remain bearish for both indices, and probabilities currently indicate that a completed Dow Theory sell signal is the most likely scenario moving forward. As always, anything is possible, and both averages could certainly head to new highs from here. However, our system is based upon statistical analysis, so we will side with the odds.

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Category: Commentary, Market Update

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