February was a month of milestones for the Dow Jones Industrial Average. The index first broke above the May 2011 peak of 12,876, making “new highs,” in technical speak. Later that month the Dow traded over 13,000 – a big, round psychological number for investors.
Mainstream media rolled out joyful headlines and market bulls erupted in cheers. We, however, needed some more convincing.
While the Dow Jones Industrial Average (DJIA) was looking strong, the Dow Jones Transportation Average (DJTA) was showing signs of weakness. Boom and Bust subscribers got the scoop on a central tenet of the Dow Theory: that is, new highs in one average (DJIA), not confirmed by new highs in the other average (DJTA), should be viewed with caution.
Today, the Industrial Average is still above 13,000 and just yesterday traded at a 52-month high. The Transportation Average, on the other hand, is still well below the highs it made last summer. And right now it’s trading in a common consolidation pattern – a symmetrical triangle – telling me market participants are very indecisive. Take a look…
The index will eventually break out of this consolidation pattern, either higher or lower. The pattern doesn’t tell us which direction. It only tells us that, right now, the bulls and bears are equally matched… and both have weak convictions.
With no crystal ball, we’re left with two “if-then” scenarios to consider.
If the Dow Jones Transportation Average breaks decisively (say, above 5,400) higher… then it will likely move to new highs.
If the DJTA breaks decisively (say, below 5,100) lower… then a significant correction is likely in the works.
For now… we wait.
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