NEW YORK (TheStreet) -- Investors and traders looking for clues about the stock market's direction should pay attention to Dow Theory, because it could flash a sell signal.
If you're unfamiliar with Dow Theory, it's an old-fashioned method of technical analysis that looks at the Dow Jones Industrial Average and Dow Jones Transportation Average.
Essentially, a Dow Theory buy signal occurs when either of those indices sets a new closing high for the period being analyzed, followed by a confirming closing high by the other index. If the second index fails to make that confirming high, it's called a Dow Theory nonconfirmation.
Similarly, a Dow Theory sell signal occurs when transports or industrials set a new closing low for the time being analyzed, followed by a confirming closing low by the other. If the other index does not follow, it is a Dow Theory nonconfirmation.The daily chart for the Dow Jones Transportation Average (below) is negative with declining momentum (12x3x3 daily slow stochastic, and closes below the 50-day and 200-day simple moving averages at 5078 and 5075, respectively, which are close to a bearish crossover. Last year, there were expectations for a Dow Theory buy signal, but it wasn't to be. The Dow transports set an all-time high of 5627.85, and an all-time closing high of 5618.25, on July 7, 2011. The previous closing high for the transports was 5514.87 on April 29, 2011. The year-to-date high for the Dow industrials in 2011 was also set on April 29, 2011 at 12,810.54, so a Dow Theory buy signal in July required a close above 12,810.54 by the Dow industrials for confirmation. Source: Thomson Reuters The best the Dow industrials could do was a 12,724.41 close on July 21, 2011. On Aug. 2, 2011 both averages plunged below their 200-day simple moving averages. The daily chart for the Dow Jones Industrial Average (below) is also negative, with declining momentum (12x3x3 daily slow stochastic). The Dow industrials is below its 50-day simple moving average at 12,609, but the 200-day simple-moving average at 12,523 held at Tuesday's low. The transports are thus leading the industrials lower. Source: Thomson Reuters
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV