by Pater Tenebrarum, Acting-Man.com:
A Possible Economic Red Alert
We have already remarked on the growing divergence between the Dow Jones Transportation Average (TRAN) and the Dow Jones Industrials Average (DJIA) on previous occasions. These two stock averages marked the beginning of technical analysis as we know it today. Charles Dow compared the action in the averages over the long term and noticed that price divergences between them tended to develop close to turning points in the economy and the stock market.
Dow assumed that a marked upturn or downturn in one of the two sectors would soon be followed by a turn in the other sector. He essentially concluded that unless the two sectors were “confirming” each other, trouble was likely brewing under the surface. Over time, a set of technical trading rules was developed based on this observation, which is known as the “Dow Theory” today. To be sure, the Dow Theory is by no means providing fool-proof signals. However, a very large and long-lasting divergence between the two averages is usually not a particularly good sign.
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