The bizarre thing about the markets lately is that they aren't giving any clear reversal warnings, despite the real world data which suggests (At least to me) that everything should be imploding in on itself. There's only so much bailout one system can take.
Usually, as big economic problems take their toll on the economy, the Dow Theory indicator will display specific data in a specific way. For example, Just before the 2008 crash, the Dow Industrials outperformed the Dow transports by a large margin, and then the Dow transports outperformed the Dow by a large margin. Specifically, the transports hit a new yearly high while the Dow failed to confirm the movements over time. The interesting thing about this is that the moves were most likely trader driven - as companies came out with quarterly numbers, the traders descended.
But the moment .... the day that the transports made that new high was the day investors needed to start panicking out of investments, precisely because the context of this move was that the dow had briefly outperormed the transports before following their bear trend. So in the moment, the subsequent out-performance of the transportation average should have been incredibly, extremely stark, thus giving a clear clue that things were not as they should be. In other words, divergence means change is coming.
Back in the mid 90s, the dow traded flat for an entire year while the transportation average hit the skids. The signal here, as it is today, was to hold, and buy the dips on good quality stocks that were selling for a bargain. When the inevitable reversal of trend from flat to bull hit, the clue that the trend was real was simply that the averages confirmed each other's movements.
Today ... we have the transportation average trading with a slightly downward bias, while the Dow tracks slightly upward and onward. The Key thing to watch is for more divergence. Does the transportation average surge to a new high? Does the Dow surge to a new high? Do they confirm each other's moves? If it looks like the Dow is into a new bull run, the transportation average MUST confirm these moves, otherwise you can expect more sharp sell-offs as the Dow makes a new high, then consolidates, thus trading basically flat or slightly up.
BUT ... in the context of the last 6 months, If the transportation average makes a new high and the Dow does not, BE CAREFUL!
