In this post, I would like to share one of the oldest swing trading theories out there, the Dow Theory, and what it currently tells us.
The Dow Theory was introduced gradually over the first three decades of the 20th century in editorials in The Wall Street Journal. If you google, you’ll find lots of info about this Theory, so I’m not gonna bother you with that one today. I did summarize the Dow Theory to the following: whenever there’s a divergence between the Dow Jones Transportation Index vs the DJ Industrial, then trade the direction of the DJ Transportation.
Next, I’ll show you two examples. Example 1 is the current situation, a massive Bearish Divergence. Example 2 is an example of a Bullish Divergence that took place right before the US elections.
Example 1: Bearish Divergence
As you can see, there’s a huge bearish divergence going on here that started December 2016…
Based on the past, it would make sense to see the DJI catching up to the DJT. That would imply a drop of 5-10% for the Dow Jones Industrial/S&P500/Nasdaq. So manage your risks to the downside…also, see the latest update of the S&P500 in which I explain why a 5-10% drop during the next two months seems likely.
Will it be different this time?
The Sell signal is confirmed if the DJT breaks the Low of April 13, roughly 2.5% downside needed to trigger a new sell signal. That corresponds with a break below 20.400 (= -/- 2.5%) for the DJ Industrial.
In the ideal scenario and sell set up, the DJI would form a slightly Higher High while the DJT forms a slightly Lower High first, into the next major cycle date May 8-14.
Example 2: Bullish Divergence
August 2016 – November 2016
The DJ Transportation was trending up, Higer Highs and Higher Lows while the DJ Industrial was trending down, LH and Lower Lows.
This Bullish Divergence warned us that a huge uptrend was about to start and if you followed the DJT, you’d be trading in the right direction.
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