Dow Theorists look for the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average to confirm each other. That means that when one index makes a new high, the other should be making a new high as well. When there is divergence between the two, as there is now, it could signal a trend reversal for the market.
As shown below, the Dow Jones Industrial Average has been making new highs in recent weeks, while the Transports index has been struggling. The Transports index is having a tough time even holding onto its 50-day moving average, while the DJIA remains overbought. Time will tell how this plays out, but rest assured that we'll be hearing more and more about this negative divergence in the coming days.
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