Why "the other Dow" really matters: Troubling clues in the Dow Transports index

Readers here know we're concerned about the Dow Transports, because we care about them - and not just because arcane Dow Theory (the progenitor of Elliott Wave analysis) says we should. The transport sector is quite sensitive to movements in the economy. That hasn't changed at all over the years - after all, when you buy anything online nowadays, it's shipped to you or your recipient, or to a store location where you can check it out. (Hmmm, Dow Theory remains very relevant!) Last week, the Dow Jones Transportation Average ($TRAN) reacted at two significant Fibonacci levels almost simultaneously: the .786 retrace to this index' January highs, and the .382 retrace back to its all-time high (reached in May 2008). We've noted before this meant spiking above its 200-month moving average, while it stopped short of its 200-day moving average. Dow Theory says that if this index, and the Dow Jones Industrial Average, move above their January highs then it changes the character of the rally to be more bullish. What if that doesn't happen? Well, then there's risk that the Dow Transports might probe new lows. I've mentioned before that it looks to me like this index completed five Elliott Waves down, so if and when a corrective pullback rally has finished, then it can be susceptible to another set of downward movements. A pullback rally would often be expected to retrace 50% back to the May 2008 highs - but that doesn't absolutely have to happen ... the 38.2% retracement that already occurred, might suffice.

If the Dow Transports can move above their January highs, then we can revisit their prospects for a continued rally movement up. Conversely, moving lower could place this index in jeopardy of going below its 2003 low. When you study the indicators on my monthly chart of the Dow Transports (under the daily chart, below), you'll see that those indicators do not (yet, anyway) look quite as positive as they did coming out of the 2003 low. This fact doesn't guarantee that the transports roll over to new lows, or that they do it as their next move. But it also shows that this index is not guaranteed to move into a new bull market. Therefore, one guidepost we should remember is to look at whether - or not - the Dow Transports move above 3458 and especially 3737.