I have been watching the Dow Jones industrial and the Dow Jones transportation average for the last few days now. And I think that the Corona Virus might be the black swan that takes us into a new bear market. Because a sell signal has appeared, according to Dow Theory.
When both the Dow Jones Industrial and the Dow Jones transportation averages makes new lows, below their earlier lows, it means that they are sending out bearish signals, according to Dow Theory. So let’s delve into what Dow theory has to say about the year 2020.
The market has been showing strength lately. And it has been building a large base, that was looking quite promising, on the Dow Jones Industrial average, for quite some time now. It broke out of this base on november fourth, in 2019, which led to a minor Santa clause rally, as I’ve written about earlier.
This was a buy signal, according to Dow theory, although a vague one. This led to a minor rally that looked like it was going to continue this year. But that outlook now seems to have been shattered by the Corona Virus. In late 2019 it looked like the Dow Jones transportation average was going to follow the industrials into higher ground. But we now know that was probably just showing a bearish divergence. Because it never had the strength to follow the industrials into higher ground.
The black swan is infected with Corona
Despite the fact that a huge base is building on Amazon, which I have written about earlier, it now seems like the Corona virus has shattered the potential of more upside for the wider market. According to Dow theory, both averages needs to confirm the move and hit new lows to make it a sell signal. And it looks like that confirmation came last week, on thursday:
What is a Dow theory sell signal?
Dow theory was invented by Charles Dow, in the late 1800s. A sell signal happens when the transports and the industrials are both cutting below earlier lows. Because that means the economy is slowing down its activity.
Is this a sell signal?
I am just looking at Dow theory. And it gave us a probable sell signal last week. Now, this is just one tool in the toolkit, and you should not base your investing decisions on what Dow theory, or any one person, is observing. But one tool just turned bearish.
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