Yesterday I wrote “Techs Fail to Endorse the Financials-Led Selloff” and that Tech’s relative strength should be taken as a bullish sign. Today I’d like to take a look at another glaring bullish divergence.
As far as I know, the study of divergences (one of my favorite tools) dates back to the origin of the Dow Theory. I’m no expert on the theory but the gist is this: The Dow Jones Industrial Average and the Transportation Average need to align in order to confirm a trend.
Well, just as Tech stocks failed to confirm the recent weakness in the financials so the Transports have failed to confirm the recent weakness in the Industrials:
In fact, the Transports are in an UPtrend:
Clearly, the action in the Transports is bullish and suggests the recent weakness in its counterpart, the Industrials, may be overdone. So here’s to you, Dow Jones Transportation Average:
[youtube http://www.youtube.com/watch?v=bZORK6nI8kg&hl=en&fs=1](Click for video)