Dow transports getting dangerously close to a bearish signal

The Dow Jones Transportation Average’s continued selloff Thursday could bode badly for the overall stock market, as it is on the verge of triggering a bearish signal from a widely watched theory market analysis.

The Dow transports DJT, -0.79%  dropped 96 points, or 1.0%, in afternoon trading Thursday, after tumbling 306 points, or 3.0%, on Wednesday. The selloff comes despite Dow Jones Industrial Average’s DJIA, +0.39%  94-point, or 0.4% gain, which followed Wednesday’s 800-point, or 3.1% rout. See Market Snapshot.

If the transports tracker falls just 9-more points, it would close below the May 31 closing low of 9,738.03. That would be significant for followers of the Dow Theory, which has remained relevant among market watchers for a century, given its strong track record of calling major bull and bear markets.

See related: Don’t dis the Dow Theory just because it’s over 100 years old.

A close that’s lower than its previous low would follow a lower high, in which the July 16 recovery peak of 10,794.59 was below the April 24 peak of 11,098.99.

FactSet, MarketWatch

One of the key tenets of the Dow Theory is that a pattern of declining peaks and troughs defines a downtrend.

In comparison, the Dow industrials DJIA, +0.39%  currently sits 3.1% above May 31 closing low of 24,815.04, while its July 15 record close of 27,359.16 was well above the April 23 high of 26,656.39.

FactSet, MarketWatch

While the Dow industrials may be much more widely followed, and represents a much broader segment of the stock market, the transportation sector is viewed by many as a key indicator of the market’s, and the economy’s health.

The idea is, transports take to customers what industrials make; if customers aren’t taking, the makers will slow down, and then the economy weakens.

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