There's a Lot to Gain from This Dow Theory “Failure”

I’ve been a little quiet lately. It’s not that I don’t have a lot to say, it’s just that I’ve spent most of my time staring at the screen each trading day asking, “How?” and “Why?”

You see, that’s what happens when markets get irrational. Traders like myself – and I mean those that have been around for more than a few market cycles – look at a market like this and ask questions because there’s something to be learned… and of course, money to be made.

As much as most people want to think that markets don’t change, they do. Like anything else, they evolve. More data, more coverage, more participation, more politics, etc. – all of these things force the market and its participants to evolve.

That said, there are a few rules that remain constant.

Value is desirable… Take a risk to be rewarded… The economy leads the market (not the other way around)…

Keep that last one in mind, and you have to fall back on the “Dow Theory.” Here is how Investopedia defines this old chestnut…

“The Dow Theory holds that the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high and is accompanied or followed by a similar advance in the other average. For example, if the Dow Jones Industrial Average (DJIA) climbs to an intermediate high, the Dow Jones Transportation Average (DJTA) is expected to follow suit within a reasonable period of time.”

So, the Dow hit a new high last week – that’s one part of this age-old theory. The Dow Jones Transportation Index hit a new high… in April… and it’s heading into a bearish trend.

That

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