Dow recession signals not straightforward

THE Dow Jones index is one of the oldest indices in America and has some age old wisdom when it comes to predicting the market movement. The Dow Theory was theorised by Charles H Dow more than 100 years ago. He is widely considered to be the father of modern technical analysis and much of his theory on trading and investing is still widely used.

Indicies must confirm each other and in other words, the Dow Jones Industrial and Dow Jones Transportation must confirm each other's trends. Whenever the Dow Jones Industrial makes a new high, the Transportation index must follow suit to confirm a trend. Conversely, if the Transportation index declines at the highs and moves opposite from the Industrial index, a recession might follow. Simply put, the Industrial is the heart of the US economy, and whenever there is an increasing output, the major transportation companies listed in the Transportation index would be required to perform the logistical errands. Therefore, under normal circumstances, the Transportation index would follow the trend.

Over the past two and a half decades, the stock market has confirmed divergence marked out before the dot-com bubble crisis and the 2008 Great Recession. The subsequent collapse of the Industrial index is marked by the flat top of the Transportation index. Looking closely at 2006 and 2007, the Transportation index's momentum has slowed down and prices for three periods have not broken into a high.