With big declines this past week, the Dow Industrials and Dow Transports both broke support levels and forged lower lows. Confirmed lower lows amount to a Dow Theory sell signal. The first chart shows the Dow Industrials forming a double top and breaking double top support with a decline below 12700 this week. Broken resistance marks the first potential support level in the 12200 area, which is not far off. The indicator window shows RSI moving below 30 for the first time since early August. While this does suggest an oversold condition, notice that the Dow traded flat in August-September and did not bounce until early October. Should the Dow bounce next week, look for first resistance from broken support in the 12800 area.
The Dow Transports peaked around 5400 in early February and traded sideways for three months. This showed an extended period of indecision or a standoff between bulls and bears. With a sharp decline below 5000 this week, the Average clearly broke support and the bears prevailed. The next support zone resides around 4750 from the reaction lows (troughs) in mid November and mid December. Broken support turns into first resistance in the 5100 area. Notice that RSI also became oversold for the first time since early August. Also note that this oversold condition did not foreshadow a lasting bounce as the Average floundered for several weeks and broke its August lows in late September and early October. Oversold is a sign of weakness because it requires strong selling pressure to push RSI below 30.
Arthur Hill CMT