interestingly, from September onward we were witnessing a potential Dow Theory Non-Confirmation, as the Dow Indus trials broke above its prior Q1 2012 highs while the Dow Transports still remained below its corresponding 2012 highs. This was a rather ominous sign since many consider the Dow transports to be a leading indicator, premised on the belief that goods need to be distributed around the world in order to sell them to the consumer, hence since transports were lagging it suggested a decline in manufacturing output and/or consumer demand and this was not a good sign for the economy overall. However, price action over the past month implied a potential shift could be underway, as Dow Transports took out its previous September/October highs initially and more recently in 2013 it broke above its previous 2012 highs, and this was precisely the type of price action one would expect from Dow Theory – whereby transports are leading industrial.
Presently, the Dow Industrial average is above its previous Q1 2012 highs, yet it still remains below the prior highs from September/October around 13,660/65. While this does not guarantee that equities will continue to move higher over the coming days and weeks (since the Indus trials can still falter and make a lower high), it does project a rather bullish signal. Although we do not feel it is prudent to look to place a trade based on a potential Dow Theory confirmation, we think it may be something to keep an eye on since equity markets can be a great proxy to gauge “risk” – Therefore, its outcome could have a major influence on the USE and ‘high beta’ currencies (commodity and emerging currencies) overall.
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