Despite a short sell-off in mid-January due to the Martin Luther King holiday in the United States (US), the Dow Jones Industrial Average (DJIA) was poised for a great start to 2020 when prices crept to new highs beyond 29,500 points in mid-February.
Things started to go bad in end-February however, when the DJIA had a strong gap down to below 28,000, reaching the low at 24,721 within a week. The rebound in March saw the index returning to 27,000s after the Fed had an emergency rate cut but the strong selling momentum brushed off any positivity brought about by the rate cut.
Based on the wave and price action analysis, the index is on an expanded flat corrective wave with the last leg of wave Y ongoing. The sub-wave of the ((iii)) wave is incomplete and there is a strong possibility that the index might break the 20,000 level before staging a ((iv)) wave short-lived rebound.
The index is in a strong downward momentum and the potential bullish recovery is between 15,483.45 – 16,876.52 region, coinciding with the 161.8% extension of wave W.
Dow Transportation Average Index is the least known index in the United States but the importance of this index is crucial to determine the health of the major United States indices.
The wave and price action of the Dow Transportation Average Index have signalled a pre-warning when the index struggled to break the 11,500-resistance level for the whole of 2019 with the formation of a rising wedge. There is a strong possibility of the index breaking below 6,000 as the regular flat was invalidated when the supposed ((iii)) wave broke below the 9,500 level, which is the 161.8% of wave ((i))-((ii)). Moving forward, the Dow Transportation Average Index may have a stronger than expected ((iii)) wave expansion and we might see price falling to the 6,000 levels in the mid to long term.
The famous Dow Theory which is a century-old theory is still affecting the market today. From the chart above, the weakness in the transportation average is clear in 2019 and has been trading in a range while the industrials are creating new highs. The theory strongly indicates that in order to confirm the bullish advances of the industrial, the transportation must be making new highs as well. However, this was not the case in 2019 bullish momentum exhibited by the DJIA. Furthermore, the divergence can be seen across 2019 and in 2020. The diamond pattern also indicated that the transportation is heading for a downward momentum when prices broke below the diamond pattern to exhibit a bearish trend.
Current analysis confirms the bearish trend with both the industrial and transportation affirming each other by moving downward in tandem.
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