Before I look at the long-term monthly charts as of the end of May, I'll consider recent monthly Closes for the Dow 30 (INDU) versus the 20 Dow Transportation stocks (TRAN). Following this section will be my analysis of the monthly SPX, INDU, COMP and NDX charts along with relevant technical indicators
There have been Market 'warnings' regarding a lagging TRAN Average relative to INDU. There's no sell 'signal' I can point to however. Charles Dow came up with the concept of bullish or bearish confirmations between his Market averages suggesting a stock market ready to rip OR die.
If market participants know anything about Dow theory, what they may know is that a new Closing low or new Closing high in INDU should be 'confirmed' by a similar new low or high Close in the Dow Transportation Average (TRAN); or, vice versa with INDU moving in synch to TRAN. Charles Dow only used a monthly Close and considered peaks or lows made in between as 'noise'.
Dow Theory is not a system of market timing exactly, but attempts to forecast changes to the major or 'primary' trend which is the multiyear trend. So-called Dow Theory is first and foremost a forecaster of recessions or the ends of recessions.
One of Dow's important contributions was the idea that confirmation of the primary Market trend must be seem in the actions of BOTH the Industrial and Transportation Averages. Dow primarily wrote about the two Averages 'confirming each other, at least over time, in their moves to new monthly Closing highs or new monthly Closing lows.
Dow wrote that if INDU moved to a new monthly Closing high or low, without TRAN following suit and 'confirming' a similar new peak or new bottom, no change in the primary trend was suggested or 'signaled'. I'm talking about a situation of a potential reversal in the primary trend. To suggest such a change, such a trend reversal, the two averages should 'confirm' each other in similar moves to new highs or new lows:
1.) A bull market is based on a growing economy and hence growing earnings. Sometimes the first sign of renewed growth such as after a recession is that more goods start getting shipped. Such expanded shipments may FIRST cause an advance in the Transport stocks (TRAN), whereas more sales for INDU stocks may just work off inventory. Later, the Dow Industrials also surges to new Closing highs due to the pick up in orders and creates a possible Dow Theory 'buy signal'. This dynamic can sometimes reverse, with an initial pick up in manufacturing boosting INDU and then a subsequent rise in TRAN. More often TRAN has a first move higher but later BOTH Averages continue moving higher in tandem.
2.) A bear market is the result of a slow down in economic activity and growth. Often the first sign of this is seen in slowing shipments and initial selling in TRAN stocks is a result. Manufacturing may still be humming along, creating some build up in inventory. The Dow 30 Industrials will eventually feel the effect and this Average also decline in synch with TRAN. Manufacturing may slow first and INDU start selling off, with TRAN stocks to follow with less to ship. Often, selling in TRAN will be the 'canary in the coal mine' and first suggest a slowing economy and upcoming bear market.
DOW THEORY ASPECTS IN THE CURRENT MARKET (end-May, 2015):
Both the Dow 20 Transports and the Dow 30 Industrials went to new Closing highs by the end of November (2014). INDU then went on to make yet another new Closing monthly high. TRAN did not follow suit with a new high so didn't 'confirm' INDU in its new high. TRAN then has gone to a lower monthly low than occurred previously. INDU has not 'confirmed' a similar new closing monthly low; i.e., below 17165.
TRAN could still go on to make a new Closing high, 'confirming' INDU in that action, although this seems illusive currently. INDU would have to make a lower Closing monthly low to suggest or 'confirm' to me a reversal in the primary Market trend. My opinion is that INDU would need to match TRAN in a lower monthly low than seen previously (below 17165) to suggest a major downside trend reversal.
Contrary to my current opinion, there are Dow Theory adherents who say that failure of TRAN to also go to a new high at the end of February followed by a lower Close in April (relative to TRAN's prior low) suggests that the dominant bull market trend is in trouble. Take your pick. I allow more leeway in 'confirming' a reversal in the long-term trend. The most I do see is a possible to likely dip in stock prices that might be a substantial correction but not a major trend reversal.
MAY MONTH-END TECHNICAL REVIEW:
The S&P and Dow have basically been in a 7-month old trading range and have 'room' to advance before hitting technical resistance implied by the top end of their uptrend channels.
The Nasdaq has a different pattern, is not in trading range and has led this Market higher for some time; so much so that Nasdaq is hitting technical resistance implied by being at or near upper trend channel lines. This pattern, plus the inability to pierce all-time highs, plus the overbought condition COMP and NDX are retreating from is what technically helps explain the current 'indecision' pattern.
S&P 500 (SPX) MONTHLY CHART, MAY 2015 CLOSE:
As noted above and highlighted below, SPX has been in an approximate 7-month trading range between 1995-2000 on the downside and just over 2100 on the upside. Being stuck in a 100 point price range is quite different than the strong uptrend seen in 2013 and well into 2014.
The trading range pattern is tending to 'throw off' SPX's long-term overbought condition; not as quickly as a substantial pullback of course.
Upside potential for when SPX achieves a decisive upside penetration of rectangular 'box' is to 2170-2200 or higher. Stay tuned for that, perhaps after a further period of marking time.
DOW 30 (INDU) MONTHLY CHART, MAY 2015:
There's nothing much to add to my commentary above for the S&P 500 as far as the similar 7-month long relatively narrow trading range in the Dow; in INDU's case, between approximately 17160 on the downside and 18130 on the upside.
Assuming a sustained breakout above the top end of the Dow rectangular chart formation, upside potential is to 18800 or higher; to 20000 eventually? Dow 20000 would be a huge milestone and require a continuation of the multiyear major bull market.
NASDAQ COMPOSITE (COMP) MONTHLY CHART, MAY 2015:
While the monthly chart reflecting the end of May is a quite similar pattern to the big cap Nas 100, there is a key difference in the bearish diverging trend highlighted between the continued COMP advance versus 'declining' relative strength seen in the ongoing downtrend in the 8-month Relative Strength Index.
The bearish price/RSI divergence is a secondary consideration. Primary is the fact that the COMP advance has slowed considerably as the Index keeps bumping up against the top end of its uptrend channel which acts as a type of technical 'resistance'. Potential near resistance is definitely implied by the prior (March, 2000) all-time high of 5132.
Given the current nervous environment, the fact of COMP not clearing its prior peak gives fund managers an 'excuse' to sit on the sidelines in terms of continued aggressive tech buying.
NASDAQ 100 (NDX) MONTHLY CHART, MAY 2015:
As is seen in the NDX monthly chart, recent highs over the past 4 months are hitting the Index's upper (resistance) trendline and this has slowed the big cap Nas 100's advance considerably.
Moreover, NDX remains well under its prior all-time peak price of 4816. The prospects of an NDX pullback looks to outweigh the potential for an upside breakout above the resistance trendline.
GOOD TRADING SUCCESS!