Dow Theory: Time to Sell?

The Dow Jones Industrial Average fell below its November 20 closing low today and hitting a level it has not seen since October 2002. At the same time the Dow Jones Transportation Average also hit its lowest level since 2003. The significance of this concurrence, will put more downward pressure on the markets in the days ahead.

Dow Theory, which is one of the oldest technical market timing systems, dictates that this coincidence is a selling trigger. While the technicians that follow the theory do not always agree on how to interpret the charts, there are some general principles that have occurred.

• Both the Industrials and Transports have undergone a significant fall from their respective highs
• In the rallies after the November lows, neither index has been able to break through pre-rally highs
• Both indices have hit new lows

Industrials & Transports

In the chart above, the Dow Jones Industrials is represented by the white line and the left price axis. The Transports are represented by the green line and right axis. As you can see, clearly they both had a significant fall from previous highs. They also rallied in late October and again from the end of November to the New Year but could not cross above their pre-rally highs. Finally, they both are at new lows.

That being said, the Dow futures are pointing toward further drops tomorrow. Follow the futures here.

>>> Read More on Today's Fall

Comments? Send them to [e-mail]

bythenumbers.cnbc.com