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Do you want to know if the current rally of the Dow Jones Industrial Average has staying power? Watch the Dow Jones Transportation Average to find out.

You see, Charles Dow, the founder of the Wall Street Journal and co-founder of Dow Jones and Company, formed some of the earliest ideas of technical analysis dating back as early as 1851. It was analysis of the price action of the major averages.

He believed that if the industrials were to sustain their rally, the transports had to rise along with them. If industry is prospering, shippers and transporters must be getting product to the wholesalers, and then to the retailers, before the manufacturers reap their profits.

If the transports don’t begin to rally along with the industrials, then the likelihood of the industrials continuing a rally is slim. However, if the transports turn higher, then it means the industrials could go on to the next leg of a bull market.

By seeing if the transports can muster up enough strength soon to turn higher, we’ll know whether the industrials can continue their current rise or not.

This is why it’s so important right now to be watching what the Dow Transports do. Let’s take a look at the Dow Transports (line chart) and the Dow Industrials (candle chart) overlaid upon each other in the weekly, three-year chart below. Then note the transports by themselves below the chart too, which will be even easier to see.

The Transports Must Break Higher or This Rally is Toast!

See larger image

Over the last three years, you can see that the transports have followed somewhat closely what the industrials have done and vice-versa. But there are two things worth noting:

1. The transports had their “highest high” about a year and a half ago.

2. Within the last three months, the transports have continued to head lower while the industrials headed higher.

At some point very soon, this has to change. Either the transports have to play catch-up and rally upward, or the industrials will begin to weaken and follow the transports lower.

That brings me to the chart of the transports below the price chart. You’ll see its red, corrective line lower. The transports have to break upward through this in order for the industrials to sustain their rally.

Have a nice day!

Sean Hyman
Editor, Commodity Trend Alert

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