'Dow Theory' Confirms Sell Signal

'Dow Theory' Confirms Sell Signal

By STEVEN RUSSOLILLO

If there were any doubts that stocks have entered corrective mode, the "Dow Theory" is now telling us the market is heading down.

The century-old Dow Theory, a way to analyze market trends and turning points, says both the Dow Jones Industrial Average and Dow Jones Transportation Average need to move in tandem to confirm the trend. On Tuesday, the Dow Theory officially gave a sell signal, as Dow industrials and Dow transports broke decisively through June lows, with the Dow transportation index hitting a 2011 low.

The selling comes as worries about the global economy have rippled through financial markets in recent weeks amid signs of further weakening.

The symbiotic relationship between the two indexes is a clear sign to Dow theorists that the economic message and the market outlook are moving in tandem. The idea is that making goods is one leg of the industrial economy and moving those goods around is the second leg, so their trends should be in sync.

Phil Roth, chief technical market analyst at Miller Tabak & Co., said in a Wednesday note that Dow theorists pointed to several divergent actions early last month. For example, the Dow transports hit an all-time high in early July, but the industrials weren't able to follow suit.

The actions were early indicators that the market's uptrend was due for a reversal, which consequently has taken place over the past few weeks. "A sell signal has been confirmed," Mr. Roth said.

The Dow Jones Industrial Average broke an eight-day skid Wednesday, rising 29.82 points, or 0.3%, to 11896.44.

The Dow Jones Transportation Average—a 20-member index of airlines, railroads and trucking companies—turned positive in midafternoon trading, erasing a 1.9% loss, and finished up 0.5%, to 4967.18

Despite the intraday bounce, the index, which includes bellwethers FedEx Corp. and United Parcel Service Inc., remains firmly in correction territory, down 12% from its all-time closing high on July 7.

For now, market technicians are adjusting their models to reflect the stock-market's swoon.

"New short-term oversold extremes mean probabilities are increasing for a short-term rebound, but a rebound is probably a reflex affair in a medium-term trend that just turned down," Mr. Roth said.

Write to Steven Russolillo at steven.russolillo@dowjones.com