We would like to highlight one of the most basic technical signals that should be a warning of a possible top in the stock market. The signal we are talking about is the divergence between the Dow Jones Industrial and Transportation index we currently are witnessing.
The Dow Jones Transportation index topped in May 2021 at 15,750 on a close-basis (the red line) and the Dow Jones Industrial Index (the black line) hasn't peaked yet.
To confirm the divergence between the two indices, we need to see the Dow Jones Transportation index close below 14,460. Going back we have seen the two indices diverge back in 2000, 2007, 2015 and 2018 and in all cases we saw as a minimum a prolonged period of consolidation and in most cases a substantial decline following the signal.
So be aware that the warning signal is flashing.
