TRANSPORTS AND UTILITY STRENGTH MAY START PULLING INDUSTRIALS HIGHER -- THE DOW IS IN TRENDLINE SUPPORT AND IS DEEPLY OVERSOLD

TWO OUT OF THREE ARE AT NEW HIGHS ... With the Dow Utilities jumping to a new 52-week high this week, I can't resist coming back to the glaring divergence between the three Dow Jones averages. Last Friday I wrote about the divergence between the strong transports and the weak industrials. With the utilities surging this week, the divergence between the three Dow averages is even more striking. Charts 1 and 2 show the Dow Utilities and Transports hitting multi-year highs. Both averages started a bullish pattern of rising peaks and rising troughs during the second half of the year. The Dow Industrials have done just the opposite. But there's a fourth Dow Average. Chart 3 is a chart of the Dow Jones Composite Index which includes all 65 stocks in the three Dow averages. It too is trending higher and is diverging from the industrials. I'm going to go out on a limb here and suggest that it's the industrials that are out of step with the others.

Chart 1

Chart 2

Chart 3

Chart 4

INDUSTRIALS ARE DEEPLY OVERSOLD... Chart 4 plots the Dow Industrials for the last year. I call your attention to the two channel lines drawn over and under the price action. The Dow has bounced off the lower line three previous times since the start of the year, and may be doing it again. Even though the Dow has undercut its August low, it appears to be stabilizing at the lower support line for the fourth time. I also call your attention to the two versions of the Commodity Channel Index oscillator drawn over and under the Dow chart. The 50-day (intermediate) version on top of the chart shows the Dow to be in oversold territory (under -100) for the fourth time this year. Each previous instance was followed by a rally to the upper channel line. The 200-day (longer range) version of the CCI (under the chart) may be more important. It shows the Dow in oversold territory for the first time this year. And it's starting to turn up. I think there's a decent case to be made for the Dow to be forming a bottom here. Maybe not enough to push it to a new high. But enough to get it moving in the same direction as the other Dow averages and maybe even test the upper channel line. The most favorable seasonal time for that to happen is between now and January, which is traditionally the strongest time of year.