Dow Jones Industrial versus Transportation

Dow tried to find strong changes in the market trend by observing the relative behavior of DJ Industrial and DJ Transportation (explanation in Spanish here). Basically, we are looking for divergences between these 2 indexes. On the chart (click on to enlarge), we have graphed DJT (blue line) and DJI (candle chart) plus a simple Relative Strength Index underneath, all based on monthly data. We have marked two areas by drawing to rectangles. The first one from mid 2007 till mid 2008 shows a divergence: DJT was doing a new maximum (May 2008) while DJI wasn´t following. It was a clear advise of what was going to happen: DJ went down very strongly until Februray 2009.

The second area is occurring right now. Are we going to see the same fall?

First of all, we do have a divergence. This time DJI made a maximum this last April, while DJT wasn't able to overpass the April 2011 maximum. Second, all this latest movements are softer, even the RSI didn't reach the overbought zone for the last maximum. So, our guess is that we have to be very careful the next months, probably reducing our purchases or hedging our portfolio with good short positions, just in case. However, it shouldn't be as bad as we saw in 2008.

If we are right, after the fall, it can be one of the best moments to buy shares the protect ourselves against the high inflation that is surely coming.