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"Richard Russell Divergence Day" - A Rare Dow & Tran Divergence

In 2005, shortly after I moved to La Jolla, I was put on to the work of the late great Richard Russell.  Russell wrote "Dow Theory Letters", which was a daily note detailing the days price action that caught his eye.  He had written his daily note for decades, literally, and was an astute practitioner of Dow Theory.  Any meaningful divergence between the Dow Jones Industrial Average (DOW) and Dow Jones Transportation Average (TRAN) would never go unnoticed.

So in his honor, lets call today a "Richard Russell Divergence Day".  Today's session saw the TRAN plunge -3.11%, while the DOW gained 0.39%, and I'd love to believe that somewhere in the heavens Richard is feverishly writing his remarks.  

Dating back to 1970, today marks just the 6th trading session where the TRAN fell -3% or more and the DOW finished positive.  I don't believe there's anything predictive about a "Richard Russell Divergence Day", but I do at least find it interesting that the last time this occurred, 03/13/2001, the DOW got obliterated the forward seven trading sessions.  The DOW closed 03/13/2001 at 10,290.80.  Seven trading days later, the DOW traded down to 9,106.54, a decline of -11.51%.  

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Weakness over the coming two weeks for the DOW would jive with the weakness I'm anticipating in August for the S&P500 (see here).  However, I continue to view any impending weakness as healthy, welcomed, and corrective price action, that is any drawdown over the short-term will likely only interrupt the primary trend, not end it.  I believe Richard would echo these sentiments as just 9 trading days ago the TRAN and DOW both simultaneously closed at all-time high daily and weekly prices, thus labeling the primary trend in accordance to Dow Theory as up or "Bullish".   

However, today's not the start of TRAN under-performance.  The TRAN's been down 8 of the past 9 trading days, declining by -6%.  While the DOW declined -0.26% last week, the TRAN fell -2.78%.  Today's TRAN weakness was also enough to trigger an "outside month" for index, that is the TRAN's high for July is greater than June's and its low for July is less than June's.  Assuming the TRAN doesn't gain 3.92% the next two trading sessions, July will record as a "Bearish Outside Reversal Month".  This follows June's all-time high monthly close, which suggests the behavior of market participants was distributive into higher prices during the month of July. (i.e. higher prices have brought eager sellers into the market place).  Since 1970, there's only 4 prior "Bearish Outside Reversal Months" that followed an all-time high monthly close for TRAN.  There's nothing we can truly take away from four samples, but I find it interesting that the last sample occurred just four months ago in March of 2017.  This marks July as the second calendar month that's demonstrated distributive behavior across market participants following all-time high prices, and it also makes TRAN's recent breakout to new all-time highs appear as a false breakout.  From false moves comes...

While Richard would likely agree that the primary trend is up or "Bullish" as of today, he'd be warning about the possibility of a "Dow Theory Non-Confirmation" should the DOW and TRAN continue to argue.  While the future price action of both the DOW and TRAN are uncertain, I am certain of one thing - Richard's work had a positive impact on all of us trying to decipher markets and his legacy lives on in part by paying attention when the TRAN under-performs.  

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