Is the Dow Jones Transportation Average Forming a Bull Flag?

The Dow Jones Transportation Average (DJT) has been on fire, since late 2012.

A V-shaped correction, and a prolonged period of sideways trading interrupted the parabolic up trend and there’s been no net gain since September 2014.

Trading action since the November 28 all-time high has been contained by a parallel channel, that looks like a flag.

In fact, the DJT may have formed a bullish flag formation.

A bull flag is described as a consolidation period that interrupts a sharp, almost vertical rally. The consolidation range is defined by a parallel channel with a slant to the down side, and tends to separate two halves of a steep rally.

A break above the upper boundary (around 9,150) would be the first step of a bullish breakout, with a measured up side target around 10,000.

Buying against support (around 8,500) is a low-risk buying opportunity to get in on the ground floor. It’s low-risk because the nearby support level provides a clear point of ruin (stop-loss).

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A break below 8,450 would void the bull flag and allow for much lower prices.

I doubt there’s enough buying power to lift the DJT to 10,000, but trade around 8,500 (or breakout above 9,150) offers some low-risk setups.

The iShares Transportation Average ETF (NYSEArca: IYT) is the most widely traded transportation sector ETF.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

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Bullish or Bearish? Dow Jones Averages are All Over the Place

All for one and one for all may have worked for the Three Musketeers, but it’s not working for the Dow Jones Averages.

All three Dow Jones Averages are pulling in different directions.

The Dow Jones Industrial is near its all-time high. The Dow Jones Utility just came off a nine-month low and the Dow Jones Transportation Average has been stuck in neutral for four months.

Here’s a look at all three averages and an attempt to interpret the meaning of the broad Dow Jones disharmony.

Dow Jones Utility Average (DJU)

The Dow Jones Utility Average (DJU) lost as much as 14% from January 28 to March 11.

On March 11, the Profit Radar Report noted that: “Utility stocks are down 13% from their recent high, and every stock component of the Utility Select Sector SPDR ETF (NYSEArca: XLU) is trading below its 50-day SMA. RSI is at a level that sparked rallies in June 2013 and August 2014. XLU trend line resistance is just below today’s close. Unlike XLU, the Dow Jones Utility Average already close below its trend line. Nevertheless, utility stocks are compressed and should soon spring higher.”

The latest rally started on March 12, and as long as support at 585 – 574 holds, DJU may continue higher.

Dow Jones Transportation Average (DJT)

The Dow Jones Transportation Average (DJT) has been stuck in a multi-month triangle, and is threatening to close below triangle support.

A break down below the ascending green trend lines has to be graded bearish (unless it reverses). Next support is at 8,800 and 8,600.

The iShares Transportation Average ETF (NYSEArca: IYT) tracks the DJT.

Dow Jones Industrial Average (DJI)

The Dow Jones Industrial Average (DJI) just fell below long-term Fibonacci support/resistance at 18,004, which is also where the 20-day SMA is.

This allows for continued weakness.

The SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) tracks the DJI.

Bearish Divergences?

The lack of confirmation among the Dow Average isn’t a bullish development, but thus far the key U.S. indexes are not displaying signs of a major market top (for more details about the indicator that’s identified the 1987, 2000 and 2007 tops go here: Is the S&P 500 Carving Out a Major Market Top?).

Until we get the same kind of deterioration seen at prior bull market highs, divergences among the Dow Average may just be a distraction.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Dow Jones Averages Did Not (Yet?) Confirm S&P 500 Highs

The S&P 500 is at new all time highs, and, as the weekly bar chart shows, there’s some room until it hits next resistance.

However, the Dow Jones Industrial Average (NYSEArca: DIA) and Dow Jones Transportation Average (NYSEArca: IYT) failed to surpass their prior highs.

But, the Dow Jones Transportation Average (DJT) managed to close above red trend line resistance (blue circle), which is short-term bullish.

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Viewed in isolation, the S&P 500 (NYSEArca: SPY) breakout is bullish, but it has not yet been confirmed by other major market participants.

The trend is your friend … until it ends. Seasonality suggests a rally pause. Here’s a brand new and detailed S&P 500 seasonality chart.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Will the Persistently Wrong Dow Theory Sell Signal Finally Come True?

No other technical indicator has been around as long as the Dow Theory. Dow Theory started out more as an economic theory, which Charles Dow published in the Wall Street Journal around the turn of the 20th century.

Dow’s theory focused on two key economic sectors: manufacturing (industrials) and transportation. If goods were being produced and moving through the economy, it should show up in the price action of the Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJT). A strong economy would buoy both averages.

The corresponding ETFs for the DJIA and DJT are the SPDR Dow Jones Diamonds (DIA) and SPDR Dow Jones Transportation Average (IYT).

Despite a rather decent century long track record, the Dow Theory sell signal has been dead wrong for well over a year. Why is that, and will the sell signal finally kick in late September/October?

The chart below plots the Dow Jones Industrial Average (DJIA) against the Dow Jones Transportation Average (DJT). There are a number of bearish divergences, but none of them have hindered the DJIA from breaking to new recovery highs.

The Dow’s trend is clearly up while the Transport’s trend is clearly down. The Dow is above resistance while the Transport is below support. Something’s gotta give, will the Dow break down or the DJT catch up?

Historical Performance & Seasonality

An examination of the historical significance of the current divergences doesn’t reveal a bearish bias. In fact, the performance of the Dow has been positive after instances where the Dow traded close to a 52-week high, while the DJT was nearly 10% below its 52-week high.

October is also the beginning of a historically favorable season for the Transports (perhaps due to the upcoming holidays). However, the week after September triple witching and October in general, has a bearish bias for the Dow Industrials.

Technicals

As if the bearish divergence wasn’t enough, the DJIA is now above resistance. The DJT is below support. Technically it will take a move above what’s now resistance to unlock more bullish potential for the Transports, but historical performance and seasonality suggest the risk for Transports is limited. Exactly the opposite is true for the Dow Industrials.

Intangibles

QE3 is here and the massive inflow of liquidity tends to buoy all asset classes including oil. High oil prices in turn cut into the profit margin of transportation companies like FedEx, UPS, Union Pacific, etc.

FedEx has already cut its fiscal 2013 forecast. Chief Financial Officer Alan Graf blamed weak global economic conditions. But that’s old news and already priced into the Transports recent slide.

It is obvious that the Transports refuse to confirm the Dow’s rosy picture, but the bearish omen hasn’t hurt the Dow’s performance either.

I follow and respect Dow Theory, but have learned not to be dogmatic about any one single indicator. The Dow Theory sell signal will be right eventually, but the weight of evidence of technicals, seasonality, and sentiment suggests some weakness for stocks over the near-term followed by year-end strength.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.