|This is a follow up to the early April commentary on the DJ Airline Index. Just to recap, on the weekly chart the index then formed a falling wedge and retraced 62% of the prior advance. Both the pattern and the retracement are typical for corrections. With a big surge in the last week of March and first week of April (green arrow), the index broke above the upper trendline and started showing signs of a reversal.|
|Figure 1: Weekly chart of DJUSAR.|
|Graphic provided by: MetaStock.|
|After breaking the Oct-03 trendline, the index peaked below 120 and returned to support in May. With a strong bounce in mid-May and successful support test, the index is forming a potential double bottom. Key resistance resides at 117.4 (the 6-Apr high) and a move above this level would project further strength to around 137 (117.4 - 98.4 = 19, 117.4 + 19 = 136.4). Keep in mind that a double bottom remains potential until confirmed with a breakout.|
Figure 2: Daily chart of the DJUSAR.
The DJ Airline Index shows good relative strength and this increases the odds of a successful breakout. The top chart is the price relative, which measures the performance of the DJ Airline Index against the S&P 500. The price relative formed a higher low in May and broke above its April high (green arrow). Notice that the actual index remains below its April high and the price relative is leading. The breakout is still young, but shows that Airlines are leading the S&P 500 and this bodes well for a resistance breakout at 117.4.
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