Transports Break Massive Wedge

06/28/04 09:56:19 AM

by Arthur Hill

The Dow Jones Transportation Average (TRAN) is leading the market higher and challenging its 2001 highs.

Security: TRAN
Position: Buy

Despite two trendline breaks on the monthly chart, the Average held support around 2000. This level extends back to July 1996 and has been touched at least three times in the last eight years. The most recent bounce off support led to a trendline breakout around 2800 and a 52-week high.

Graphic provided by: MetaStock.

Perhaps more importantly, the pattern (1999 to 2003) looks like a massive falling wedge (magenta trendlines) that retraced a Fibonacci 62% of the prior advance (810 to 397). Both the pattern and the retracement are classic for corrections and the trendline break bodes well for further strength. In fact, it signals a continuation of the prior advance and opens the door to a move above 4000! A move below the March 2004 low (2743) would jeopardize the breakout.

The trendline break is solid, but the Average is stalling just above 3000. Resistance around 3150 extends back to December 2001. In addition, the Average formed a reaction high at 2979 in April 2000 and one at 3151 in February 2002. Obviously, there is a lot of resistance between 2900 and 3150 that must be overcome first.

Relative strength is strong, but also running into trendline resistance. Relative to the S&P 500, the Average has been outperforming since 2000, but underperforming since August 1989 (over 15 years). The outperformance over the last four and a half years has carried the price relative to the trendline extending down from August 1989. A trendline break in the price relative combined with a convincing move above 3158 would put the Average well on its way to 4000.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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WEDGE FORMATIONS

Transports Break Massive Wedge

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