Dow Transports Testing Key Support

04/05/05 07:33:27 AM

by Arthur Hill

The Dow transports show good relative strength and recently formed a potentially bullish pattern.

Security: $TRAN
Position: N/A

Despite high oil prices and a weak stock market, the Dow Jones Transportation Average remains (DJTA) in an uptrend and one of the strongest indexes. The Dow industrials are already testing its January low, but the DJTA remains well above its January low and shows good relative strength. Relative to the Nasdaq, the DJTA looks even stronger as the Nasdaq formed a lower high in early March and moved below its January low in late March.

Even though the DJTA shows good relative strength, the average declined with the rest of the market in March. However, this decline was less severe and the DJTA is trading at a key support zone around 3650. The trendline extending up from August 2004, broken resistance, and the 50-day simple moving average (SMA) all converge around 3650 to mark support.

Figure 1: Dow Jones Transportation Average. The Dow transports show good relative strength and recently formed a potentially bullish pattern.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The March decline looks corrective. After a sharp advance (3455-3890), the index formed a falling flag with the decline to 3665. These are typical for corrections and a move above the upper trendline would signal a continuation higher. A failure and move below 3650 would be quite negative.

Traders can also turn to the commodity channel index (CCI) for a potential bullish signal. CCI (15) moved into oversold territory (-100) for the third time this year (red ovals). These oversold readings alert traders to be on guard for a reversal. However, a bullish catalyst is required as indicators can become oversold and remain oversold. Note that CCI moved below -100 and remained oversold for a few weeks in January. As such, traders should look for CCI to move back above the zero line to confirm a flag breakout and signal a continuation of the prior advance.

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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