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Breakdown Dead Ahead In Transports?

10/26/05 03:57:14 PM
by David Penn

Has the upside in the Dow Jones Transportation Average all but run its course?

Security:   $TRAN
Position:   N/A

One of the stock market success stories over the past few weeks has been the resilience of the Dow Jones Transportation Average (DJTA). The fact that I find myself praising the "resilience" of the transports is itself suggestive of the difficult market climate. It's not unlike getting the response that "he's got a great personality" when a woman asks for information about a proposed blind date.

When I last looked at the Dow Jones averages ("Eyeballing The September Lows," October 5, 2005), I wanted to alert traders to the possibility of the averages making a bearish confirmation should both close beneath the lows of September. The industrials did this in short order, closing below their September lows on October 5. However, it was the transports that refused to play along. While the transports did slip below their September lows on an intraday basis on October 13 and 19, the average clearly found support at these levels and moved sharply higher shortly after midmonth. (See Figure 1.)

For their part, the industrials continued to slide. Even the bullish action of midmonth that had many a market bull frothing at the mouth was not enough to bring the industrials back above the level of the September lows -- and keep them there. All evidence in the industrials continues to point to a band of resistance around the 10,400 level.

FIGURE 1: DOW JONES TRANSPORTATION AVERAGE. Negative divergences develop in both the MACD histogram and the stochastic oscillator as shooting star candlesticks appear on the top of the October rally in the DJTA.
Graphic provided by: Prophet Financial, Inc.
In "Eyeballing The September Lows," I wrote that:

There is also the possibility of a nonconfirmation in which one average took out the September lows and the other did not. This would be a victory for neither the bulls nor the bears, technically speaking. However, in the current context of a market that appears to have made an intermediate-term top in August, a nonconfirmation might have bullish implications if it served to reinforce the validity of the 10,350 support level in the industrials or the 3575 level (approximately) in the transports.

Clearly, the 3575 level in the transports has provided the sort of support I suggested was possible. Next, I suggested that the bullish consequence of the nonconfirmation would have both averages rallying above their end-of-September/beginning-of-October highs. In this, the transports have succeeded while the industrials appear to have failed miserably. This appears then to have set up another nonconfirmation -- this time to the upside -- in which one average has reached a certain benchmark while the other has fallen short.

In the same way that the nonconfirmation to the downside forced the focus to the possibility of some upside progress, the likelihood of a nonconfirmation to the upside means that technical traders and Dow theorists need to return their focus to the possibility of more downside movement. As far as a bearish confirmation is concerned, that most likely would require a breakdown below the October lows of about 10,175 in the industrials and 3550/3575 in the transports.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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Date: 10/26/05Rank: 3Comment: 

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