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DOW THEORY


Dow Transports Make A Statement

01/17/07 08:21:36 AM
by Arthur Hill

Surging over the last few weeks, the Dow Jones Transportation Average is knocking on neckline resistance, and a breakout would be Dow theory bullish.

Security:   $DJT
Position:   Accumulate

On the weekly chart (Figure 1), the pattern at work for the Dow Jones Transportation Average (DJTA) looks like a big inverse head & shoulders. What's more, this pattern looks similar to the inverse head & shoulders pattern in 2005. Back then, the shoulders established support around 3500 and neckline resistance was 3800–3900. The distance from the neckline to the head measured about 500 points. The neckline breakout led to a massive advance that exceeded 5000 in May 2006. The rally from 3900 to 5000 was much more than the 500 points projected by the head & shoulders formation.

FIGURE 1: DJTA, WEEKLY. The inverse head & shoulders pattern currently forming looks remarkably like the h&s pattern that formed back in 2005.
Graphic provided by: Telechart 2007.
 
The current head & shoulders is equally big and a breakout would be most bullish. The shoulders established support around 4400–4500 and there is neckline resistance around 4900–5000. The distance from the neckline to the head is about 800 points. A break above neckline resistance would project further strength to around 5800, and this would be most bullish for the rest of the market. Such a breakout would also confirm the new highs in the Dow Industrials and be bullish for Dow theory.

FIGURE 2: DJTA, DAILY. The breakout over the last few days reinforces support from the December low and points to higher prices.
Graphic provided by: Telechart 2007.
 
The December low holds the key (Figure 2). It looked as if the DJTA was breaking down with a big support break in July. However, the average firmed around 4200 and surged back above 4400 to keep the bulls alive. The December pullback held above this breakout and the pattern looks like a falling flag (magenta trendlines). The breakout over the last few days reinforces support from the December low and points to higher prices. Failure to hold this breakout and a move below 4500 would be bearish for the Dow transports and Dow theory.



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.

Title: Editor
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Date: 01/17/07Rank: 4Comment: 
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