Dow Transports Losing The Battle

11/02/07 11:44:59 AM

by Arthur Hill

The Dow Jones Transportation Average has been battling two key moving averages the last two months, and continuing relative weakness suggests that this will be a losing battle.

Security: $TRAN
Position: Sell

Before moving on to the current situation, let's take a look at the weekly chart for some long-term perspective (Figure 1). The Dow transports broke down with a sharp decline this summer and then consolidated the last two months. Just like the summer of 2006, the transports average managed to firm around the 50-week moving average (blue ovals). In 2006, the Dow transports surged in October and this made for a successful moving average test. We have yet to see a surge this time around, and this test may not be successful.

FIGURE 1: DOW JONES TRANSPORTS, WEEKLY. The DJTA broke down with a sharp decline this summer and then consolidated the last two months.

Graphic provided by: TeleChart 2007.

Turning to the daily chart (Figure 2), the Dow transports broke the 50-day and 200-day moving averages in August and then bounced back toward these two averages. There was even a surge in early October, but this surge failed to hold and the Dow transports met resistance from broken support (blue line). It has been a right battle around these two moving averages. I would not bet on a bullish resolution unless the DJTA breaks above broken resistance at 5000.

FIGURE 2: DOW JONES TRANSPORTS, DAILY. The Dow transports broke the 50-day and 200-day moving averages in August and then bounced back toward these two moving averages.

Graphic provided by: TeleChart 2007.

Continued relative weakness points to a bearish resolution instead of a bullish resolution. The red line shows the price relative, which compares the performance of the Dow transports to the Standard & Poor's 500 exchange traded fund (SPY). The indicator peaked this summer and declined until late September. The price relative found support over the last six weeks but did not reverse this downtrend, and the Dow transports remain relatively weak. This is not a good sign and it favors a support break at 4750. Such a break would signal a continuation lower and forecast a move below the August low.

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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Dow Transports Losing The Battle

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