Dow Transport Index New High Prediction

06/26/08 09:57:30 AM

by Alan R. Northam

The Dow Jones Transportation Average has made a price high in July 2007 and in May 2008. The transports could now be set to make one more run at yet another new high in the very near future.

Security: $TRANS
Position: N/A

Figure 1 below shows the monthly chart for the Dow Jones Transportation Average (DJTA) rally off the 2003 lows. This rally has been impulsive and has completed waves (1), (2), (3), and (4) of the five-wave impulse. I have shown wave (5) in the gray color, representing that wave (5) may not yet be complete. Impulse waves are made up of five subwaves and define the direction of the major trend which is up for the transports. Once the impulse wave is complete, this market should sell off and could lose from one-third to two-thirds of the price gained for the complete rally from 2003 or from 4250 to about 3250.

FIGURE 1: $TRAN SHOWING ELLIOTT WAVE COUNT, MONTHLY. Chart shows waves (1) through (4) of a five-wave impulse as being complete, with wave (5) yet to be completed. Impulse waves define the direction of the market trend, which in the case of the transports is up.

Graphic provided by: StockCharts.com.

Zooming in to the weekly chart for the DJTA in Figure 2, I have shown the rally from the early 2008 low. This rally also looks impulsive and has completed subwaves 1, 2, and 3 of wave (5). Currently, this market is in the process of completing wave 4 down, a corrective wave, that does not yet look complete. Once complete, the final wave, wave 5, should commence, which when completed will complete the five-wave impulse, wave (5) off the 2003 lows. I have also added a support line drawn off the price high of wave 1. Price cannot move below this support line or the analysis will have to be reconsidered and could be an indication that the price high made in March is the final market top. The transports have already started to move lower to correct the complete rally off the 2003 lows.

FIGURE 2: $TRAN SHOWING THE ELLIOTT WAVE COUNT, WEEKLY. The Elliott wave count shows that subwaves 1 through 3 of wave (5) to be complete, with subwaves 4 and 5 yet to be completed.

Graphic provided by: StockCharts.com.

Zooming in further shows the daily price chart in Figure 3. From the high of wave 3, the transports has been undergoing corrective wave 4. This corrective wave is taking the shape of an A,B,C zigzag with wave C forming an ending diagonal. Ending diagonals are made up of five subwaves, waves a,b,c,d, and wave e of which waves d and e are not yet complete. Therefore, I expect to see the transports work themselves a little lower in the next few days before completing corrective wave 4. Ending diagonals signal that the market correction is near completion and the previous trend is about to resume, which in the case of the transports is up. Once corrective wave 4 is complete, then the final wave 5 of the five-wave impulse off the January 2008 lows will commence. Once wave 5 is complete, this will also complete wave (5) of the five-wave impulse off the 2003 price lows. I have added a price target for the completion of both wave 5 and wave (5) of 5625.

FIGURE 3: $TRAN SHOWING THE ELLIOTT WAVE COUNT, DAILY. The Elliott wave count shows that wave 4 still has one more upwave, wave d, and one more downwave, wave e, before being complete. Once wave 4 is complete, then wave 5 should commence.

Graphic provided by: StockCharts.com.

In conclusion, the DJTA could be setting itself up for one more run to new higher highs with a price target of 5625. However, for the transports to move higher, the support line drawn off the price high of wave 1 on the daily price chart must be respected and the market cannot penetrate this support line. However, should the support line be penetrated, then the transports have already made a bull market top and a market selloff is already under way that could result in the transports losing from one-third to two-thirds of the price gains it has made off the price lows of 2003.

Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.