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Transports Driving Market Lower

08/22/11 08:20:48 AM
by Matt Blackman

Transports often lead stocks at a bottom since they are quicker out of the starting gate when the economy starts to shows signs of picking up. When they weaken ahead of the industrials, it shows that the economy is encountering growing headwinds.

Security:   IYT, DIA
Position:   N/A

I mentioned in my last Traders.com Advantage article "Head & Shoulders Warnings Should Not Be Ignored" that on July 27 I noticed that the transports sector was showing negative divergence with the industrials and that this was a bearish omen. This was further confirmed by the sell signal when the relative strength index (RSI) crossed down through the RSI moving average (middle graph window) on July 26.


FIGURE 1: IYT VS. DIA. Chart comparing performance of the iShares Dow Jones Transports ETF (IYT) to the Dow Jones Industrial Average Diamonds Trust ETF (DIA).
Graphic provided by: Freestockcharts.com.
 
In Figure 1, we see a chart taken just after midday on August 18 showing the iShares Dow Transports ETF (IYT), down more than 5.3% on the day versus 4.1% for the industrials. Since the left head & shoulders top peak formed on July 7, the DIA had dropped 13% compared to IYT, which had lost 23%. The short-term RSI also generated another sell signal on August 18, which is further confirmation of transport weakness.

The fact that transports continue to lead industrials to the downside is further confirmation of overall weakness ahead.

Why are transports so important? When the economy is improving and orders are picking up for industrial and commercial products as well as consumer retail goods, most of which are shipped by truck, train, or ship, transporters benefit ahead of other sectors. So the fact that transports continue to weaken is not a good sign.



Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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