Transportation Average Establishing Support?

10/07/11 01:37:19 PM

by Chaitali Mohile

The bearish rally of $TRAN has reached important support levels. Will the index establish support or break down?

Security: $TRAN
Position: N/A

In mid 2010 the Dow Jones Transportation Average ($TRAN) initiated a strong bullish rally with the support of the 200-day moving average (MA). The index surged to a high at the 5500 level, forming a series of higher highs and lows. Later, $TRAN formed a double top at the higher level. As such, the index should have moved much higher, but the indicators in Figure 1 were not positive toward the rally. The full stochastic (14,3,3) and the moving average convergence/divergence (MACD) (12,26,9) was descending during the bullish rally, indicating a negative divergence.

The average directional index (ADX) (14) failed to develop an uptrend. Therefore, the indicator signaled an upcoming bearish strength for $TRAN. As a result, the price formed an evening star candlestick -- a bearish reversal formation in Figure 1. Thereafter, the index plunged to the 200-day MA support at 4324 levels. During the process, the index lost nearly 1,000 points, dropping the stochastic oscillator to an oversold region below 20 levels.

FIGURE 1: $TRAN, WEEKLY

Graphic provided by: StockCharts.com.

The price consolidated at the long-term moving average support for about two months. The MACD (12,26,9) is highly negative but is not showing any reversal possibilities. The ADX (14) in Figure 1 is developing a fresh downtrend, so the index is not likely to initiate a pullback rally in the near future. $TRAN could witness a few bullish sessions within the 200-day MA support-resistance zone. There are various supports marked in Figure 1, which would prevent the downfall of the index.

FIGURE 2: $TRAN, MONTHLY

Graphic provided by: StockCharts.com.

According to the monthly time frame in Figure 2, 5500 level is the toughest resistance for $TRAN. Since 2007, the index had hit resistance three times. The index witnessed huge selling pressure at this level. In 2011, once again $TRAN is correcting from the 5500 levels. The index has already lost 1,500 points and the rally is ready to breach the 50-day moving average (MA) support. The bearish rally has drifted the momentum oscillator below 50 levels, indicating a weak momentum in the rally. The positive MACD (12,26,9) is likely to undergo a bearish crossover in positive territory. Although the selling pressure (red line) of the ADX (14) surged above the buying pressure (green) and has reached 25 levels, the downtrend has not developed. The ADX line is still below 20 levels, signifying a weak trend.

The bears have temporarily stopped their aggressive move. In addition, the index has already traveled a long distance toward in a southward direction on the chart; there is not enough space for the bearish rally. Figure 2 shows support at 3700 levels. This would be the crucial support for the index to avoid future price damage.

Considering both charts, the index is unlikely to start up the new bullish rally from current levels. $TRAN is likely to undergo a volatile consolidation over the next few trading sessions.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company:	Independent
Address:	C1/3 Parth Indraprasth Towers. Vastrapur
	Ahmedabad, Guj 380015
E-mail address:	chaitalimohile@yahoo.co.in
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