|The Dow Transports were profiled in early March with a large head and shoulders working towards completion, with neckline support around 2800. The average continues to consolidate with a symmetrical triangle (magenta trendlines) above support. A move below symmetrical triangle support would signal a continuation lower and add further weight to a potential Dow Theory sell signal.|
Figure 1: Dow Transports daily chart.
For clues on the direction of the Dow Transports, traders may turn to the DJ Air Freight Index with FedEx (FDX) as a key component. After a sharp advance, the index retraced 50% with a falling wedge decline. Both the retracement and the pattern are classic for corrections in ongoing uptrends.
|Figure 2: The DJ Air Freight Index daily chart.|
|Graphic provided by: MetaStock.|
|As long as the lower trendline and prior high at 490 hold, the correction remains a work in progress. In other words, it has yet to run its course or, more importantly, signal a continuation of the prior advance. As such, the current trend is viewed as bearish until proven otherwise with a breakout at 490 and it would be wise to respect the bears.|
|RSI hints that a base may be forming, but also remains short of bullish confirmation. The indicator formed a bullish divergence over the last few weeks (green arrow) as selling pressure abated. However, selling pressure is still winning the battle over buying pressure as RSI failed to hold above 50. While bullish and bearish divergences provide early signals, it takes a move above 50 to show material buying pressure and confirm the validity of a divergence.|
|The bottom line is that it would take a move above 490 in the index and above 50 in RSI to turn bullish again. As long as both of these levels hold, the bears rule the roost and further weakness is expected, which would suggest a support break in the Dow Transports.|
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