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Transportation Diffusion Index Weakens

03/03/11 10:15:05 AM
by Alan R. Northam

The Transportation Statistical Diffusion Index suggests that the Dow Jones Transportation Average is on the cusp of a new downtrend.

Security:   .DJT
Position:   N/A

The Transportation Statistical Diffusion Index (TSDI) is an oscillator made up of all 20 of the securities contained within the Dow Jones Transportation index (DJTA). The index measures the number of stocks within the index that are in strong positive trends. A stock is said to be in a strong positive trend when its linear regression slope indicator is above its zero line and whose R-squared indicator is above its critical level. If either one of these two indicators fails, then the diffusion index falls, indicating that the DJTA has weakened.

The TSDI is shown in the bottom window of Figure 1. This oscillator moves between zero, when none of the 20 stocks making up the DJTA is in strong positive trends, and 20, when all the stocks are in strong positive trends. The version of the TSDI shown in Figure 1 is an intermediate-term indicator as the linear regression slope and the R-squared indicators are being measured over a 50-day time frame. This figure shows that the diffusion index has now dropped from eight to seven, indicating that only seven of the 20 transportation stocks are now in strong uptrends, signaling that the transportation index has again weakened. The indicators above the diffusion index window measures the strength of the TSDI. (The DJTA is shown in the background for reference.)

FIGURE 1: DJTA DIFFUSION INDEX, DAILY. The bottom window shows the DJTA diffusion index. The top window shows the linear regression slope indicator, the second lower window shows that R-squared indicator, and the third lower window the relative standard error indicator. The DJTA is shown in the background for reference.
Graphic provided by: MetaStock.
The 50-day linear regression slope indicator in the top window is currently below its zero line, indicating that the diffusion index is in an intermediate-term downtrend. However, from mid-February this indicator has been moving sideways, indicating that the slope of the downtrend is no longer accelerating. This is an indication that the rate at which the stocks within the DJTA are weakening could be slowing down.

The 50-day R-squared indicator is currently above 0.9, indicating a very strong downtrend for the diffusion index. As long as this indicator remains strong, we could continue to weaken.

The 50-day relative standard error indicator is currently at 0.5, indicating an average amount of volatility. A move in this indicator to above 0.8 would indicate strong volatility. Strong volatility is normally a prerequisite to a change in trend. Note: A change in trend does not necessarily mean a reversal in trend. A change from either an uptrend or a downtrend to a sideways trend (trading range) is also a change in trend, as is a change from a steep uptrend or downtrend to a more shallow trend.

In conclusion, the analysis of the TSDI suggests that the DJTA continues to weaken with only about one-third of its stocks now continuing to prop it up. The diffusion index remains in a strong downtrend, indicating that the transportation market sector will most likely continue to weaken.

With only about one-third of the stocks within the DJTA remaining in strong uptrends, it would not be surprising to note that this index may have seen its peak in mid February and may now be in the early stages of a new downtrend.

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 or by visiting his website at You can also follow him on Twitter @TradersClassrm.

Garland, Tx
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