#$iyt

Here are some of the most noteworthy trendline developments across the markets for Wednesday, September 18, 2019.

CRB Commodity Index $CRB Testing Post-2014 Down Trendline

KBW Bank Index $BKX Testing Post-2018 Down Trendline

iShares High Yield Bond ETF $HYG Testing Post-2007 Down Trendline

Russell 3000 Value:Growth Ratio Testing Post-2017 Down Trendline

Dow Jones Transportation Average $DJT Testing Post-2018 Down Trendline

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One of the key tenets of Dow Theory is that the primary trend is confirmed when the Industrials and Transports make new highs. Both are close to achieving this, but not quite there yet. The Industrials slowly grinding higher. But it is the Transports that show a lot of promise. Just two weeks ago they broke the neckline of an Inverse Head and Shoulders pattern.

This pattern gives a price objective to at least 230 on the Transport ETF, $IYT. That would be a new all-time high. And there are only a couple of hiccups in the way of getting there. The first is the December 3rd high. At just under 200 this level would signal a higher high and continuation of the path higher.

When they start to move it is hard to stop them. Big, weighty with lots of momentum, the transports are the blood of the economy. Flowing over the roads, seas and airways they give the pulse of economic activity. Since December the Transportation Index ETF has been moving steadily higher with the broad market. But toward the end of February it started to roll over. Problems?

The chart below shows the price action over the last 6 months. Notice that the recent top, a lower high, occurred as it touched the 200 day SMA. A weaker top. But look closer and you will see some real strength. The momentum indicators were flashing overbought signals in February.

And after a 3 week move lower they had reset that momentum. The RSI held in the bullish range on its pullback and the MACD remained positive. These are signs of a digestive move rather than a reversal. The price found support over the 50 day SMA at the end of last week and printed a Hammer candle, a possible reversal.

Charles Dow is known as the father of technical analysis and his Dow Theory has instilled in us all the relevance and importance of market price and volume action to the analysis of financial markets and the allocation of investment portfolios and trading accounts. But perhaps its high time Dow Theory was modernized and brought into the 21st Century of trading and investing.

As the creators Stock Trader’s Almanac and champions of market cycles, patterns and seasonality we have had to change with the times over our past 52 years on The Street. Our market probability calendar has changed dramatically over the years, most notably by the mid-month spike. We’ve built on the January Barometer, First Five Days and Santa Claus Rally indicators by combing them into the January Indicator Trifecta. Adding MACD-timing to the Best Six Months has also been a boon. There is more…

The concept of Dow Theory is still quite sound: technical confirmation across correlated industries or major segments of the market economy. We are big fans of confirmation. We are especially fond of seasonal or cyclical trading patterns that are confirmed over multiple time frames: long, short and intermediate.

With all the recent near term bearish sentiment and the chatter about the big Dow Theory sell signal since the Dow Jones Transportation Average posted a confirming new low with thought it prudent to examine this closer.

Referring the “Gross Output by Industry” data as of 2018 Q2 on the St. Louis Fed’s excellent data base you can see that the services industry is about two thirds (65%) of the U.S. economic output while “goods-producing” industries are about 25% of the economy. (Government accounts for the rest.) The “transportation and warehousing” industry account for a mere 3.4% and “manufacturing” is 13.7%.

So how can such a small portion of the current economy still be deemed a leading indicator? Utilities are a paltry 1.4% of the economy, but at least everyone and everything uses energy. Think back to early 2016 when we had our last Dow Theory sell signal. Industrials and Transports made new lows but not Utilities. Perhaps confirmation from Healthcare or Financials should be considered. In any event, it’s probably time to revisit this century-old indicator.

The Transportation Index took a shot to the face when FedEx announced a slow down in December. But this was a secondary punch. It had already started to move lower off of a September high. Like the rest of the market, it was already following an easier path lower. Now that it is moving higher is the drop over?

Looking at the technicals a case can be made for either direction. The chart below shows the Index completing an extended AB=CD pattern in September that started off of the 2012 low. Extended because the CD leg is longer than the AB leg. This usually leads to a retracement and it has retraced over 38.2% of the pattern.

This would be a good place for a reversal to happen. It also has seen the RSI momentum indicator hit the oversold level and reverse. This is the same spot the RSI bottomed and then price reversed in 2016 and 2011. At the bottom of the chart the MACD is also at an extreme low level that was followed by a reversal in 2009, 2011 and 2016.

On the other side of the story is the intermediate trend. For the short term this is just a counter trend bounce. Yes all reversals start this way but they do not all have to continue. The 2 legs lower off of the September high, with the bounces, can be seen as the first 4 waves of an impulse wave to the downside with the 5th wave still to come. A similar 3rd leg would reach the 61.8% retracement of the pattern. This is a common reversal area.

Equity markets are on fire again.  The S&P 500 and and Nasdaq 100 are making new all time highs.  The Russell 2000 and Nasdaq Composite are also at all-time highs.  Last week the Dow Transports made a new all-time high.  Everything is rising.  Of course the financial media are still searching in every dark corner for the crisis that could be, disregarding the welfare of their viewers.  

At this point there is only one data point that has yet to confirm renewed strength in the bull market.  One more market to make a new all-time high.  One last hurdle.  The Dow Jones Industrial Average is the lone Index that has yet to make a new all-time high.  It would seem that this Index of 30 mega cap stocks should not hold up the party with the other 7000 stocks.  

In fact there are plenty of the Industrials that are also at all-time highs, so it is not even all 30 of them.  There is only 1 of the 30 that is more that 5% below its high, Chevron.  And although the Industrials are 552 points below the all-time high close this is only just over 2% from the top.  

Many eyes will continue to watch as historically the Industrials have been the barometer of a bull market.  When they make a new all-time high after the Transports also do so, they reconfirm the primary trend as bullish in Dow Theory.  Maybe these two sectors do not carry as much importance about the broad market direction as they did in the early 20th Century, or maybe they still do.  Either way the debate will rage until a new high is made.  

The Industrials do have a lot of support for that to happen.  They have made a series of higher highs and higher lows since bottoming at the 200 day SMA in the beginning of April.  They also have bullish momentum readings with the RSI strong in the bullish zone and the MACD rising and positive.  The Bollinger Bands® are also supportive of further upside as they point higher and are opening.  

I just got back from a trip to South Dakota and Colorado last week.  The modern history of this part of the country dates to the middle of the 19th century and is built on the Indian Wars (my daughter reminds me we don't call them Indians now), the Gold Rush and lesser well known, the locomotive.  The locomotive could make or break a small mountain town.  Bringing supplies and allowing trade but also tying people together.

The Native American's did not fair so well during that time, and the Gold Rush died out.  But the locomotive remains an important aspect of economic empowerment in the west to this day.  And the locomotive is also an important part, along with the rest of the transportation sector, to today's stock market.

The chart of the Dow Jones Transportation Index above shows how the price has moved over the last year.  After a good run higher to a top at an all-time high in January it pulled back.  And it has languished in a mostly sideways motion since.  Several touches at the 200 day SMA, all of which held up, confirm more of a bullish consolidation than a correction brewing.  And with the move off of the last touch in early July, the Transports are now running to test that all-time high from 7 months ago.

The Transportation Index ($IYT) started moving higher out of consolidation about a month ago. Since that move started it has risen more than 12% in a month. That is a strong move. Coming into the Christmas holiday weekend it seems to be a bit tired, printing back-to-back doji's Wednesday and Thursday. The common trader perspective on these is that they are reversal candlesticks.

In fact they signal indecision, not a reversal. Think of it this way. A stock opens at a price level and trades higher. As it reaches the highs sellers take control and push the stock back lower. The sellers continue to control the price and push it below the open price. But then buyers step in and eventually overwhelm the sellers, moving the price back higher. And when it reaches to opening price equilibrium is reached again. Nobody has won, nobody has lost. Indecision.

Indecision then can be worked out either to the upside or to the downside over time. In the short run that suggest that the Transportation Index can continue higher. There are several aspects of the short term chart that support that path. The momentum remains strong and only narrowly overbought with the stock under accumulation. But often it is the longer timeframe that can help see the path. The chart below shows that longer perspective for the transports. It gives the price of the Index on a monthly basis.

The chart starts with a corrective Elliott Wave pattern from 2003 through to the low in 2009. But then it started higher. The impulse Wave has 3 waves higher mixed with 2 corrective waves. So far the Transports have seen one of the waves higher complete and a pullback in the corrective wave follow. They are now working on the Wave III higher, which has a target to 10950. This is measured from the smaller wave (iii) added to the last low. Yes waves are fractal. So the end of this Wave III is also wave (v) on the smaller scale. Does that mean the end is upon us for the run in the Transports?

Not at all. In fact Wave count itself suggests there is a corrective Wave IV. A viewing of Wave II would suggest that Wave IV would be flat as opposed to the downward nature of Wave II. So maybe Wave IV goes sideways for a while and then Wave V begins. Using 10950 as an estimate for the top of Wave III and assuming a flat Wave IV, gives a range of 14500 to 15400 to the ultimate top. This assumes that Wave V is at least as long as Wave I and not longer than Wave III, but it could keep going as well.

Another estimate can be made by looking at the AB=CD pattern. Should it extend to a 3 Drives pattern there would be a third leg higher in the series. The first was a move of 3500, with the second a double of that or 7000. A third leg in the series would then look for a 14000 point move or to 20500. I know you are all shaking your heads right about now. Momentum is hot, verging on overbought, blah blah blah. But look at the last time that momentum became overbought in March 2013. The Transports continued higher another 3000 points before the ultimate top.

I do not know how long the drive will continue. But pulling back from the day-to-day traffic suggests that any stall or pullback right now is nothing more than a pull into the rest stop for a while before continuing on the trip. As we wind up the year, heading into the holiday weekend. I hope you enjoy your trips to see friends and family. It has been a great year in the markets and hopefully in you life as well. Lets look to make 2018 even better. Merry Christmas and Happy Holidays to all!

My Gift to You!