#^djt

I have been watching the Transportation sector the last few weeks.  Looking at it on a short term basis.  It appeared ready for a break out to the upside.  That may have ended Thursday.  Too soon to tell.  But the longer term picture has some interesting things to say.

The chart below of the monthly price action in the Transportation Average shows the potential for more short term negative price action but longer term upside.  The short term downside comes from two concurring technical views.  The Average completed an extended AB=CD pattern late in 2014 and is pulling back.  A typical target would be a 38.2% retracement of the the pattern and reversal as a show of strength.  Or a deeper retracement to 50% or 61.8% as a sign of some weakness to prevail.

The second is the Elliott Wave action that is building.  The Average completed an upside wave (iii) within wave III at the point D.  Since then wave (iv), a corrective wave has been building.  One of the principles of Elliott Wave analysis is that the two corrective waves are usually not of the same form.  So if one is flat the other tends to be steeper.  With wave (ii) flat it would be expected that wave (iv) would be steep.  So far it has been steeper that wave (ii).  

Another principle is that wave (iv) cannot retrace far enough that is falls within wave (i).  That still leaves a lot of room to the downside for wave (iv).  The 38.2% retracement drawn is a fair guess at where it may stop, but the 50% retracement is not out of the range.  

Then comes the good news.  Following wave (iv) is the last piece of the wave III to the upside.  And Elliott Wave principles suggest it will be between 1400 and 4300 points.  I know, quite a range.  I might look to a number, after wave (iv) is finished, that puts wave (v) above wave (iii).

I am an optimist. I see the glass as half full and start looking for ways to fill it and make a bigger glass. I also am a technician first in terms of analyzing stocks. That means that the only truth for me is found in the actual price action. I no longer watch or read any news other than what I get from twitter. It may make me a boring guy at a cocktail party but it works for me.

Three weeks ago, when the Transports were one of the flavors of the day for talking heads, I wrote some thoughts that would have comforted long term investors and drove out short term traders. There may have been a third group that just got scared when they saw the words "Elliott Wave". Basically I wrote about the pullback leading to another strong leg higher. Now it looks like the transport train may be stopping to pick up riders.

The pullback can happen in sections though and the current chart above suggests that the first of 3 legs may be over. Digging into the Elliott Wave again, the price is moving in Wave (iv) of Wave III, or pulling back. Wave (iv) would have 3 legs: down, up down, before completing.

The weekly candlestick from last week, a Hammer, can signal a reversal. It needs confirmation by a higher close this week. That is the signal I am waiting on. That Hammer also touched the 100 week SMA for the first time in 3 years. There is nothing magical about the 100 week SMA, other than many traders will use SMA's as a bullish/bearish barometer. So if it were to reverse here it would be a sign that many determined the downtrend is over for now.

The Transportation Index was the talk of the investment and trading world a few weeks back.  Seems Everyone, including those that swear technicals do not make any sense became an expert, embracing Dow Theory and calling for a correction.

Rule #1 of Technical Analysis: Technical Analysis is about identifying points of reflection not points of inflection.

Well that did not turn out so well.  But now that the Russell 2000 and Nasdaq 100 are at all-time highs, all is forgotten about Charles Dow and his Theory and we have all moved on to becoming experts on Greece.  That is the way of the modern world.  

I try not to play those games but take a broad technical approach to the market as a starting point. Not relying on correlations continuing.  But looking at price action on a standalone basis and applying multiple types of tools for look for those reflection points.  Now that the Transports have been abandoned it seems a good time to spend some time looking there.  

The long term monthly chart of the Transportation Index above has a lot to say.  The first thing that jumps out is that the wild and strong pullback has only retraced 14% of the move higher from the 2009 low.   If you prefer to measure an absolute pullback then it has made just over 11%.  If you needed some perspective this should help.  The large technical picture is not so bright though.  There are two big patterns on this chart, an AB=CD pattern, and an Elliott Wave.  

Lets look at the AB=CD first.  From the 2003 low the AB leg rose to the 2008 high.  There was a quick retracement to the financial crisis lows and then the CD leg began.  If it completed in December then it made about a 200% extension of the AB leg.  From there  pullback could be expected.  And it could get a lot worse than it has gone so far.  Technicians would brace for 38.2% pullback at least typically, and be pleasantly surprised if it stops well short of that in a show of strength.  That is marked at about 6500.  Yikes!

The Elliott Wave also starts out scary, but has a silver lining to it.  If the Motive Wave started at the financial crisis low then it looks as if the Index is in Wave (iv) of Wave III higher.  The scary part is that Wave (iv) would be anticipated to be a downward wave as the other retracement wave, Wave (ii) was flat.  And that is what is showing so far.  The silver lining is twofold.  When Wave (iv) completes the following Wave (v) has a good range higher to complete Wave III.  

A technician would look for a repeat of Wave I, or about 1500 points higher.  This suggests that Wave (iv) will not fall much further, for Wave (v) to end above Wave (iii).  And it gets better.  The bigger Wave IV would then anticipate to be flat before Wave V starts a new 5 wave pattern higher of at least 3500 points.  

None of this is a guarantee of the future and it is pretty mixed view, so what can you take away from it?  First, the transports are falling and the indication is that it will get worse.  Second, is that when they do turn a corner and move higher, the move could be a great buying point for both an intermediate term position and a long term investment.

The Dow Transportation Index ($DJT, $IYT) has been the talk of the town lately.  Tuesday it broke below support and fell into critical territory.  Like a runaway train.  That is, if you are looking at it on a short term basis.  And that is what you will get from the television and most other media sites.  

You see it has been so long since there has been even a 10% correction in the markets, and index ranges have been so narrow, that market watchers have all grown accustom to to the lack of movement.  I'm not sure if a psychologist would call this part of the recency bias or not, but the recent tight range has traders, pundits and prognosticators focusing on a tighter picture.  And what happens when an abnormally narrow range fills your normally large screen?  Every tick in the market looks like a monster move.  Like you are the ant trying to move a leaf instead of the human you are watching.

One way to remove this bias is to widen out your base.  Look at a longer time frame with more and varied price history.  The Transports are down, that is a fact.  But it is hardly a crushing blow.  They are less than 9% off of their highs in December.  

Another way to change your focus to fresh view is to remove price altogether.  The chart above does this in the top panel, showing only the smoothed moving averages at 20, 50, 100, 150 and 200 days.  This view brings out an interesting feature.  The SMA's might be about to turn down.  But they have not yet.   Looking far to the left of the chart, when this happened last in July 2011, gives more information.  The downturn happened and then the 20 day SMA bottomed quickly and started back higher.  

During this correction the Transports fell over 28%.  This can be seen in the bottom panel.  When they recovered 7 months later the Transports held level until the SMA's moved to a tight point again.  That point launched a 2 year move higher.  

What are the take aways?  First, the transports have not rolled over yet.  Watch to see all the SMA's moving lower for the bias to change to a downtrend.  Next, these points where the SMA's get very tightly intertwined can be important pivots.  But as show in 2011 and 2012 they can move either way.  A turn up would shift the bias higher.  Until then Transports are a sector to avoid, but hardly off the rails.

My wife took off today. Well not forever, just for the weekend. But to San Diego. Now San Diego is a magical place. Where narwhals bob in the Pacific Ocean so the natives can play ring toss and the big event of the year is the one day it is cloudy. So we will miss her here.

But if you are from the mid West then you know it is an especially magical place this time of year. You see the weather at my house just outside of Cleveland is forecast to be 10 degrees or less, everyday, with wind chills of minus 20 to minus 10. Oh and did I mention the snow? During all this I will be carting around two kids to their activities all weekend. Basketball, speedskating, birthday parties, 4th grade retreat (seriously?) and who knows what else.

For a guy who works out of the home this is traumatic. But it got me thinking about transportation. And then looking at the Transportation Index. And wow, if that is not exciting!

The chart of the Dow Jones Transportation Average above has a very interesting phenomenon going on. You can see many positives. The second bounce off of the 100 day SMA with a higher low (remember that thought). The confirmation higher of the Harami candlestick from Wednesday. The RSI and MACD turning up. But one you might not recognize is the Positive RSI Reversal.

This occurs when the RSI falls back and makes a lower low, while the price or index, does not make a lower low, and then both reverse higher. This technical pattern looks for a retracement in the index higher equal to the last leg higher or more. For the chart above a move from 8580.81 to 9257.44 or 676.63 points, added to 8659.40 or to 9336.03.

This is significant as it would make a new all-time high in the Transportation Index. That could mean a new Dow Theory Confirmation if the Industrials come along as well. And a renewed commitment to the uptrending market.