The Potential in the Transports in 3 Concepts

As the month closes it is often a good time to step back and take a broader perspective on the markets. If you do that with the Dow Jones Transportation Average Index ($TRAN) there are three simple guiding characteristics that you need to watch to stay on the right side of the market in transportation stocks. Everyone is familiar with the Head and Shoulders Pattern and there is one in the Transports, it is just upside down. The monthly chart below shows this, with the Neckline at about the 5600 level. What is important to know about this technical pattern is that it looks for a move up to 9050 at least (you get there from measuring the distance from the tip of the Head to the Neckline and adding it to the Neckline higher). That is still a long way to go to the upside. The second thing is what is called a Measured Move. This is Technical Analyst jargon to describe that the move in the Transports on the blue arrow added again to the consolidation over the last few


months would target a level of 10050 were it to happen again, and these types of symmetrical moves do happen often. This would be in play on a move above the consolidation zone, over 7500. The third concept to understand is that the first two are not guarantees. That means that the Transports may not reach those levels, but it also means that it could reverse and move lower. That is the more interesting scenario. And a move below the red consolidation zone, below 7000 is a signal to reverse course and look lower. That would give two immediate targets: 6250 and then the Neckline at 5650. Clean and simple. Use it as a guide for the transportation ETF, $IYT, or for your transportation stocks.

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