The Transports have left the rails

• Posted by Greg Harmon
• on May 27th, 2015

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.

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