David's Trade Journal

[david_3011]

David's Weekly Market Chartmentary June 12, 2005

Check Up on The Trannies

Dow Jones Transportation Average is probably the most important index as far as our economy's concerned. This average represents the movement of goods and services. Instead of getting confused by all the government statistics, the best way to take the pulse of the economy is to check up on the Transports.

This weekly Dow Transports chart shows a very strong uptrend that started in March 2003, about 51 months ago. It’s such a strong uptrend that, prior to May this year, the Aroon UP (green line in lower pane) only touched the bottom twice (yellow highlights). It didn’t even touch the bottom on the 2 recent declines that fell below 30 (blue circles). Throughout this uptrend, the Aroon UP spent most of the time staying above 70.



There's something different this time. This was the first time Aroon UP had not only fallen below 30, but had been staying at 0 since the beginning of May (black circle). It all began with the crossover (red circle) of Aroon UP & Aroon DOWN in the beginning of April (see dotted black vertical line). It's technically significant because the crossover occurred at about the same time the Average broke below the blue trendline and the -D (Negative Directional Indicator - red line) crossed above the thick black ADX (Average Directional Index) line. That was only the third time (pink circles), the –D moved above ADX while the +D (Positive Directional Indicator – green line) stayed below ADX. Each time resulted in a decline of the Transports Average.

Now, the Transports seems to be at an important juncture with –D looking to cross above ADX. This could mean the resumption of the down trend after the brief pause in May. Let’s zoom it in and see if we could get a better view on the daily chart.

This daily Transports chart below shows that the –D had already crossed above both the ADX and the +D. The ADX had also leveled off and shown a small uptick. This means the momentum of the recent downtrend had started to pick up the steam. Meanwhile, the 50-day and the 200-day moving averages had just run into each other while the Transports had dropped below both moving averages (yellow highlight). If the 50-day MA crossed below the 200-day MA, that could mean further deterioration of the Trannies.



Another sign of further deterioration is for the Aroon UP to cross below 50 while Aroon DOWN stays above 70. As of Friday, Aroon UP did fall below 70 (blue circle); it stood at 66.67. Aroon UP also had previously spent almost 1.5 months under 30 in March and April when the Trannies declined more than 8%. So, it's not unprecedented for the Aroon UP to fall below 30 and stay down there for a while. Anyway you look at it, the Transportation Average just doesn't look too healthy at this time. But, I'd like to check one more thing for confirmation.

Federal Express (FDX) is the current number 1 weighted component of the Transports Average. This daily chart of FDX with the overlay of the Transports indicates exactly that leadership - as the FedEx goes, so goes the Transports. Recently, the FedEx had fallen faster than the rest of the Trannies on extreme volume. In addition, the RSI had just broken the uptrend trendline and fallen below 50. MACD histogram had just turn negative while MACD crossed below the faster “trigger” line or the red line.

The only positive that I can see from this deteriorating technical picture is that the extreme selloff volume (more than 3 times the 21-day average) on Thursday could also signal the bottoming of its decline. That could be the final blowoff. We should take note of that technical possibility.



In any regard, based on the above technical view of the long-term, short-term, and the intra-market comparative analysis, the Dow Transport Average appears to be in trouble. If the Transports failed to rally from here, it should be self-evident that our economy is headed for a slowdown. And, a global economic slowdown should then ensue, that is, if it’s not already taking place.

Here’s one sign of a possible global economic slowdown. The Baltic Dry Index (see right column in the table below) is a measure of freight rates for bulk cargo of raw materials that are shipped to industrial users. It’s fallen more than 37% this year, to 2.889.



And, finally, for those of you who inquired, here’s the follow-up on last Sunday’s Fibonacci Arc analysis of the NASDAQ.

As I mentioned last week, on its way down, the inner layers become the supports. This past week, Nasdaq had fallen through both layers of supports and finally stopped at a tad above the 23.60% Fibonacci Retracement. The gap-up occurred on 5/25 had been filled, and is now served as the final support. We’ll revisit Nasdaq later. That's it for now.