Wednesday, October 28, 2009

Transports Are Sending Bad Signals

I'm a big fan of Dow theory. It basically says that markets have to move in tandem. It makes intuitive sense as well. When the economy starts to grow, all sectors have to participate. Business has to move more stuff from point A to point B. As a result transport companies should see an increase in earnings. The logical outcome of this theory is the work of John Murphy whose book "The Technical Analysis of the Financial Markets" basically says all markets (stocks, bonds, commodities and currencies) are inter-related.

Anyway, the reason I mention this is the transports aren't looking that good right now.

Let's start with the weekly chart:

Click for a larger image.

There are two key points.

-- Prices have broken a long upward sloping trend line and

-- The MACD is about is give a sell signal.

Let's add the daily chart:

Click for a larger image

First notice the chart has probably printed a double top. This is a reversal formation -- one of the main chart events we look for.

Secondly, I've broken the chart down into two boxes box A and box B. Notice that box B is technically weaker than box A -- both the MACD and RSI have printed weaker numbers.

Third, notice point C. Prices have moved through all the EMAs and a trend line. Also note the 10 day EMA has moved through the 20 day EMA -- another bearish development.

Yesterday I noted that several broad markets are sending sell signals. The transports were one of these markets. Putting all of these elements together it looks like we are heading for a correction. However, it's very important to remember this is a technical read; it is one side of the equation. It is not an analysis of the fundamental side of the equation. We still have a very important GDP print tomorrow which could completely reverse all of this information.

My best guess about what is happening is traders are taking some money off the table in anticipation of a weak GDP print tomorrow. They've made some great profits; now its time to recognize some of those profits.