Tuesday, February 10, 2009

Transports Not Signaling Strength

It's been a long time since I have written anything about Dow Theory. Here is a rough explanation:

A theory which says the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high, it is accompanied or followed by a similar advance in the other.

I use the S&P 500 and the transportation average together. The logic is pretty simple. If the economy is expanding, then people will have to ship more stuff from a to b. If the economy is contracting people will have to ship less stuff from point a to point b. When transportation profits are declining, so are transportation profits. When transportation profits are increasing so are transportation stocks. So -- let's see what the transportation averages say.

Click for a larger image

Notice the following on the transportation average chart

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

-- The MACD is oversold

-- The RSI tells us prices are weak

-- Prices are in a downward sloping triangle pattern.

The railroad sector recently broke a multi-year upward sloping trendline and is now forming a downward sloping triangle. The sector has dropped about 80 points or about 35% since the thrid quarter of last year. Also notice that the small SMAs are below the larger SMAs and all the SMAs are heading lower.

The shipping sector has dropped about 50% (roughly 320 to current level around 150) since the beginning of the third quarter last year. Prices have been forming a triangle consolidation pattern since the beginning of the fourth quarter last year.The SMA picture is bearish, although the 10 week SMA is about to cross over the 20 week SMA which is bullish.

The trucking sector has dropped about 120 points since the beginning of July last year. That's a drop of about 22%. Prices have been in a consolidation pattern since the beginning of Ovtober last year. The SMAs are in a bearish pattern, although it appears the 10 week SMA is about to cross over the 20 week SMA.

Bottom line: none of these charts is signaling a turnaround anytime soon.