Watch Transports
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8/9/12

The market is “climbing a wall of worry” according to some commentators.  Others believe the market is topping and are predicting gloom and doom.  We try to be neutral in trading, as anticipation can be very expensive.  We also look at technical patterns for entry prices for our long term investments or stocks we would buy to sell covered calls against.

Here is a chart of the S&P 500 for the last four months.  We have drawn in the lower trend line and upper trend line of the “bull channel” that has defined the market since the last week of May.

We have also drawn a horizontal line on the closing high of 1405 from May 1, 2012  This level seems to be holding the market from moving higher.  Is the economy better today than it was on May 1st?

Below is the same chart for the DJI (Dow Jones Industrials).  This looks like a similar pattern on the bull channel, but notice the high from May 1, 2012 is 110 points above the present market.

The charts above depict the markets setting higher lows and higher highs for the last two and a half months.

Below is the chart that haunts many technicians looking at the market.  This is the Dow Jones Transports (DJT).  Dow Theory requires transportation companies to confirm a rally in the industrials (and vice versa).  After all, if you are building all those widgets, some shipper has to move them to market.  If corporations are not shipping products, they will have to slow production in the future.

The transports chart shows this sector tried to rally with the industrials in June, but broke lower after setting a closing high of 5250 on June 19, 2012  Since then, transports have established a trend of lower highs and higher lows.  The transports are building a wedge, but we don’t know if it is bullish or bearish.  The upper and lower trend lines will meet in the future, and the index will have to violate one of the limits, but we cannot know that now.

What we do know is the transports are not confirming a bull market break out to the upside for the broader market.  The general market could “pop” higher; there is room for the transports to move higher without violating the upper trend line resistance.  “Pop” is the important adjective to use though, unless the transports break resistance and confirm a rally, the general market will be drug lower in the coming days.

Of course, all of this is conjecture if a headline story out of Europe shows Mario Draghi popping champagne corks with the Bundesbank President and Ben Bernanke.  We are buying positions in TZA at <= $17.50 to protect our portfolios and options in the SwingTrader.  It seems like the right thing to do!

Quote:
The Fed's problem is that all the newly created "money" has gone unspent and unlent. To repeat an analogy I have used to explain why there is no inflation – it is as though Bernanke dropped $10 million in newly printed bills on your lawn – and you are so worried you hid them in the garage.---Art Cashin

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