Don’t Chase The Transports

Those that follow the Dow Theory look to the transportation group as a leading indicator.  The logic follows that an uptick in economic growth should first be seen by the transportation stocks as materials being ordered first need to be transported before they can be turned into products.  Over the past decades, as the US economy has morphed into a service oriented economy and away from a manufacturing one, plenty of arguments have turned up against the Dow Theory as it stands.  While the debate is still out there, it is possible that the transports at least to some extent, through a technical lens act as somewhat of a leading indicator due to self reinforcement on the part of traders.

Along with the broader market, the Dow transports, here-forward represented by the iShares Dow Jones Transportation ETF (IYT), rallied hard off the November 2012 lows.  The ETF rose more than 35% until it found a recent high in mid July.  The movement in the transports over the past three months resembles quite closely how they acted just before the big sell-off that hit in July 2011.

iyt multi year

Closer up, on the daily chart of the iShares Dow Jones Transportation ETF (IYT) looking back to the beginning of this year, while it continually worked higher, we note that the three tops (blue bubbles) also closely resemble each other.  Furthermore, each of the tops came on waning momentum, as is clearly visible by the MACD momentum oscillator on the chart below.  For the right here and right now, a break below lateral support at $114.00 could accelerate the downward movement and press the ETF toward the neckline of this three-headed monster on the chart, which is the black trend line currently around the $108 area.

iyt daily chart





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