For most of 2012, weakness in the Transports vs. the greater stock market was a concern, but now that it’s the other way around, MoneyShow’s Tom Aspray explores what this switch might be signaling now.

Many in the financial press since have focused on the ability of the Dow Transportation Average to finally surpass its all time highs from May 2008. I follow the Dow Jones Transportation Average quite closely as it is one gauge I use to determine the overall health of the stock market.

The divergence between the Dow Industrials and the Dow Transports had me concerned last September, One Sector Sends a Strong Warning, as I knew the participation of the Transports was needed for a truly healthy market.

Finally in December, the Dow Jones Transportation Average broke out of its trading channel and the relative performance analysis suggested that IYT was now starting to lead the S&P 500.

Since the middle of last month the iShares Dow Jones Transportation Average (IYT) is up 10.5% while the SPDR Diamond Trust (DIA), which tracks the Dow was only up 4%. The Spyder Trust (SPY) over the same time period has gained 4.9%.

The Dow Industrial Average is still 3.5% below October 11, 2007 high of 14,198, so should investors be concerned?

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Chart Analysis: I have found that one of the cleanest ways to compare the two market averages is to look at the weekly close only charts.

  • The chart of the Dow Industrials shows what may be a rising wedge formation, lines a and b.

  • This is a potentially negative formation but it would take a weekly close below 12,815 to turn the chart negative.

  • The upper boundary of the formation is at now at 13,935.

  • The upside breakout in the Dow Transports makes the next upside target at 5866, which is the quarterly R2 resistance.

  • The first good support is now at the May 2008 high.

The weekly chart of the iShares Dow Jones Transportation Average (IYT) shows the breakout of the trading channel, lines c and d, which preceded it’s upward acceleration.

  • IYT is already close to this week’s starc+ band at $102.90 with the monthly starc+ band at $105.74.

  • Looking at the trading range between the 2011 high and the 2011 low, the 127.2% Fibonacci target is at $110.

  • The RS line has continued to rise sharply after breaking its downtrend, line e, in December.

  • Volume was strong last week and the downtrend in the on-balance volume (OBV), line f, was broken in early January.

  • The rising 20-day EMA is now at 5521, which is 4% below Tuesday’s close.

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Tickers Mentioned: Tickers: SPY, DIA, IYT, KSA, TRN