Don't Fall for the Transports Trap

05/22/2015 10:05 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

A number of analysts are pointing to the failure of the Dow Transports to confirm the new highs in the Dow Industrials as a reason investors should not buy stocks, so MoneyShow’s Tom Aspray takes a technical look at the charts to help you decide if the divergence is a valid reason to avoid the stock market.

The S&P 500 managed another new closing high on Thursday as the stock market continues to edge higher despite the general skepticism over the stock market’s rally. The Dow Transports and Nasdaq 100 were both leaders up over 0.50%. The oil service stocks led the market as the Market Vectors Oil Services (OIH) was up 2.7% on the day.

A number of analysts are pointing to the failure of the Dow Transports to confirm the new highs in the Dow Industrials as a reason investors should not buy stocks. The five month weakness in the Transports can be added to the long list of reasons some have voiced over the past few years why the stock market can’t possibly go higher.

Remember the fear over the too high deficit? The reoccurring fears over a EuroZone collapse? What about the August 2011 downgrade of US debt? What about the Hindenburg Omen sell signal in June 2014?

A technical look at the Dow Industrials and Dow Transports may help you decide whether the well publicized divergence between these two averages is a valid reason to avoid the stock market.

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Chart Analysis: The monthly close only charts of the two Dow averages can give you a different perspective of the long-term trend.

  • The Dow Industrials looks ready to close the month of May above the February closing high of 18,132.
  • The long-term uptrend connecting the 2009 and 2011 lows is well below current levels at 16,188.
  • The Dow Transport last made a monthly closing high last November at 9198.
  • It has formed lower highs since then and is currently well below those highs.
  • The Transports has diverged before in this bull market.
  • It peaked in May 2011 and formed lower highs for the next 21 months, line c.
  • During this period, it diverged from the Dow Industrials, which was making higher highs, line a.
  • In January of 2013 the Dow Transports finally confirmed the Industrials by making a new monthly closing high at 5804.
  • The Dow Transports are currently 47.3% above this high.

The weekly chart of the iShares Transportation Average (IYT) is down 6.21% YTD after a solid gain of 25.4% in 2014.

  • IYT is now 8.5% below the November 2014 high of $167.80.
  • As of Thursday’s close, IYT is below the long-term uptrend, line e, at $155.81.
  • The quarterly projected pivot support is at $151.72.
  • There is additional support in the $150 area with the weekly starc- band at $146.42.
  • The relative performance dropped below its WMA in January.
  • The rebound in the middle of March (see arrow) was a classic rally failure.
  • The RS line has plunged even further and shows no signs yet of bottoming.
  • The weekly OBV has dropped further below its flat WMA but is acting better than prices.
  • The 20-day EMA is at $155.42 with the quarterly pivot at $158.47.

What it Means: To develop a comprehensive view of the stock market, it is important to look at all market segments as well as other technical studies like the NYSE A/D line. When the Dow Transports are leading S&P 500 higher, it is another plus for the market. This is not the case right now, but it is not a reason to stay out of stocks.

I had discussed this divergence in March’s Diverging Transports Not a Concern yet... and my opinion has not changed much. It is a popular topic. From a technical perspective, it looks as though the decline in the Dow Transports may continue into the summer months. The charts suggest that this is just a pause in the stock market’s positive major trend. If the Dow Industrials should develop a pattern of weekly lower highs and lower lows, this would make the divergence with the Dow Transports more of a concern.

How to Profit: No new recommendation.

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