A Longer Look at the Transports

08/10/2015 6:00 am EST

Focus: ETFS

Gregory Harmon, CMT

Founder and President, Dragonfly Capital Management

Greg Harmon, of Dragonfly Capital, takes a technical look at the monthly price action in the Transportation Average. Although it shows that more short-term negative price action is possible, Greg illustrates how it also shows the potential for longer-term upside.

I have been watching the Transportation sector the last few weeks. Looking at it on a short-term basis, it appeared ready for a breakout to the upside. That may have ended Thursday. Too soon to tell. But the longer-term picture has some interesting things to say.

The chart below of the monthly price action in the Transportation Average shows the potential for more short-term negative price action but longer-term upside. The short-term downside comes from two concurring technical views. The Average completed an extended AB=CD pattern late in 2014 and is pulling back. A typical target would be a 38.2% retracement of the pattern and reversal as a show of strength. Or a deeper retracement to 50% or 61.8% as a sign of some weakness to prevail.

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The second is the Elliott Wave action that is building. The Average completed an upside wave (iii) within wave III at the point D. Since then, wave (iv), a corrective wave has been building. One of the principles of Elliott Wave analysis is that the two corrective waves are usually not of the same form. So, if one is flat the other tends to be steeper. With wave (ii) flat it would be expected that wave (iv) would be steep. So far, it has been steeper that wave (ii).

Another principle is that wave (iv) cannot retrace far enough that is falls within wave (i). That still leaves a lot of room to the downside for wave (iv). The 38.2% retracement drawn is a fair guess at where it may stop, but the 50% retracement is not out of the range.

Then comes the good news. Following wave (iv) is the last piece of the wave III to the upside. And Elliott Wave principles suggest it will be between 1400 and 4300 points. I know, quite a range. I might look to a number, after wave (iv) is finished, that puts wave (v) above wave (iii).

By Greg Harmon of Dragonfly Capital

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