Divergence in Dow Jones sectors are providing two market scenarios for traders, reports Suri Duddella.

Experienced investors look for the tenets of "The Dow Theory" to spot the hidden trends of the markets to make informed decisions.  Dow Theory is an analysis that explores the relationship between the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA). According to the Dow Theory, if the two averages acted in harmony, with both reaching new highs or lows around the same time period, then the price action of each was said to be confirming. If these two averages are showing a divergence, then the market is liable to reverse course (see chart).

DJTA

U.S. Transportation stocks are the barometer of the intermediate term business outlook as described by Dow Theory. The basic theory is to compare the performances of DJIA and DJTA to see if there are largely confirming one another or forming a divergence.  Current U.S. transportation industry is showing strong strength along with the major indexes (Dow Jones, S&P 500 and Nasdaq) as it is confirming strength.  Some of the leading Transportation index (DJTA) stocks from: Railways, Airlines, Shipping or Trucking companies are:  Union Pacific Corp. (UNP), CSX Corp. (CSX), United Airlines Holdings Inc. (UAL), Unites Postal Service (UPS), Alaska Air Group Inc. (ALK), Delta Air Lines Inc. (DAL), FedEx Corp. (FDX), American Airlines Group Inc. (AAL).

The emerging patterns show two potential scenarios in Dow Jones Transportation Index (DJTA) and the outcome could guide the Dow Jones Industrials (DJIA) and S&P 500 indexes (see chart above).
 H.M. Gartley established the concept of Harmonic Patterns in 1932. Gartley wrote about a five-point pattern (known as Gartley) in his book Profits in the Stock Market. The primary theory behind harmonic patterns is based on price/time movements which adhere to Fibonacci ratio relationships and its symmetry in markets. Fibonacci ratio analysis works well with any market and on any timeframe chart. The basic idea of using these ratios is to identify key turning points, retracements, and extensions along with a series of the swing high and the swing low points. The derived projections and retracements using these swing points (Highs and Lows) will give key price levels for Targets or Stops.

The following chart shows a Bullish Cypher (5-point Harmonic Pattern) in Dow Jones Transportation index. 

Bullish Scenario - Bullish Cypher Pattern (A 5-Point Harmonic Pattern)

TRAN_X5

The chart presents a Bullish Harmonic pattern (Bullish Cypher) and a trend in Dow Jones Transportation Index from January 2019 to June 2019. An entry level is above 9994 with a stop below 9715. First target range is 11267-11689. 

The Bear case

One of the most popular chart patterns in market analysis is the "Head and Shoulders" (H&S) pattern. The H&S patterns signal market tops in an established sideways to up trending or bullish market. The H&S patterns are reversal patterns as they reverse its prior uptrend and follow a bearish or downtrend from its breakdown. These patterns are signified by three successive peaks resembling two shoulders on both sides and a head in the middle. The head is the largest of the three peaks.

Bearish Scenario: Head and Shoulders Pattern

TRAN_HS

Trading Head & Shoulders Pattern

Entry: After the right-shoulder formation and pattern is complete, if price closes below the neckline with increased volume, enter a short trade below the breakout bar's low.

Stops: 1. Place a stop above the middle of the neckline and right-shoulder and place a final stop above the high of the right-shoulder.

Targets: Targets are projected from the neckline level. Measure the height of the head and use Fibonacci ratios to compute targets.  The first target range is 62% to 79% of the height of the head and the second target range is 127% to 162% below the neckline.

The above chart shows an emerging Head & Shoulders pattern in Dow Jones Transportation Index (DJTA).  If DJTA closes below the neckline 9983, it will confirm the H&S pattern, and a short entry may be entered. Place stops above 10350 level and targets at 9540 and 9067-9263 levels.

Find more of Suri’s analysis at http://www.surinotes.com/