Will The Dow Jones Transportation Index Break Higher?

By Jim Donnelly, Olson Global Markets

After being mired in a narrow, but declining trading range (that looks a lot like a “bull flag”) for almost a year, the Dow Jones Transportation Index (DJT) appears to be in position to “breakout” and finally take aim at a test of long-term “channel top” resistance now sitting at 5,675. For that to happen, a move above key resistance at the 5,233 has to take place.

Long-term (monthly) stochastic and RSI oscillators have already triggered “buy” signals, which is encouraging. The discouraging problem is that the Moving Average Convergence/ Divergence oscillator (MACD), however, is still on a “sell” signal and has been diverging bearishly from price for nearly six years.

Nevertheless, a break above key resistance at 5,233 could trigger “follow-through” buying over the intermediate-term and force the DJT higher, perhaps up to an eventual test of “channel top” resistance.

Dow theorists would welcome such an outcome, since it would “confirm” the bullish move already made by the Dow Jones Industrial Average this year. Marginally lower energy costs, a 4-1/2 year high in the Conference Board’s Consumer Confidence Index (at 73.7 in November 2012 versus 76.4 in February 2008), tight airline seating capacity (meaning stronger pricing power) and rising import cargo volumes on domestic railways (despite a strike at one of the nation’s largest port complexes) have helped to brighten near-term expectations for the DJT.

If a break above 5,233 and a subsequent move up to 5,675 were to take place, the move would represent an 8.45% gain from current levels. That being said, once reached a move above 5,675 could prove to be a very difficult matter, particularly if economic activity were to slow, or if energy costs were to begin to rise again. For now, however, a move to the upside in the Dow Jones Transportation Index appears to be more likely than not.



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