Dow Jones Transportation Average Breaks Above Major Resistance

By Jim Donnelly, Olson Global Markets

Despite overbought conditions on monthly bar charts, the Dow Jones Transportation Average (DJT) broke above long-term channel-top resistance currently sitting at 7,240. This is an important event all by itself, but to Dow theorists this bullish breakout has even more meaning. Dow Theory purports that transportation stocks must lead industrial stocks in order to confirm and advance a bullish trend in the broader markets. This facet of Dow Theory implies that the movement and delivery of an increased amount of goods suggests that industrial producers are manufacturing an increased amount of things; or that raw materials are being shipped to destinations that need those materials in order to make more things. As such, the DJT is considered to be an important leading indicator for the direction of equity prices in general.

That being said, overbought conditions are a concern. A solid break back below former channel-top resistance at 7,240 could be interpreted as a false breakout. On the other hand, further advances in the Dow Jones Transportation Average would likely increase investor confidence and could trigger a new round of equity-buying activity. Even more interesting is that when searching for the next major resistance target, trend line resistance at the 9,500 level is a distinct possibility. That level, if it were reached, would represent a 24% advance from the 7,469 close of Friday.

Support from within the ranks of Dow Jones Transportation Average comes from: JB Hunt Transport Services Inc. (JBHT), Alaska Air Group, Inc. (ALK), Kirby Corporation (KEX), Delta Air Lines Inc. (DAL), FedEx Corporation (FDX), United Parcel Service, Inc. (UPS) and Kansas City Southern (KSU) each of which has scored an all-time high during the past month or so. Others, like JetBlue Airways Corporation (JBLU) and Con-way Inc. (CNW) have either bullishly broken out of recognizable technical patterns or are about to do so.

Clearly, the tapering plans of the Federal Reserve have weighed on market psychology in recent weeks. Nevertheless, over the next few months the Fed will still be injecting another $200B dollars into the economy with the Japanese central bank adding a similar amount of monetary stimulus. That, along with a lot of cash still sitting in short-term fixed-income investments could team up to send equity prices higher still.

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