DJ Transportation & Utility Averages Suggest Stocks Bull Market Is OverStock-Markets / Stocks Bear Market Apr 20, 2015 - 06:15 PM GMT
Let’s analyse the technicals of these two indexes beginning with the DJ Transports.
The Dow Jones Transportation Average is a stock market index of the American transportation sector. Price last traded at $8647.
Let’s take a bottom up approach beginning with the weekly chart.
DJT WEEKLY CHART
We can see four peaks – a quadruple top. This is bearish indeed. Generally, the fourth attempt at resistance is successful but, as Gann noted, price failing on the fourth attempt and turning down is very bearish.
The first peak, the all time high at 9310, was accompanied by a triple bearish divergence on the Relative Strength Indicator (RSI). This often leads to a significant decline and that is my expectation here.
The Moving Average Convergence Divergence (MACD) indicator has been trending down bearishly and has subsequently made a new low. This is likely indicating a bear trend is at hand.
DJT MONTHLY CHART
The Stochastic and MACD indicators both have a bearish bias with the red line above the blue line.
The Bollinger Bands show price has moved away from the upper band and is now hovering around the middle band. The upper band looks to be curling over for the first time in over 2 years.
I believe a bear trend is now in progress however price will need to break below the previous swing low which stands at 7700 and is denoted by the upper horizontal line.
I have added Fibonacci retracement levels of the move up from the 2009 low to recent high and I am targeting the final low to be around the 61.8% level at 4875.
I have added moving averages with time periods of 100 (red) and 200 (black) and price may find support at these averages.
The lower horizontal line denotes the October 2011 low at 3951 and I doubt price will trade that low.
Let’s wrap it up by looking at the big picture yearly chart.
DJT YEARLY CHART
The Andrew’s Pitchfork show price has blown off above the upper channel. It is quite common to see this take place when price first attacks that upper channel line. It is often a false break top and price comes back down to put in a pullback low. This low may be around the middle trend line or the lower trend line.
The Bollinger Bands show price has traded well above the upper band which is a common feature found at solid tops. I’d like to see price find support at the middle band.
The RSI made a new high with the all time price high. This indicates strength and gives me confidence that once the pullback is over price should then head back up to new all time highs while this indicator shows a weaker reading – a bearish divergence.
The Stochastic indicator is showing a bearish divergence and this high and I expect a new high in the years to come to throw up another bearish divergence. This indicator looks to be threatening a bearish crossover.
I have added the same Fibonacci retracement levels from the monthly chart just to add another perspective. The 61.8% level looks to be right around the middle Bollinger Band and the lower pitchfork channel come 2016-17. Food for thought.
Also, I have drawn a green highlighted circle which denotes the area whereby price launched higher parabolic style. Price often returns to these exact levels when correcting and I favour that occurring here. This area is just above the 61.8% Fibonacci retracement level.
Summing up, the top looks in place here and a big bear trend looks to be tracing out its first baby steps.
Now let’s turn our attention to the DJ Utilities Average index.
The Dow Jones Utility Average (DJU) is a stock index that keeps track of 15 prominent utility companies. Price last traded at $583.28.
Let’s take a top down approach beginning with the yearly chart.
DJU YEARLY CHART
The Relative Strength Indicator (RSI) is showing a bearish divergence at the recent high while the Stochastic indicator is showing a triple bearish divergence. It would be no surprise to see a significant decline develop from here.
The Bollinger Bands show price recently traded above the upper band which is often found at tops. I would like to see prie come back down now and eventually bottom out around the middle band before resuming the massive uptrend.
The Parabolic Stop and Reverse (PSAR) indicator has a bullish bias with the dots underneath price. I would like to see the move down bust the dots on the downside to relieve the bullish pressure before the uptrend continues.
I have drawn an uptrend line which may provide support for price however this trend line is not unobvious so the potential exists for price to make a false break below this line before resuming upwards. Let’s see.
DJU MONTHLY CHART
The recent high showed a quadruple bearish divergence on RSI while both the Stochastic and Moving Average Convergence Divergence (MACD) indicators are both now trending down with a bearish bias. So, lower price look likely according to these indicators.
Price has recently busted the PSAR support with the dots now on the upside indicating a bearish bias.
The Bollinger Bands show price is now back to the middle band. Does price bounce back up to the upper band or break down to the lower band? I favour the latter after a bit more work around the middle band.
I favour a bear trend is now in progress and to confirm that outlook price will need to break below the previous swing low of 524.82 which is denoted by the horizontal line.
How low do I expect price to trade?
I have added Fibonacci retracement levels of the move up from 2009 low to recent high and I am targeting the 61.8% level at 429.43. The 76.4% level at 375.63 also needs to be given consideration.
Also, I have added a 200 period moving average which also may provide support.
Let’s move on to the weekly chart.
DJU WEEKLY CHART
I have drawn two horizontal lines which denote previous swing lows and we can see price has already busted below these levels so a lower low is in place. Now we just await a lower high and the downtrend will be off and away.
I have added Fibonacci retracement levels of the recent move down in order to determine where the lower high might be. The 61.8% level at 622.09 and the 76.4% level at 635.50 both loom large.
Price will need to bust PSAR resistance first with the dots above price. Until that happens the potential exists for price to drop a bit further.
The lower indicators, the RSI, Stochastic and MACD, have all made new lows recently. This is a bearish development in that a more solid price low would likely occur with bullish divergences meaning stronger readings. So, the current rally is most likely a bear rally.
Summing up, the indications are that the bull trend is through and a bear trend is in its infancy.
By Austin Galt
Austin Galt is The Voodoo Analyst. I have studied charts for over 20 years and am currently a private trader. Several years ago I worked as a licensed advisor with a well known Australian stock broker. While there was an abundance of fundamental analysts, there seemed to be a dearth of technical analysts. My aim here is to provide my view of technical analysis that is both intriguing and misunderstood by many. I like to refer to it as the black magic of stock market analysis.
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