Dow Transports Drive Themselves Higher

March 6th, 2013

by Dominic Cimino

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The Dow Transports Index continues to be a leader during this bull market run. Not the S&P 500, nor the Dow Industrials; not even the small cap Russell 2000 or the technology laden Nasdaq 100 have during this current rally equaled the bullish prowess of the Transports from a chart perspective. Let's study the weekly bar chart of the Dow Jones Transportations Average Index. A potential extremely bullish chart pattern is in place for this current leader of indices, one that I'm sure will have all but the biggest of bulls questioning my chart interpretation.

Notice the well-defined bullish trend channel that's in place. It's defined by the rising parallel red lines. Note how the entire rally from the '09 bottom is confined within this pattern as the index continues to rise. Earlier this year, the index powered through a triple top formation that was formed by the major market peaks of 2007, 2008, and 2011. Those peaks formed at the previous all-time high for the index, which is indicated by the thick green horizontal line. Make no mistake; powering through that area in a rising channel is bullish chart action.

I'm sure my interpretation of the next chart pattern will be controversial, mostly because of the extremely bullish implications if the pattern were to proceed to completion. But if I'm to be a chart purist, I cannot deny my observations because of any notions of improbability. When I look at this chart, I can't help but see an enormous textbook inverted head-and-shoulders pattern. I alluded to this pattern previously in my article Dow Transports Index Making All-Time Highs. The shoulders and the head are highlighted by the short pink horizontal lines. For all of you chartists, notice the precise symmetry of the shoulders from the neckline, which is the former three-peak all-time high area and is shown as the green horizontal line.

Since my previous article, the index has indeed powered trough the neckline that was defined by the old highs. If this neckline holds going forward, the bullish implications are significant. I suggest watching the support area of the pattern's neckline. Retests of necklines are very common, and this could happen very easily given the market's recent gains. Any major penetration back through the neck-line on a closing basis will negate the pattern and its bullish implications.

In conclusion, I'd like to part on this note. On one hand, you have analysts pointing at potential market negatives such as: unsustainable high corporate profit margins, an overextended market rally, personal incomes that have fallen even as individuals have increased their spending, low economic growth forecasts, etc. On the other hand, you here have a chart analyst pointing out a rather bullish potential chart implication. I know it's all very confusing, and I can't say for certain that the market will move higher in spite of the well-intended warnings issued by some market bears. In fact, it could place a major top tomorrow.

But here are some things I can say about the patterns that I've showcased here. First, they are present for viewing by anyone with a chart and knowledge of chart interpretation. In addition, they present no guarantee, and all chart patterns can fail. But as long as the support levels provided by the bullish trend channel and potential inverted head-and-shoulders patterns hold, I view the overall market as having further bullish potential, in spite of the fact that I too have previously urged caution because of the negative renderings of market fundamentals. Admittedly, this tiger of a market has thus far eaten through many walls of worry.

Dominic Cimino

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Preferred planning concepts, LLC & Cambridge are not affiliated.


© 2013, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.

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