Traders Beware: Don’t Chase the Transports Higher

by Serge Berger | July 31, 2013 1:48 am

iShares Dow Jones Transportation Average (IYT[1]) — Those that follow Dow Theory look to the transportation group as a leading indicator. The logic is that an uptick in economic growth should first be seen by the transportation stocks as materials being ordered need to be transported before they can be turned into products.

Over the past few decades, as the U.S. economy has morphed from a manufacturing-oriented economy into a service-oriented one, plenty of arguments have been raised as to the validity of Dow Theory as it stands. While the debate is ongoing, it is possible that the transports, through a technical lens, act as somewhat of a leading indicator due to self-reinforcement on the part of traders.

 IYT Chart
Click to Enlarge

Along with the broader market, the Dow transports and the representative ETF, IYT, rallied hard off the November 2012 lows. The ETF rose more than 35% until it found a recent high in mid-July. The movement in the transports during the past three months closely resembles the action just before the big sell-off in July 2011.

IYT Chart
Click to Enlarge

Closer up, on the daily chart of IYT looking back to the beginning of this year, while it continually worked higher, we note that the three tops (blue bubbles) also closely resemble each other. Furthermore, each of the tops came on waning momentum, as is clearly visible by the MACD momentum oscillator at the bottom of the chart.

A break below lateral support at $114 could accelerate the downward movement and press the ETF toward the neckline of this three-headed monster on the chart, which is the black trendline currently around the $108 area.

  1. IYT:

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